A federal appeals court yesterday overturned the criminal convictions of 2 former executives at ArthroCare, ruling that a lower court was wrong to exclude some and admit other evidence in their trials.
Former ArthroCare CEO Michael Baker and ex-CFO Michael Gluk were convicted in June 2014 of running a scheme to defraud investors of more than $750 million; Baker was sentenced to 20 years in prison and Gluk drew a 10-year term.
Prosecutors alleged that the scheme was designed to generate false revenue numbers to meet internal and external forecasts by dumping inventory, 1st with a distributor called DiscoCare and eventually via free shipments to end-users. ArthroCare was DiscoCare’s only client until it acquired DiscoCare in December 2007, according to the documents.
In May 2013, ex-executive David Applegate pleaded guilty to the fraud charges; later that month former co-worker John Raffle denied his involvement but later changed his plea to guilty. Raffle was sentenced to serve 6 years and 8 months in prison followed by 3 years of supervised release; Applegate was sentenced to a 5-year term and 3 years of supervised release.
ArthroCare, which was acquired for $1.7 billion by Smith & Nephew (NYSE:SNN) in May 2014, agreed to pay a $30 million fine and enter a deferred prosecution deal to settle its part in the fraud.
But Baker and Gluk appealed their convictions to the U.S. Court of Appeals for the 5th Circuit, arguing that Judge Samuel Sparks of the U.S. District Court for Western Texas wrongfully excluded evidence from investigations by law firm Latham & Watkins and the SEC that showed they were in the dark about the fraud going on at DiscoCare.
“Both investigations determined that Raffle and Applegate hid the fraud from Gluk and Baker; as all parties admit, the reports could have significantly affected the jury’s view of the case,” Judge Grady Jolly wrote in the 5th Circuit decision. “We accordingly hold that the Latham and SEC reports are likely to have a proper and appropriate influence on a jury’s deliberations by providing it with expert assistance regarding the plausibility of expert testimony. The government acknowledges that the reports could have held significant weight to the jury. We agree, and thus conclude that the exclusion of these reports was not harmless error. We therefore hold that the district court abused its discretion and committed reversible error by refusing to admit the reports. Accordingly, we reverse and remand based on this error.”
The appeals court also agreed with the defendants’ argument that Sparks improperly allowed testimony about medical fraud that allegedly took place at DiscoCare, but was not included in the charges against Baker and Gluk.
“The district court could have done more to police the line between proper and improper evidence; it should have been careful to prevent the government from dwelling on the salacious details of DiscoCare’s business practices that could not be charged to the defendants,” Jolly wrote, remanding the case back to the Western Texas court for a new trial.
A U.S. Justice Departmen spokesman declined to comment on the decision.
In a phone interview, Baker’s lawyer Dennis Riordan said he was delighted with the decision, which “raises the question of whether the government can and should go forward with a retrial.”
Elliot Scherker, a lawyer for Gluk, in a phone interview said he was gratified with the decision.
Material from Reuters was used in this report.