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United States v. Baker

United States Court of Appeals, Fifth Circuit

April 26, 2019

UNITED STATES OF AMERICA, Plaintiff - Appellee
MICHAEL BAKER, Defendant-Appellant

          Appeal from the United States District Court for the Western District of Texas

          Before WIENER, SOUTHWICK, and COSTA, Circuit Judges.

          WIENER, Circuit Judge

         Treating the petition for rehearing en banc as a petition for panel rehearing, the petition for rehearing en banc is DENIED. The following is substituted in place of our opinion.

         Defendant-Appellant Michael Baker was the Chief Executive Officer of ArthroCare, a publicly traded medical-device company. Baker, along with the company's other senior executives, engaged in a "channel-stuffing" scheme that involved sending excess products to a distributor that did not need those products. ArthroCare reported those shipments as legitimate sales, which inflated the company's revenue numbers in its financial reports. Baker hid this scheme from ArthroCare's board and auditors, and he made false statements to the SEC and to investors about the company's business model and relationships with its distributors. When it was uncovered that the statements were false and that some of these sales were not legitimate, ArthroCare restated its earnings and revenues, causing its stock price to drop.

         This is the second time Baker has been convicted. He was first convicted in 2014, but this court vacated that conviction based on erroneous evidentiary rulings. At the second trial, after seven days of testimony-including from the other ArthroCare executives involved in the scheme-a jury convicted Baker on charges of wire fraud, securities fraud, making false statements to the SEC, and conspiracy to commit wire fraud and securities fraud.

         Baker appealed, raising challenges to the district court's evidentiary rulings and jury instructions. Finding no reversible error, we AFFIRM.

         I. Facts and Proceedings

         A. Factual Background

         Michael Baker was the CEO of ArthroCare, a publicly traded medical-device company based in Austin, Texas. ArthroCare's products used a technology that allowed doctors to cut, seal, and remove tissue at a low temperature and in a minimally invasive manner. ArthroCare sold its products to hospitals and surgery centers through sales representatives, sales agents, and, relevant here, distributors. As CEO, Baker was involved in ArthroCare's day-to-day operations. He worked closely with other senior executives, including Michael Gluk, the Chief Financial Officer, John Raffle, the Senior Vice President of Operations, David Applegate, the Vice President of the "spine division," and Steve Oliver, the Senior Director of Financial Planning.[1]

         Baker set growth targets for the company and oversaw a "channel-stuffing" operation to inflate ArthroCare's revenue numbers. Baker, as well as Gluk, Raffle, and Applegate, hid the fraudulent nature of this operation from ArthroCare's board of directors, audit committee, and auditors. They also made false statements to investors about the company's revenue projections and relationships with its distributors. When all this was uncovered, ArthroCare restated its past earnings and revenue, causing its stock price to drop and its investors to sustain significant losses.

         This court previously described the basic structure of the channel-stuffing scheme between ArthroCare and one of its distributors, DiscoCare; Baker's false statements to investors about that relationship; and how the fraud was uncovered:

"Channel stuffing" is a fraudulent scheme companies sometimes attempt, in an effort to smooth out uneven earnings- typically to meet Wall Street earnings expectations. Specifically, a company that anticipates missing its earnings goals will agree to sell products to a coconspirator. The company will book those sales as revenue for the current quarter, increasing reported earnings. In the following quarter, the coconspirator returns the products, decreasing the company's reported earnings in that quarter. Effectively, the company fraudulently "borrows" earnings from the future quarter to meet earnings expectations in the present. Thus, in the second quarter, the company must have enough genuine revenue to make up for the "borrowed" earnings and to meet that quarter's earnings expectations. If the company does not meet expectations in the second quarter, it might "borrow" ever-larger amounts of money from future quarters, until the amounts become so large that they can no longer be hidden and the fraud is revealed.
ArthroCare carried out exactly this fraud, with DiscoCare playing the role of coconspirator. Over several years, ArthroCare fraudulently "borrowed" around $26 million from DiscoCare. This "borrowing" occurred by directing DiscoCare to buy products from ArthroCare on credit, with the agreement that ArthroCare would be paid only when DiscoCare could sell those products. Although this can be a legitimate sales strategy, it was fraudulent here because DiscoCare purchased medical devices that it knew it could not sell reasonably soon for the sole purpose of propping up ArthroCare's quarterly earnings. This fraud was carried out under the day-to-day supervision of John Raffle, the Vice President of Strategic Business Units, and of David Applegate, another [ArthroCare] executive.
DiscoCare's business model (apart from the accounting fraud) was potentially wrongful, though no charges were brought. DiscoCare provided a medical device for which most insurers refused reimbursement. To sell its device, DiscoCare reached agreements with plaintiffs' attorneys in civil actions for personal injuries. These agreements resulted in the majority of DiscoCare's sales. Under this agreement, DiscoCare would treat clients of the attorneys. The plaintiffs' attorneys would then cite the expense of their clients' treatment as a reason for defendants to settle personal injury lawsuits. DiscoCare also allegedly illegally coached doctors on which billing codes to use, in an effort to increase insurance reimbursements. This practice allegedly went as far as instructing doctors to perform an unnecessary surgical incision to classify the treatment as a surgery. No charges were filed on any of this conduct.
ArthroCare subsequently purchased DiscoCare for $25 million, a price that far exceeded its true value (DiscoCare had no employees at the time). During this purchase, the fraud began to unravel, with media reports alleging accounting improprieties. To reassure investors, Gluk and Baker made several false statements during a series of conference calls. As evidence mounted, the audit committee of ArthroCare's board of directors commissioned an independent investigation by forensic accountants and the law firm Latham & Watkins. As a result of this investigation, the board determined that Raffle and Applegate had committed fraud and that Gluk and Baker had not adequately supervised them. The board restated earnings, resulting in a significant drop in the value of ArthroCare stock. The board fired Raffle and Applegate for their roles in the fraud. The board also fired Gluk, determining that he had been remiss in not detecting the fraud earlier. Finally, the board fired Baker, determining that he should have implemented better internal controls.[2]

         After the Securities and Exchange Commission ("SEC") and the Department of Justice ("DOJ") investigated, a grand jury indicted Baker and Gluk on charges for wire fraud, securities fraud, making false statements to the SEC, and conspiracy to commit wire fraud and securities fraud.

         B. Procedural Background

         Baker has been convicted twice for his conduct relating to the fraud at ArthroCare. At the first trial in June 2014, a jury convicted Baker and Gluk on all counts. On appeal, this court vacated Baker's and Gluk's convictions on evidentiary grounds and remanded for a new trial.[3]

         On remand, Gluk admitted that he had participated in the fraud, agreed to cooperate and testify against Baker, and pleaded guilty to conspiracy to commit wire fraud and securities fraud. The government retried Baker, this time with Gluk as a witness. The facts established at the second trial largely track the facts in the first trial, as this court set them out in the previous appeal.[4] The government put on thirteen witnesses, including: Gluk, [5] Raffle, [6]Applegate, [7] Oliver, [8] ArthroCare's Chief Medical Officer and Audit Committee chairman, and several analysts and investors who testified to their reliance on Baker's statements.

         At trial, Baker's counsel conceded that a fraud had occurred at ArthroCare, but the defense was that Gluk, Raffle, and Applegate had orchestrated it without Baker's knowledge. Baker's counsel attempted to show that although Baker was generally aware of the nature of DiscoCare's business, he did not have specific knowledge about the fraudulent details, or he learned about them too late. Baker's counsel also sought to undermine Gluk's, Raffle's, and Applegate's credibility based on their plea deals with the government and their own participation in the DiscoCare scheme. Baker did not testify or present witnesses, but his counsel did introduce exhibits, including the SEC memoranda that this court had held were admissible.

         The jury convicted Baker on twelve counts and acquitted him on two of the wire fraud counts and one false statement count. The trial court then (1) sentenced him to a 240-month term of imprisonment and five years of supervised release; (2) imposed a $1 million fine; and (3) ordered that he forfeit $12.7 million.

         Baker timely appealed.

         II. Analysis

         Baker challenges his conviction on four grounds. First, he contends that the FBI case agent's testimony was improper "summary witness" testimony. Second, he asserts that the district court should have admitted the SEC deposition testimony of Brian Simmons, ArthroCare's former controller who invoked the Fifth Amendment and did not testify at Baker's trial. Third, he challenges the district court's jury instruction on wire fraud, insisting that it did not require the government to prove the "obtain money or property" element of that offense. Finally, he maintains that the district court erred by refusing to instruct the jury on "advance knowledge" for accomplice liability under Rosemond v. United States, 134 S.Ct. 1240 (2014). We address each issue in turn.

         A. Summary Witness Testimony 1. Background

         FBI Special Agent Steven Callender was the case agent. He reviewed many of the documents admitted into evidence and testified at trial. Baker contends that Agent Callender's testimony was impermissible "summary witness" testimony.

         Baker objected at trial to Agent Callender's testimony. The district court overruled his objection and allowed Agent Callender to testify, but stated that its ruling did not stop Baker's counsel "from making an objection if [the testimony] gets into substantive evidence. If he's just talking about his research of documents, that's tangible, then he can go into the summary. But if he gets into any other testimony, feel free to object."

         When the prosecutor asked Agent Callender to explain his summary charts setting out the exhibits that corresponded to each count in the indictment, Baker's counsel objected to the witness "being asked whether or not these are the exhibits that correspond to those counts in the indictment." The district court overruled that objection, stating "I think this is a very complicated case." The court then gave the jury a limiting instruction about the use of demonstratives and summary witnesses:

[L]et me remind you, a demonstrative evidence is really not evidence. When he moves to introduce it, he's just giving notice that he's got a [sic] demonstrative evidence. If we had a great big blackboard or bulletin board while he presents a witness, he could have the witness -- or he can draw on it with regard to the witness' testimony. So this is not evidence. It is merely an illustration because they're going to use this FBI agent as a summary witness, and you'll give it whatever substance that you think it deserves, if any.

         Agent Callender then testified. His testimony consisted primarily of reading and explaining (1) exhibits that had already been admitted at the trial and (2) new exhibits that were being admitted through his testimony. The exhibits he testified about included audio clips, transcripts of conference calls, documents showing ArthroCare's organizational charts, board presentations, payroll information, emails between Baker and other executives, and SEC filings.

         2. Analysis

         We review "the admission of evidence, including summaries and summary testimony, for abuse of discretion."[9] "If there is error, it is 'excused unless it had a substantial and injurious effect or influence in determining the jury's verdict.'"[10]

         We "allow[] summary witness testimony in 'limited circumstances' in complex cases," but have "repeatedly warned of its dangers."[11] "While such witnesses may be appropriate for summarizing voluminous records, as contemplated by Rule 1006, rebuttal testimony by an advocate summarizing and organizing the case for the jury constitutes a very different phenomenon, not justified by the Federal Rules of Evidence or our precedent."[12] "In particular, 'summary witnesses are not to be used as a substitute for, or a supplement to, closing argument.'"[13]

         "To minimize the danger of abuse, summary testimony 'must have an adequate foundation in evidence that is already admitted, and should be accompanied by a cautionary jury instruction.'"[14] "Moreover, '[f]ull cross-examination and admonitions to the jury minimize the risk of prejudice.'"[15]

         i. Summary Witnesses in General

         Baker claims that, in general, summary witness testimony is inadmissible. He argues that summary witnesses lack personal knowledge of the matter to which they are testifying, so Rule 602 of the Federal Rules of Evidence prohibits that type of testimony. He also contends that, because Rule 1006, which governs summaries, is located within Article X of the Rules that govern "writings and recordings"-and not "witnesses"-Rule 1006 does not allow live summary witnesses.

         Regrettably, Baker does not cite United States v. Armstrong, the key Fifth Circuit case that refutes these arguments. Contrary to Baker's contention that summary witnesses are inadmissible, this circuit expressly allows summary witnesses to summarize voluminous records in complex cases.[16]

         ii. Agent Callender's Testimony

         The next issue is whether Agent Callender's testimony permissibly summarized the voluminous evidence, or impermissibly "organiz[ed] the case for the jury" or served as a "substitute" for closing argument.[17]

         Baker contends that Agent Callender's testimony was "wholly argumentative," drew inferences for the jury, and impermissibly summarized the prosecutor's closing argument. Baker flags several parts of Agent Callender's testimony as objectionable: (1) Agent Callender read an email in which Raffle indicates that Baker had approved adding DiscoCare employees to the ArthroCare payroll; (2) the prosecutor asked Agent Callender whether a letter in an employee's file was "consistent or inconsistent" with ArthroCare's organizational charts; (3) testimony about a conference call at which Gluk discussed a "small success fee" paid to DiscoCare and subsequent emails showing a related $10 million payment to DiscoCare; (4) Agent Callender's discussion of emails that Baker had sent to himself containing his monthly stock portfolio; and (5) Agent Callender's testimony about particular exhibits that corresponded to the counts listed on a demonstrative chart. Baker describes this testimony as "highlight[ing] key pieces of prosecution evidence," "walk[ing] through the charges count by count," and "indistinguishable from a closing argument."

         The government counters that most of Agent Callender's testimony was not "summary witness" testimony, but rather was about exhibits that were being admitted during his testimony. The government also argues that the large number of documents and the complexity of the case justified the use of a summary witness.

         When Agent Callender began testifying, the government introduced twenty-one new exhibits, each of which was admitted. Much of his testimony consisted of reading the contents of those exhibits aloud. Baker's specific objections are primarily to the parts of Agent Callender's testimony that introduced those new exhibits. But, this type of testimony is not summary testimony.[18]

         In contrast, Agent Callender's testimony that tied specific, already-admitted exhibits to the substantive indictment counts listed on a demonstrative chart is summary testimony. Such testimony is permissible in complex cases with voluminous evidence. Contrary to Baker's contention that this was not a complex case, channel stuffing is a relatively complicated type of fraud. The jury heard seven days of testimony; there were 15 charges; and the district court stated that it was "a very complicated case." The evidence was also voluminous. The government introduced 193 exhibits and Baker introduced 87. Agent Callender gave a "rough estimate" that the investigation involved "between three and seven million" documents.

         A review of the testimony shows that, although Agent Callender highlighted some key pieces of evidence, the testimony did not draw inferences for the jury, was not "wholly argumentative," and did not serve as a substitute for closing argument.[19] Rather, the testimony consisted of reading the contents of exhibits and sorting through the evidence to show how the documents related to each other and to the charges in the indictment.[20] This type of testimony is different from the testimony that this circuit has excluded, such as allowing a case agent "to recap a significant portion of the testimony already introduced by the Government" during a rebuttal case, [21] putting on a summary witness "before there [was] any evidence admitted for the witness to summarize, "[22] or using a summary witness to "merely [] repeat or paraphrase the in-court testimony of another as to ordinary, observable facts . . . ."[23] We conclude that Agent Callender's testimony was permissible.

         To the extent that Agent Callender's testimony went too far, all three curatives were present: (1) the testimony had an adequate foundation in the evidence already admitted; (2) the district court gave the jury a limiting instruction about summary evidence generally; and (3) Baker's counsel cross-examined Agent Callender.[24] These minimized the risk of prejudice, so any error was harmless.[25]

         B. Brian Simmons's SEC Deposition Testimony

         In 2010, the SEC deposed Brian Simmons, ArthroCare's former controller, in its civil investigation of the company. At the first trial, Baker sought to subpoena Simmons, but Simmons refused to testify, asserting his Fifth Amendment right against self-incrimination. Baker and Gluk sought to admit Simmons's SEC deposition testimony under Rule 804(b)(1). In a written order, the district court excluded the testimony.

         At the second trial, after Raffle, Applegate, and Gluk testified that Simmons had participated in the fraud at ArthroCare, [26] Baker again subpoenaed Simmons. But Simmons refused to testify on Fifth Amendment grounds, and Baker again sought to admit excerpts of Simmons's SEC deposition testimony. Baker proffered excerpts of that testimony, in which Simmons (1) denied wrongdoing and awareness of improper activities at ArthroCare and (2) stated that ArthroCare's audit committee and outside auditor, PricewaterhouseCoopers, were aware of a "bill-and-hold" practice for ArthroCare's sales to DiscoCare. The district court, referencing its order in the first trial, again excluded the testimony.

         Rule 804(b)(1) provides exceptions to the rule against hearsay for "former testimony" of witnesses who are unavailable. It provides:

(b) . . .
(1) Former Testimony. Testimony that:
(A)was given as a witness at a trial, hearing, or lawful deposition, whether given during the current proceeding or a different one; and
(B)is now offered against a party who had - or, in a civil case, whose predecessor in interest had - an opportunity and similar motive to develop it by direct, cross-, or redirect examination.[27]

         Simmons's deposition testimony contains hearsay and his invocation of the Fifth Amendment made him unavailable.[28] The issues therefore are (1) whether the DOJ and the SEC are the "same party" or "predecessors in interest," and (2) if so, whether the SEC, in its civil investigation of ArthroCare, had both the ...

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