SANTA ANA – LAWFUEL – US Law, Law Jobs – Two men who ran the Irvine-based Endocare, Inc., a manufacturer of a device used to treat cancerous tumors, were indicted today by a federal grand jury that accused them of causing investors to lose at least $200 million. The indictment alleges that the former executives concocted bogus sales and repeatedly overstated company revenues to analysts, investors, auditors and the Securities and Exchange Commission.
The indictment names Paul Mikus, a 41-year-old Coto de Caza resident, who was the chief executive officer and chairman of the board, and John Cracchiolo, a 50-year-old resident of Gardenville, Nevada, who was the company’s chief financial officer and chief operating officer.
Endocare manufactures and sells a medical device that is used to freeze cancerous tissue. The device is called a Cryocare Box (Cryo-Box), which is used with related probe kits. According to the indictment, when Mikus and Cracchiolo were running Endocare, the company sold the Cryo-Box for approximately $200,000 to $300,000, but revenue from the purchase of disposable probe kits was considered superior because such revenue was recurring and predictable. The profit margin on the sale of disposable probe kits also was higher than for Cryo-Box sales.
Mikus and Cracchiolo allegedly inflated revenues through a series of sham transactions and by failing to disclose important business developments, such as customer checks being returned for insufficient funds. According to the indictment, Mikus and Cracchiolo fraudulently overstated Endocare’s past and projected revenue and the number of past and projected cryo-procedures performed, as well as fraudulently reporting to shareholders and analysts the manner in which Endocare recognized revenue.
In relation to a stock offering in 2001, Mikus and Cracchiolo allegedly failed to properly disclose to market analysts the scope of Endocare’s relationship to its largest distributor, United States Medical Development (USMD). During that time, Mikus and Cracchiolo allegedly falsely stated that the Cryo-Boxes were sold to USMD on a “pass-through basis” in which USMD immediately resold the Cryo-Boxes for immediate use in performing procedures, when, in fact, after being purchased, such Cryo-Boxes generally remained unopened and unused in USMD warehouses. As a result of this conduct, according to the indictment, investors purchased Endocare’s stock at a price that was inflated due to the defendants’ fraudulent conduct.
The indictment charges Mikus and Cracchiolo with 18 counts of wire fraud, two counts of securities fraud, one count of false certification of financial reports, one count of false statements in reports filed with the SEC, one count of lying to accountants, and four counts of “honest services” wire fraud. These charges carry a statutory maximum penalty of 430 years in prison and $21.75 million in fines.
An indictment contains allegations that a defendant has committed a crime. Every defendant is presumed to be innocent until proven guilty in court.
Mikus and Cracchiolo have agreed to surrender themselves to federal authorities later this month.
The criminal case is the product of an investigation by the Federal Bureau of Investigation.
The Securities and Exchange Commission filed a civil action against Mikus and Cracchiolo last August, see: http://www.sec.gov/litigation/litreleases/2006/lr19800.htm.
CONTACT: Assistant United States Attorney Andrew Stolper
Assistant United States Attorney Kenneth Julian