Conviction stands for ex-ArthroCare CEO Baker in $750m fraud case

A federal judge Texas this week upheld the conviction of former ArthroCare CEO Michael Baker on eight counts of wire fraud, rejecting his argument citing a recent U.S. Supreme Court case.

Baker and ex-ArthroCare CFO Michael Gluk were convicted in June 2014 on charges that they ran a scheme to generate false revenue numbers by dumping inventory, first 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.

Although Baker was sentenced to 20 years in prison and Gluk drew a 10-year term, the U.S. Court of Appeals for the 5th Circuit overturned the convictions in January 2016 and ordered new trials. Gluk then pleaded guilty to a single count of conspiracy to commit wire fraud and securities fraud.

Baker’s second trial, which began in late July, ended August 18 when the jury in the U.S. District Court for Western Texas convicted him on 12 of 15 counts, according to court documents. The jury found Baker guilty of one count of wire & securities fraud; seven counts of wire fraud; two counts of securities fraud; and two counts of false statements. Baker was found not guilty on two of the wire fraud counts and one count of the false statement charges, according to the documents.

Baker moved to have the wire fraud charges tossed based on the Supreme Court case Honeycutt v. United States, which states that to “obtain property” from a victim, a defendant must personally acquire the property, according to court documents. His motion claimed that “there is no plausible sense” through which he obtained property from ArthoCare’s investors and argued that the government used the wire fraud charges to double-dip what it calls a securities fraud case.

Judge Sam Sparks disagreed, finding that the jury heard ample evidence of Baker’s guilt on the wire fraud charges, citing witness testimony from Gluk and two other co-conspirators that he “directed a scheme to mislead ArthroCare’s investors about the financial condition of the company to inflate the value of ArthroCare’s shares. In executing this scheme, Baker and his co-conspirators manipulated and misrepresented ArthroCare’s revenue as well as concealed the nature and significance of ArthroCare’ s relationship with its distributors and with DiscoCare.”

“In addition, the evidence at trial showed Baker did more than simply direct his colleagues to manipulate revenue. A reasonable juror could have found Baker repeatedly and intentionally lied to investors about ArthroCare’s earnings and revenues through inaccurate public filings, conference calls with investors and direct email. Likewise, a rational trier of fact could have found Baker knew the revenue and earnings he reported were false because he led and participated in efforts to inflate these numbers,” Sparks wrote.

Furthermore, the judge wrote, “a reasonable juror could have concluded Baker lied about the nature of ArthroCare’s relationship with DiscoCare and his role in using DiscoCare to manipulate ArthroCare’s earnings and revenues” during a deposition before the U.S. Securities & Exchange Commission.

“Similarly, a reasonable juror could have concluded Baker lied when he stated the price ArthroCare paid to acquire DiscoCare, $25 million, was not related to the $25 million termination fee in ArthroCare’s contract with DiscoCare,” he wrote.

“In sum, the Court finds the evidence was overwhelming such that a rational jury could conclude beyond a reasonable doubt Baker willfully participated in a conspiracy to commit wire fraud and securities fraud, committed both wire fraud and securities fraud, and made false, material statements to the SEC he knew to be false. Therefore, Baker’s argument the government’s evidence was insufficient to prove guilt beyond a doubt is without merit,” Sparks wrote.

As for the Honeycutt-based argument, Sparks found that “in a scheme to defraud the focus is on depriving a victim of property for some benefit; precedent imposes no requirement that a defendant must directly gain or possess said property.”

“At trial, substantial evidence was presented to show the misleading and fraudulent statements made by Baker induced investment in ArthroCare. Baker’s co-conspirators testified the purpose of the scheme was to attract investment through inflated earnings per share. Testimony also suggested the scheme was intended to enrich Baker and his co-conspirators through bonuses and the appreciation of their own ArthroCare stock and stock options. In particular, evidence produced at trial showed Baker significantly benefitted from the scheme as he received high compensation, collected performance bonuses, and profited from the sale of his personal stock in ArthroCare,” he wrote.

“Additionally, various analysts and investors testified they would not have invested in or recommended investing in ArthroCare if they had known the true state ofArthroCare’s earnings and its relationship with DiscoCare. These same analysts and investors further testified they lost millions of dollars because of Baker’s scheme. Thus, viewing the evidence in the light most favorable to the prosecution, the court concludes a rational trier of fact could have found the goal of the scheme conducted by Baker and his co-conspirators was to deprive investors of money they otherwise would have possessed,” Sparks wrote.

ArthroCare, which was acquired for $1.7 billion by Smith & Nephew (NYSE:SNN) in May 2014, agreed in January 2014 to pay a $30 million fine and enter a deferred prosecution deal to settle its part in the fraud.