United States v. Michael Baker , 923 F.3d 390 ( 2019 )

Case: 17-51034 Document: 00514932568 Page: 1 Date Filed: 04/26/2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 17-51034 FILED
April 26, 2019
Lyle W. Cayce
UNITED STATES OF AMERICA, Clerk
Plaintiff - Appellee
v.
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
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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
1 Raffle described Baker’s “inner circle” at the company and testified that he did not
“believe anyone held anything back from this group when we were there. . . . [I]t was a small
company, we were working together to achieve a goal, and we talked about everything.” Gluk
testified to the executives’ “informal” “open-door” working environment and that he and
Baker would talk “at least once a day.”
2
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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
3
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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
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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
2 United States v. Gluk, 831 F.3d 608, 611–12 (5th Cir. 2016) (amended opinion on
petition for panel rehearing).
3 Id. at 610.
4 See id. at 611–612.
5 Gluk testified that he “conspired with Mike Baker, John Raffle, David Applegate and
others to misrepresent the accounts of ArthroCare Corporation, to engage in channel stuffing
and hide the nature of the relationship between DiscoCare and ArthroCare, and as a result
of all that, [] filed incorrect statements with the Securities and Exchange Commission.”
6 Raffles testified that he had “an agreement” with Baker to engage in channel stuffing
to “manipulate ArthroCare’s earnings and revenue numbers.”
7 Applegate testified that he had an agreement with Baker “[n]ot to disclose DiscoCare
and particularly not to disclose the personal injury aspect of DiscoCare.”
8 Oliver testified that he participated in a scheme with Baker to “manipulate revenue
and income in order to achieve targets that were in alignment with what the expectation[] of
the analyst community were.”
5
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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
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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.
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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
9 United States v. Armstrong, 619 F.3d 380, 383 (5th Cir. 2010).
10 Id. (quoting United States v. Harms, 442 F.3d 367, 375 (5th Cir. 2006)).
11 Id. at 385 (quoting United States v. Nguyen, 504 F.3d 561, 572 (5th Cir. 2007)).
12 Id. (quoting United States v. Fullwood, 342 F.3d 409, 414 (5th Cir. 2003)).
13 Id.
8
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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
14 Id. (quoting United States v. Bishop, 264 F.3d 535, 547 (5th Cir. 2001)).
15 Id. (quoting Bishop, 264 F.3d at 547).
16 Id.
17 See id.
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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
18 See United States v. Castillo, 77 F.3d 1480, 1499 (5th Cir. 1996) (“[T]he witness may
testify to facts that were ‘personally experienced’ by him, even though this testimony
‘bolsters’ the government’s other evidence.”).
10
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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
19 See United States v. Echols, 574 F. App’x 350, 356 (5th Cir. 2014) (“[The summary
witness] only succinctly referenced patients’ and doctors’ testimony to remind the jury which
witnesses the documentary evidence related to and said virtually nothing about the
testimony of the government’s principal trial witnesses.”).
20 Here is one representative example:
Q. Can we take a look at Count 5? Can you tell the jury about what government
exhibits relate to Count 5?
A. Count 5 relates to an email from Mike Gluk to Mike Baker, who were both in
Texas, and it was routed through ArthroCare’s servers in California. And the
e-mail was sent March 20, 2008. It’s Exhibit 379.
Q. All right. And that’s been put into evidence, correct?
A. It has.
21 Fullwood, 342 F.3d at 412–13.
22 United States v. Griffin, 324 F.3d 330, 348–49 (5th Cir. 2003).
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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
23 Castillo, 77 F.3d at 1499–1500.
24 Armstrong, 619 F.3d at 385.
25 See United States v. Spalding, 894 F.3d 173, 186 (5th Cir. 2018).
26 Simmons was an unindicted co-conspirator.
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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 opportunity and a similar motive to the DOJ in
developing Simmons’s testimony.
We review the district court’s exclusion of the testimony for abuse of
discretion. 29 We conclude that the SEC and the DOJ were not the same party
for 804(b) purposes under these circumstances. But even if the agencies were
the same party, they did not have sufficiently similar motives in developing
Simmons’s testimony.
27 FED. R. EVID. 804(b)(1).
28 Id. R. 804(a)(1).
29 United States v. Kimball, 15 F.3d 54, 55 (5th Cir. 1994).
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1. Same Party
This court has not decided whether the SEC and the DOJ are the same
party for 804(b) purposes. 30 The case law on this issue is limited, and no court
has expressly held that the SEC and the DOJ are the same party. 31 Courts
sometimes proceed directly to the “similar motive” inquiry. 32
Baker contends that the two agencies are the same party because they
are both Executive Branch agencies. He relies primarily on United States v.
Sklena, 692 F.3d 725, 730–32 (7th Cir. 2012), which held that the Commodity
Futures Trading Commission (“CFTC”) and the DOJ were the same party for
804(b) purposes. He also relies on Boone v. Kurtz, 617 F.2d 435, 436 (5th Cir.
1980), in which we held that different government agencies were the same
party for res judicata purposes.
In response, the government cites United States v. Martoma, 12-Cr. 973,
2014 WL 5361977, at *3–5 & n.5 (S.D.N.Y. Jan. 8, 2014), in which the district
court considered whether an unavailable co-conspirator’s prior SEC deposition
was admissible at a later criminal trial. The Martoma court held that the SEC
and DOJ were not the same party for 804(b) purposes. 33
In Sklena, the Seventh Circuit relied on the significant control that the
DOJ exercised over the CFTC, including the CFTC’s statutory mandate to
30 Neither party contends that the SEC was the DOJ’s “predecessor in interest” at
Simmons’s deposition.
31 See United States v. Sklena, 692 F.3d 725, 731 (7th Cir. 2012) (“There is very little
law on the question whether two government agencies, or as in this case the United States
and a subsidiary agency, should be considered as different parties for litigation purposes, or
if they are both merely agents of the United States.”).
32 See, e.g., United States v. Whitman, 555 F. App’x 98, 103 (2d Cir. 2014) (summary
order) (“Assuming arguendo that the SEC lawyers and the trial prosecutors can be treated
as the same party, the district court reasonably concluded that they had differing motivations
to develop testimony by cross-examination.”); see also United States v. Kennard, 472 F.3d
851, 855 (11th Cir. 2006) (not addressing the “same party” issue and instead addressing only
whether the SEC and the DOJ had similar motives).
33 United States v. Martoma, 12-Cr. 973, 2014 WL 5361977, at *3–5 & n.5 (S.D.N.Y.
Jan. 8, 2014).
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report to the DOJ. 34 The court reasoned that the “statutory control mechanism
suggests to us that, had the Department wished, it could have ensured that
the CFTC lawyers included questions of interest to the United States when
they deposed [the non-testifying codefendant].” 35 The court’s holding also
relied on the agencies’ “closely coordinated roles on behalf of the United States
in the overall enforcement of a single statutory scheme.” 36 The Sklena court
concluded that “[f]unctionally, the United States is acting in the present case
through both its attorneys in the Department and one of its agencies, and we
find this to be enough to satisfy the ‘same party’ requirement of Rule
804(b)(1).” 37
Here, the district court determined that the SEC and the DOJ were not
the same party because the SEC conducted an independent investigation of
ArthroCare and its employees and independently pursued its own criminal and
civil actions. On appeal, Baker disagrees with that conclusion. He points to
several emails between prosecutors and SEC investigators describing
telephone calls, meetings, and “working together.” According to Baker, these
show that the SEC “was functionally working as part of the prosecution team.”
In response, the government points out that (1) the SEC did not
participate in any interviews conducted by the DOJ; (2) the DOJ was not
present at any of the SEC’s depositions; (3) an SEC attorney was not cross-
designated or assigned to the prosecution team; and (4) the DOJ did not
provide the SEC with materials from its investigation. In an order denying the
designation of the SEC as part of the prosecution team at the first trial, the
district court concluded that “[w]hile the SEC provided some material to the
34 692 F.3d at 731–32 (citing 7 U.S.C. § 13a–1(a), (f)–(g)).
35 Id. at 732.
36 Id.
37 Id.
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Government—which the Government, in turn, has provided to Defendants—
the SEC’s investigation pre-dated and was independent from the Government’s
investigation, and there was no overlap of personnel or direction.” The
government also notes that when the DOJ formally requested information
from the SEC, the SEC faced restrictions responding to that request and
limited the information it provided to the DOJ.
Although there was some cooperation between the two agencies, it was
not extensive enough for the SEC and the DOJ to be deemed the same party.
Baker’s contention that the SEC and the DOJ coordinated closely is
undermined by (1) the telephone calls and meetings Baker cites occurred after
Simmons’s February 2010 deposition and (2) the district court’s specific
findings that the SEC had been uncooperative and limited the information it
provided to the DOJ.
Sklena does not mandate a different result. Unlike the CFTC, the SEC
is not statutorily required to report to the DOJ, nor must the two agencies
cooperate to enforce the same statutory scheme. The SEC is an independent
agency with its own litigating authority. 38
2. Opportunity and Similar Motive
Even if the SEC and the DOJ were deemed to be the same party, they
did not share a sufficiently similar motive in developing Simmons’s testimony.
When, as here, testimony in a prior civil proceeding is being offered against
38 In contrast to the CFTC, “the SEC has ‘complete autonomy in civil prosecutions’ and
is not required to report on its activities to the USAO.” Martoma, 2014 WL 5361977, at *4 &
n.5 (quoting SEC v. Robert Collier & Co. Inc., 76 F.2d 939, 940 (2d Cir. 1935)); see United
States v. Klein, 16-cr-422, 2017 WL 1316999, at *6 (S.D.N.Y. Feb. 2, 2017) (“In contrast [to
Sklena,] the SEC and DOJ are independent executive agencies and there is no indication
whatsoever that they coordinated their investigations here.”); see also 15 U.S.C. § 77t
(“Whenever it shall appear to the Commission that any person is engaged or about to engage
in any acts or practices which constitute or will constitute a violation of the provisions of this
subchapter, . . . the Commission may, in its discretion, bring an action in any district court
of the United States . . . .”).
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the government in a subsequent criminal proceeding, this court considers “(1)
the type of proceeding in which the testimony is given, (2) trial strategy, (3) the
potential penalties or financial stakes, and (4) the number of issues and
parties.” 39
At the first trial, the district court excluded the testimony, ruling that
the SEC and the DOJ did not have sufficiently similar motives. At the second
trial, the district court referenced its previous order and again excluded
Simmons’s testimony. The court added that there was “no question” that
Simmons was “involved in a conspiracy if there was a conspiracy,” and that he
would have had “to be deaf, blind and dumb in his position not to see it.” The
court concluded that (1) “the SEC ha[d] been totally noncooperative in this
criminal case from the beginning, declined to share any information to the
Department of Justice [or] counsel in this case for the defense” and would not
“provide its investigators to cooperate in any way”; (2) The SEC’s civil
investigation of ArthroCare was “totally different from a criminal trial”; and
(3) the court’s review of the SEC deposition testimony showed no “basis for any
cross-examination.”
Even if we assumed that the SEC and the DOJ are the same party, the
agencies did not have sufficiently similar motives. First, the stakes and
burdens of proof were different: The SEC was in the discovery phase in relation
to potential civil enforcement actions, whereas the DOJ was investigating for
potential criminal involvement after a grand jury indictment. Second, the
focuses and motivations of the investigations were different: The SEC was
39 United States v. McDonald, 837 F.2d 1287, 1292 (1988) (quoting United States v.
Feldman, 761 F.2d 380, 385 (7th Cir. 1985)); see also WRIGHT & MILLER, 30B FED. PRAC. &
PROC. § 6974 (2018 ed.) (“The ‘similar motive’ sentiment can be boiled down to a call for trial
courts to analyze: (i) the issue or issues to which the testimony was addressed, (ii) the degree
to which those issues mattered to the ultimate resolution of the proceeding; and then (iii)
compare those variables across the two proceedings.”).
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likely developing a factual background regarding wrongdoing at the company
generally, whereas the DOJ would have been gathering evidence to convict
specific individuals. 40 Third, the lack of cross-examination shows the agencies’
different trial strategies: The SEC deposition excerpts show no sign of cross-
examination or additional follow-up questions after Simmons denied his
involvement and that he had any conversations with Baker. In contrast, for
the reasons we have already explained, the agencies were not coordinating
their activity to a degree that would have led the SEC lawyer to cross-examine
Simmons like a criminal prosecutor would have. 41
The district court did not abuse its discretion in excluding Simmons’s
deposition testimony.
C. The “Obtain Money or Property” Element of Wire Fraud
Baker next contends that the term “obtain money or property” in the
wire fraud statute, 18 U.S.C. § 1343, requires the government to plead and
prove that Baker “intended to obtain money or property from deceived
investors.” This challenge to the jury instructions presents a question of
statutory interpretation, so we review it de novo. 42 We also review de novo
40 See Martoma, 2014 WL 5361977, at *4 (“[T]he purpose of a deposition in a civil case
or an administrative investigation is to develop investigative leads and to ‘freeze the
witness[’s] . . . story.’ . . . The SEC lawyers taking [the co-conspirator’s] deposition were not
attempting to persuade a jury to convict, or even attempting to persuade a grand jury to
indict. Instead, the [co-conspirator’s SEC deposition] was part of an effort to ‘develop the facts
to determine if an [enforcement action] was warranted.’” (quoting DiNapoli, 8 F.3d at 913)).
41 See Whitman, 555 F. App’x at 103 (“The rest of the examination consisted of general
inquiries about his relationship to [the defendant] and his work at [the company], many of
which elicited long, descriptive answers from [the unavailable co-conspirator] that,
unsurprisingly, asserted innocence. A prosecutor seeking to rebut a trial defense would have
pressed the witness, but the SEC examiner rarely did, for the most part allowing [the co-
conspirator’s testimony to stand unquestioned.”); McDonald, 837 F.2d at 1293 (although the
DOJ and the former party in a civil action had “similar status in their respective claims, we
find that the trial strategies were not sufficiently similar” for admission under Rule
804(b)(1)).
42 United States v. Harris, 740 F.3d 956, 964 (5th Cir. 2014).
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Baker’s contention that the indictment did not charge the elements of the
offense. 43
Baker asked for a jury instruction defining a “scheme to defraud” as one
“intended to obtain money or property from the victim by fraudulent means,”
and requiring that the defendant intended to “acquire[] some money or
property that the victim gives up.” The district court denied that request.
Instead, the district court’s jury instructions on wire fraud required, in
relevant part:
That the defendant knowingly devised, or intended to devise, any
scheme to defraud, that is to deceive investors about ArthroCare
Corporation’s financial condition[.]
...
A “scheme to defraud” means any plan, pattern, or course of action
intended to deprive another of money or property, or bring about
some financial gain to the person engaged in the scheme.
After the jury convicted Baker, he moved for a judgment of acquittal. He
reasserted his objection to the definition of a “scheme to defraud,” focusing on
the “or bring about some financial gain to the person engaged in the scheme”
language. The district court denied the motion, concluding that “the focus” of
a scheme to defraud is on “depriving the victim of property for some benefit”
and that there is “no requirement that a defendant must directly gain or
possess [the victim’s] property.” The court explained that “substantial evidence
was presented to show the misleading and fraudulent statements made by
Baker induced investment in ArthroCare,” and that “a rational trier of fact
could have found the goal of the scheme . . . was to deprive investors of money
they otherwise would have possessed.”
43 United States v. Kay, 359 F.3d 738, 742 (5th Cir. 2004).
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On appeal, Baker challenges this instruction on two grounds. First, he
contends that the wire fraud statute imposes a “mirror image” requirement.
For support, he relies on the Supreme Court’s decision in Skilling v. United
States, which states that under “traditional” fraud, “the victim’s loss of money
or property supplied the defendant’s gain, with one the mirror image of the
other.’” 44
Although Baker describes that statement from Skilling as its holding, a
review of the case proves otherwise. In context, the Court was comparing
“traditional” fraud with honest-services fraud:
Unlike fraud in which the victim’s loss of money or property
supplied the defendant’s gain, with one the mirror image of the
other, . . . the honest-services theory targeted corruption that
lacked similar symmetry. While the offender profited, the betrayed
party suffered no deprivation of money or property; instead, a third
party, who had not been deceived, provided the enrichment. 45
Skilling did not impose a “mirror image” requirement for wire fraud. As the
district court explained, “Skilling merely commented that traditional fraud
features a bilateral relationship—one between the offender and the victim—
while the honest-services theory concerns a trilateral relationship between
bribe-giver, bribe-recipient, and betrayed party. . . . Skilling did not interpret
wire fraud or securities fraud to require proof the defendant sought to
personally acquire money or property from the victim.” Moreover, no court has
held that a “mirror image” transaction is necessary. 46
Baker next points to the language of § 1343, which provides:
Whoever, having devised or intending to devise any scheme or
artifice to defraud, or for obtaining money or property by means of
false or fraudulent pretenses, . . . transmits or causes to be
44Skilling v. United States, 561 U.S. 358, 400 (2010).
45Id. (emphasis added).
46 United States v. Hedaithy, 392 F.3d 580, 601 (3d Cir. 2004); see United States v.
Finazzo, 850 F.3d 94, 105–07 (2d Cir. 2017).
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transmitted by means of wire, . . . any writings, signs, signals,
pictures, or sounds for the purpose of executing such scheme or
artifice, shall be fined . . . or imprisoned not more than 20 years,
or both. 47
Baker compares the statute’s “obtaining money or property” language with the
jury instruction’s definition of a “scheme to defraud” that required that the
scheme intended to “bring about some financial gain to the person engaged in
the scheme.” According to Baker, the instruction did not require the
government to prove that he intended to obtain property from a victim, but
instead allowed for a conviction based on a scheme that was only intended to
bring about a financial gain to Baker.
Baker relies on Sekhar v. United States, a case interpreting the Hobbs
Act, which held that “a defendant must pursue something of value from the
victim that can be exercised, transferred, or sold . . . .” 48 However, “[u]nlike the
mail fraud statute, the Hobbs Act expressly requires the Government to prove
that the defendant ‘obtain[ed] property from another.’” 49
He also relies on United States v. Honeycutt, a case interpreting the
federal forfeiture statute, which held that a defendant may not “be held jointly
and severally liable for property that his co-conspirator derived from a crime
but that the defendant himself did not acquire.” 50 But Honeycutt did not
consider the wire fraud statute and therefore did not broaden the Court’s
interpretation of that offense. 51
47 18 U.S.C. § 1343.
48 570 U.S. 729, 736 (2013).
49 Hedaithy, 392 F.3d at 602 n.21; see Finazzo, 840 F.3d at 107 (“[I]n contrast to the
Hobbs Act extortion provision, the mail and wire fraud statutes do not require a defendant
to obtain or seek to obtain property . . . .”).
50 Honeycutt v. United States, 137 S. Ct. 1626, 1630 (2017).
51 See Porcelli v. United States, 404 F.3d 157, 162 (2d Cir. 2005) (“The fact that the
Hobbs Act and the mail and wire fraud statutes contain the word ‘obtain’ does not necessitate
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Section 1343 does not require an intent to obtain property directly from
a victim. In United States v. Hedaithy, the Third Circuit considered a similar
assertion. There, the defendants argued that a scheme must be “designed to
actually ‘obtain’ the victim’s property.” The court rejected that argument on
several grounds:
We reject [that argument], primarily because it is
inconsistent with the Supreme Court’s decision in Carpenter [v.
United States, 484 U.S. 19 (1987)]. Although the defendants in
Carpenter clearly “obtained” the Journal’s confidential business
information, this was not the conduct, according to the Court, that
constituted the mail fraud violation. Rather, the conduct on which
the Court focused was the act of fraudulently depriving the
Journal of the exclusive use of its information.
Furthermore, Defendants’ argument misconstrues the
language of other relevant decisions. For example, they rely upon
the Supreme Court’s statement in Cleveland [v. United States]
that “[i]t does not suffice, we clarify, that the object of the fraud
may become property in the recipient’s hands; for purposes of the
mail fraud statute, the thing obtained must be property in the
hands of the victim.” [531 U.S. 12, 15 (2000)]. The context in which
this statement was written, however, clarifies that the Court was
not setting out a requirement that a mail fraud scheme must be
designed to “obtain” property. Rather, this language reflects the
Court’s conclusion that a victim has been defrauded of “property,”
within the meaning of the mail fraud statute, only if that which
the victim was defrauded of is something that constitutes
“property” in the hands of the victim.
Defendants also insist that their interpretation of the mail
fraud statute is supported by the Supreme Court’s holdings, in
McNally and Cleveland, that § 1341’s second clause—“or for
obtaining money or property by means of false or fraudulent
promises”—“simply modifies” the first clause—“any scheme or
artifice to defraud.” McNally, 483 U.S. at 359, 107 S. Ct. 2875;
Cleveland, 531 U.S. at 26, 121 S. Ct. 365. Defendants construe this
imposing [a] construction of a wholly separate statute onto this Court’s pre-existing
construction of the mail fraud statute.”).
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language as meaning that any violation of the mail fraud statute
must involve a scheme for obtaining the victim’s property. We do
not read McNally or Cleveland as providing any such
requirement. . . . In neither case, . . . did the Court hold that a mail
fraud violation requires that the second clause of § 1341 be
satisfied. 52
In addition to the Third Circuit’s persuasive rejection of the argument
that Baker advances, this court, in United States v. McMillan, held that an
indictment sufficiently charged mail fraud in the context of a scheme to
“defraud the victim insofar as victims were left without money that they
otherwise would have possessed.” 53 This court also explained that the “issue is
whether the victims’ property rights were affected by the
misrepresentations.” 54
The jury instructions here 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: (1) He made false statements
to investors and potential investors to induce them to hold onto or buy
ArthroCare stock; (2) he knew the statements did not accurately reflect
ArthroCare’s business model or revenue projections; and (3) the scheme was
intended to benefit Baker via bonuses and appreciation of his own stock
options. By inducing investments in ArthroCare, the scheme affected the
victims’ property rights by wrongfully leaving them “without money that they
otherwise would have possessed.” 55
The jury instructions were not erroneous.
52 Hedaithy, 392 F.3d at 601–02.
53 600 F.3d 434, 449 (5th Cir. 2010).
54 Id.
55 McMillan, 600 F.3d at 449.
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D. Accomplice and Co-conspirator Liability
Baker was charged as both a principal and an aider or abettor under
18 U.S.C. § 2 for the wire and securities fraud charges. The district court’s jury
instructions on “Aiding and Abetting (Agency)” included some general
language about accomplice liability, then stated:
You must be convinced that the Government has proved
each of the following beyond a reasonable doubt:
First: That the offenses alleged in Counts Two through
Twelve were committed by some person;
Second: That the defendant associated with the criminal
venture;
Third: That the defendant purposefully participated in the
criminal venture; and
Fourth: That the defendant sought by action to make that
venture successful.
“To associate with the criminal venture” means that the
defendant shared the criminal intent of the principal. This element
cannot be established if the defendant had no knowledge of the
principal’s criminal venture.
“To participate in the criminal venture” means that the
defendant engaged in some affirmative conduct designed to aid the
venture or assist the principal of the crime.
This instruction tracked the Fifth Circuit Pattern Instruction on
accomplice liability. 56 Baker challenges this instruction as lacking an express
“advance knowledge” instruction based on Rosemond, a Supreme Court
decision addressing the federal aiding and abetting statute’s mens rea
requirements.
56 FIFTH CIRCUIT PATTERN CRIM. JURY INSTRUCTIONS § 2.4.
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Although Baker preserved that objection and briefed the Rosemond issue
on appeal, we need not address it because the jury also convicted Baker as a
co-conspirator. In addition to the charges for aiding and abetting wire and
securities fraud, Baker was also charged with and convicted of “Conspiracy to
Commit Wire Fraud and Securities Fraud.” 57
“In Pinkerton, the Supreme Court held that conspirators are criminally
liable for substantive crimes committed by other conspirators in furtherance of
the conspiracy, unless the crime ‘did not fall within the scope of the unlawful
project, or was merely a part of the ramifications of the plan which could not
be reasonably foreseen as a necessary or natural consequence of the unlawful
agreement.’” 58 “A substantive conviction cannot be upheld solely under
Pinkerton unless the jury was given a Pinkerton instruction.” 59
Here, the jury (1) was properly instructed on the Pinkerton theory of co-
conspirator liability and (2) convicted Baker on a separate charge for
conspiracy to commit wire and securities fraud. 60 The evidence at trial showed
that Baker instructed others to participate in the channel-stuffing scheme and
approved the statements covering it up. The substantial evidence of Baker’s
involvement establishes that the fraudulent acts were reasonably foreseeable
by him and done in furtherance of the conspiracy. We therefore affirm Baker’s
conviction on the wire and securities fraud charges under the Pinkerton theory
of co-conspirator liability and do not address Baker’s challenge to the jury
instructions under Rosemond. 61
57 ROA.3885.
58 United States v. Gonzales, 841 F.3d 339, 344 n.4 (5th Cir. 2016) (quoting Pinkerton
v. United States, 328 U.S. 640, 647–48 (1948)).
59 United States v. Alaniz, 726 F.3d 586, 614 (5th Cir. 2013) (quotation omitted).
60 ROA.3875–76.
61 See United States v. Saunders, 605 F. App’x 285, 288–89 (5th Cir. 2015) (“We will
assume that the jury charge on aiding and abetting is inadequate under Rosemond. [The
defendant’s] rights, however, were not affected because the jury was given a correct Pinkerton
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E. Baker’s “Other” Objections
Baker contends that, in addition to the purported Rosemond error, the
jury instructions were flawed in several other ways. Baker did not object to
these issues in the district court, so they are reviewed for plain error. 62 None
of these challenges has merit under the plain-error test.
First, Baker challenges the instruction that: “If another person is acting
under the direction of the defendant or if the defendant joins another person
and performs acts with the intent to commit a crime, then the law holds the
defendant responsible for the acts and conduct of such other persons just as
though the defendant had committed the acts or engaged in such conduct.”
Baker contends that this statement “is no longer legally accurate after
Rosemond,” and that the instruction implied that he could be liable for the
crimes of ArthroCare’s employees who were “acting under” his direction.
This instruction prefaced the formal elements of accomplice liability.
Given that context, the instruction simply set out the basic principle of
accomplice liability and was followed by a formal four-part definition. This
instruction was not erroneous. 63
Next, Baker contends that the Pinkerton instruction was improper,
noting that Pinkerton is controversial and has been criticized by courts. He also
contends that “there was no evidentiary basis” for the Pinkerton instruction.
instruction. . . . Given the copious evidence under the Pinkerton theory, any inadequacy in
the district court’s aiding and abetting instruction did not affect [the defendant’s] substantial
rights.”); see also United States v. Hare, 820 F.3d 93, 105 (4th Cir.), cert. denied, 137 S. Ct.
224 (2016) (same); United States v. Stubbs, 578 F. App’x 114, 118 n.6 (3d Cir. 2014) (“Since
we find the evidence sufficient to convict [the defendant] under a Pinkerton theory of
vicarious liability, we need not decide whether there was sufficient evidence of [the
defendant’s] advance knowledge under Rosemond.”).
62 United States v. Fuchs, 467 F.3d 889, 901 (5th Cir. 2006).
63 See Kay, 513 F.3d at 463 (“When reviewing the jury’s understanding of the charge,
we look to the total context of the trial, with the benefit of arguments by all counsel.”).
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But this circuit has repeatedly applied Pinkerton, 64 and the evidence at trial—
including testimony from three co-conspirators—provided a sufficient basis for
the instruction.
Finally, Baker argues that the court’s “reckless indifference” instruction
was improper because it conflicted with the wire fraud statute’s required
“specific intent to defraud.” 65 But we have approved such instructions. 66 The
“reckless indifference” instruction was not erroneous.
III. CONCLUSION
Baker’s conviction is, in all respects, AFFIRMED.
64 E.g., Gonzales, 841 F.3d at 351–53.
65 The district court instructed the jury that a representation is false if it “is made
with reckless indifference as to its truth or falsity” and that “[r]eckless indifference means
the omission or misrepresentation was so obvious that the defendant must have been aware
of it.”
66 See United States v. Puente, 982 F.2d 156, 159 (5th Cir. 1993) (“‘Reckless
indifference’ has been held sufficient to satisfy § 1001’s scienter requirement so that a
defendant who deliberately avoids learning the truth cannot circumvent criminal
sanctions.”).
27