The U.S. Court of Appeals for the Fifth Circuit has overturned the fraud convictions of former ArthroCare CEO Michael Baker and CFO Michael Gluk, saying that the Austin trial court erred in excluding evidence that implicated other people in the fraud scheme.

In June 2014, Baker and Gluk were convicted of wire fraud, securities fraud and conspiracy in an alleged scheme to bolster Austin-based ArthroCare's stock price by engaging in a practice known as “channel stuffing” — inflating sales results by forcing more products into a distribution channel than the channel is capable of selling. Baker was also convicted of making false statements.

During the trial, evidence from investigations by the U.S. Securities and Exchange Commission and the law firm of Latham & Watkins was excluded by the trial judge. The Fifth Circuit said that this exclusion “was not harmless error” and ordered a new trial for Baker and Gluk, who are currently serving respective prison terms of 20 years and 10 years.

In the appeal to the Fifth Circuit, Baker and Gluk contended that the trial judge erred in admitting prejudicial evidence of alleged fraud at DiscoCare, an ArthroCare distributor. The appeals court said that the trial judge should have taken steps to halt prosecutors from dwelling on “salacious details” of business practices at DiscoCare, over which Baker and Gluk had no control.

In January 2014, ArthroCare entered a deferred prosecution agreement with the Justice Department and agreed to pay a $30 million penalty. The company has since been acquired by British medical equipment company Smith & Nephew Plc.

The Cogdell Law Firm is a boutique law firm focusing on large, complex business and criminal financial-related litigation, including white collar criminal defense, securities fraud, health care fraud investigation, criminal appeals and state criminal defense. When results matter most, contact Dan Cogdell at (713) 426-2244 or [email protected]