Supply Chain

ArthroCare Execs Win Appeal of Fraud Convictions

An appeals court ordered a new trial for the CFO and CEO of the surgical device maker. Both are serving prison terms.
Matthew HellerJanuary 26, 2016

An appeals court has thrown out the accounting fraud convictions of the former CFO and former chief executive of surgical device maker ArthroCare, saying the trial judge erred by excluding evidence that showed they were not aware of the $750 million fraud.

The U.S. Fifth Circuit Court of Appeals on Monday ordered a new trial for former CEO Michael Baker, 56, and former CFO Michael Gluk, who have been serving prison terms of 20 years and 10 years, respectively, since their June 2014 convictions for wire fraud, securities fraud, and conspiracy.

Prosecutors alleged that Baker and Gluk schemed to prop up ArthroCare’s stock price by inflating sales and smoothing out earnings through a series of quarter-end transactions, known as “channel stuffing,” with distributor DiscoCare. Two former ArthroCare senior vice presidents, John Raffle and David Applegate, were key prosecution witnesses.

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But according to the appeals court, the trial judge improperly excluded evidence of investigations by the law firm Latham & Watkins and the U.S Securities and Exchange Commission that concluded Raffle and Applegate misled Baker and Gluk.

The Latham and SEC reports were “likely to have a proper and appropriate influence” on the jury’s deliberations, the court said, rejecting the government’s position that Latham and the SEC were no more capable than the jury of determining whether Baker and Gluk committed fraud.

Baker’s lawyer Dennis Riordan said told Reuters the decision “raises the question of whether the government can and should go forward with a retrial.”

The “channel stuffing” scheme at ArthroCare lasted from 2005 to 2009. According to prosecutors, DiscoCare agreed to accept shipment of approximately $37 million of product in exchange for substantial, upfront cash commissions, extended payment terms, and the ability to return product, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

After the fraud was revealed, ArthroCare shares plunged from $40.03 in July 2008 to $5.92 in December of that year.

Raffle and Applegate pleaded guilty to fraud and other charges in 2013 and were sentenced to 80 months and 60 months in prison, respectively.