ArthroCare ex-CEO, ex-CFO win reversal of U.S. fraud convictions

(Adds Department of Justice comment, ArthroCare settlement of criminal case)

By Jonathan Stempel

Jan 25 (Reuters) - A U.S (Other OTC: UBGXF - news) . appeals court on Monday overturned the convictions of the former chief executive officer and chief financial officer of surgical device maker ArthroCare Corp for engineering what federal prosecutors called a $750 million securities fraud.

The 5th U.S. Circuit Court of Appeals in New Orleans agreed with former CEO Michael Baker and former CFO Michael Gluk that the trial judge in Austin, Texas, erred in excluding evidence suggesting that other people committed the fraud and had misled one or both executives.

Excluding evidence from probes by the U.S. Securities and Exchange Commission and the law firm Latham & Watkins "was not harmless error," Circuit Judge E. Grady Jolly wrote for the appeals court, which ordered a new trial.

Baker, 56, and Gluk, 57, have been serving respective prison terms of 20 years and 10 years following their June 2014 convictions for wire fraud, securities fraud and conspiracy. Baker was also convicted of making false statements.

A U.S. Department of Justice spokesman declined to comment.

Baker and Gluk were accused of having from 2005 to 2009 schemed to prop up ArthroCare's stock price by inflating sales and smoothing out earnings through a series of quarter-end transactions, known as "channel stuffing," with distributors.

Two former ArthroCare executives who pleaded guilty to felonies testified that Baker and Gluk knew of the fraud, which the defendants denied.

ArthroCare agreed in January 2014 to pay a $30 million penalty and enter a deferred prosecution agreement to end a Justice Department probe.

The Austin-based company was acquired four months later by British medical equipment company Smith & Nephew Plc (LSE: SN.L - news) for about $1.7 billion, based on reported shares outstanding.

Baker and Gluk also argued that their trial judge erred by admitting prejudicial evidence of an alleged fraud at the distributor DiscoCare.

Grady stopped short of saying this alone justified reversing the convictions, but said the trial judge should have done more to stop prosecutors from dwelling on "salacious details" about DiscoCare's business that were not Baker's and Gluk's fault.

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.

The case is U.S. v. Gluk et al, 5th U.S. Circuit Court of Appeals, No. 14-51012. (Reporting by Jonathan Stempel in New York; Editing by Jonathan Oatis and Lisa Shumaker)