Ex-ArthroCare CEO Baker loses appeal of 20-year sentence

Gavel, handcuffsA federal appeals court this week upheld the 20-year sentence imposed on former ArthroCare CEO Michael Baker after his second conviction in a $750 million fraud case.

Baker and ex-ArthroCare CFO Michael Gluk were first convicted in June 2014 on charges that they ran a scheme to inflate revenues 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 the distributor in December 2007.

After 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 and ordered new trials. Gluk later pleaded guilty to a single count of conspiracy to commit wire fraud and securities fraud and testified against Baker at his former boss’s second trial.

That jury convicted Baker on 12 of 15 counts; he subsequently lostbid to toss the wire fraud charges and in November 2017 was again sentenced to 20 years plus five years of supervised release, a $1 million fine and the forfeiture of another $12.7 million. Other former ArthroCare executives, David Applegate and John Raffle, who pleaded guilty in 2013, drew sentences of five years and 6⅔ years, respectively, the DoJ said. Gluk drew 50 months in January 2018.

After the second conviction Baker again appealed to the 5th Circuit on four grounds, according to court documents, arguing that an FBI agent’s testimony amounted to improper “summary witness” testimony; that the district court should have allowed the testimony of an unindicted co-conspirator, former controller Brian Simmons, who pleaded the 5th Amendment; that the lower court’s jury instruction on wire fraud should have required prosecutors to prove the “obtain money or property” clause for that charge; and that the Texas district court should have instructed the jury on “advance knowledge” for accomplice liability.

The appeals court this time upheld Baker’s conviction, ruling Jan. 9 that the FBI agent’s was permissible and that the Texas court was right to exclude Simmons’ testimony. On the “obtain money or property” issue, the appeals court found that the district court’s instructions “allowed for a conviction if Baker intended to deceive the victims out of their money for his own financial benefit.”

“The evidence at trial showed that Baker did just that,” the appeals court found. “By inducing investments in ArthroCare, the scheme affected the victims’ property rights by wrongfully leaving them ‘without money that they otherwise would have possessed.’”

The circuit court also upheld the jury instructions on accomplice liability, finding that “the evidence at trial – including testimony from three coconspirators – provided a sufficient basis for the instruction.”

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

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Ex-ArthroCare CEO Brown draws 20-year sentence

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Gavel, handcuffsA federal judge in Texas last week accepted prosecutors’ recommendations in sentencing former ArthroCare CEO Michael Baker to a 20-year prison term after his conviction in a $750 million fraud 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. Baker moved to have the wire fraud charges tossed based on the Supreme Court case Honeycutt v. United States; Judge Sam Sparks disagreed, finding that the jury heard ample evidence of Baker’s guilt on the wire fraud charges.

Sparks later ordered Baker to cough up the nearly $21.6 million he pulled down from stock sales during the alleged conspiracy; Baker argued that he should only forfeit about $1.4 million, according to the documents.

Sparks acceded to the prosecutors’s request Nov. 3, imposing a 20-year sentence plus five years of supervised release, a $1 million fine and the forfeiture of $13.7 million, according to the U.S. Justice Dept.

Other former ArthroCare executives, David Applegate and John Raffle, who pleaded guilty in 2013, drew sentences of 5 years and 6⅔ years, respectively, the DoJ said. Gluk is slated to be sentenced Jan. 5, 2018.

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.