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In the Courts

Fraud Convictions Vacated for District Judge's Evidentiary Errors

On Jan. 25, the U.S. Court of Appeals for the Fifth Circuit vacated the convictions of Michael Baker and Michael Gluk, the former CEO and CFO of ArthroCare, respectively, and remanded for a new trial for their role in a $750 million securities fraud. United States v. Gluk, 2016 WL 304041 (5th Cir. 2016). The circuit court ruled that the district judge had wrongly excluded from evidence investigative reports prepared by a law firm and the SEC, while improperly allowing prosecutors to dwell on “salacious details” of an unrelated fraud at the company. Id. at 2.

Gluk and Baker were accused of overseeing a “channel-stuffing” scheme at ArthroCare, a medical device company headquartered in Austin, TX. The purpose of the scheme was to prop up the company's stock price by inflating sales and smoothing out earnings through fraudulent quarter-end transactions. In a typical channel-stuffing scheme, a company at risk of missing its quarterly earnings expectations will oversell product to a co-conspirator distributor, which then returns the unsold product in the next quarter. This allows the company to overstate its quarterly earnings, but this can quickly spiral out of control as the company must continually repeat the scheme in order to meet expectations.

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