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ArthroCare Poked by SEC Probe

OKLAHOMA CITY -- Arthrocare (ARTC) can now add a government investigation and an expanded class-action lawsuit to its long list of woes.

The Austin, Texas-based medical device maker revealed on Thursday that the Securities and Exchange Commission has launched an informal inquiry into accounting issues related to a looming restatement that the company announced earlier this week.

Meanwhile, securities attorneys have unveiled plans to broaden a class-action lawsuit that they filed against the company months ago.

BMO analyst Joanne Wuensch has been bracing for such fallout. Even as she upgraded Arthrocare from underperform to market perform on Tuesday, citing the stock's low price after a 40% plunge, she portrayed news of the company's restatement as "likely just the first shoe to drop."

Wuensch then set a new price target of $23 -- down a full $15 from her previous goal -- and specifically warned that possible government probes could prevent the stock from reaching that level. Although the shares quickly surpassed her target, climbing to a high of $27 on Wednesday, they fell back to $25.05 on news Thursday of the SEC inquiry.

"And so it has begun," Wuensch mused upon first learning of Arthrocare's unreliable financial statements. "To quote Sir Walter Scott: 'Oh what a tangled web we weave, when first we practice to deceive.'"

"With this piece of information in the public domain," she said of the pending restatement, "what is left is the question of what else is out there? Is there another shoe to fall? And how significant is it?"

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