Surgeon Stumped By Teak Farming

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Spine surgeon and inventor Gary Michelson attained billionaire status five years ago after his successful lawsuit against a company that shortchanged him on licensing his surgical devices. Now he is heading back to court. This time he’s in a fight with a former best friend he alleges ripped him off over their investments in Costa Rican teak forests.

Michelson, a Brentwood resident, has become known for his charitable contributions and for living fairly modestly. He has three rescue dogs and drives a PT Cruiser.

Meanwhile, he accuses his former friend and a partner of diverting the teak money toward such things as superdeluxe cars, including a classic Corvette and a vintage Lancia.

Michelson’s attorney, Luke Dauchot, is asking the court to set a summer trial date for the suit, which was filed in 2007. Dauchot also represented Michelson in the licensing battle that netted him $1.35 billion in 2005.

“Wealthy people are often tempting targets for fraud,” said Dauchot, a partner in the downtown L.A. office of Kirkland & Ellis LLP. “But I think it takes on an added level when you consider that this came from someone whom he considered to be certainly one of his best friends. There is that emotional component to it.”

Even before his landmark legal victory, Michelson was investing in Costa Rican teak farms with the goal of sustainable harvesting of the valuable hardwood. Over the years, he put in $32 million, according to the suit. The defendants claim the assets are still valuable, even in the down market. Michelson is seeking at least $20 million in damages.

He claims his friend, Neil Campbell, and a Costa Rica partner, Phillip Richard Powers, looted his money through a kickback scheme, and Powers stole from the partnership to buy pricey cars for himself and Campbell.

The suit states that Powers spent at least $1.2 million on exotic and vintage cars, including a McLaren Formula One car, a 1958 Corvette and a 1958 Lancia Aurelia.

In response to a pretrial request by Michelson’s attorneys, a Los Angeles Superior Court judge ruled Feb. 4 that Campbell breached his fiduciary duty to Michelson when he received kickbacks from Powers in the form of jewelry, furnishings, exotic cars and $1.2 million in cash. The judge granted Michelson $1.5 million in damages, which he is trying to recoup by asking a Florida federal court to impose a lien on Campbell’s $1.9 million home in Sarasota, Fla.

Michelson declined to comment for this article, referring questions to his attorney, Dauchot.

But in a 2007 interview with the Business Journal, Michelson gave some indication that he was having problems with people and money.

“I’ve been burned a couple times,” he said. “I got lied to because I wasn’t scrutinizing enough. That’s when I realized I needed to hire staff.”

Dauchot wouldn’t confirm that the quote referenced the teak farm problem, but said he wouldn’t be uncomfortable seeing it in this article.

An attorney for Campbell did not return requests for comment, and attorneys for Powers declined to comment.

Powers, who is a U.S. citizen but has lived in Costa Rica since 1992, claims in court documents that he struck a deal with Michelson and Campbell that called for him to locate and acquire properties suitable for teak farming, and then maintain the farms. Powers also claims that Michelson and Campbell were free to accept or reject his offers to invest in the properties.

Michelson’s wealth is largely derived from the $1.35 billion settlement with medical device manufacturer Medtronic Inc., which helped him rank No. 23 on the Business Journal’s 2009 list of Wealthiest Angelenos with an estimated net worth of $1.44 billion. The hefty settlement involved patents for spinal devices that Michelson invented that make surgery easier and help patients heal better.

Medtronic had sued him for selling the devices to a competitor. He countersued, alleging the Minneapolis company had underpaid him. Michelson won a $510 million jury trial, and later got a settlement for even more money.

Teak farming time

According to legal documents, Campbell first suggested to Michelson in 1998 that the two invest $1 million together in a thousand-acre Costa Rican teak farm through one of Campbell’s friends, Powers. Campbell introduced Powers to Michelson at that time, while the three were vacationing near Castaic Lake.

When Campbell revived the talks in 1999, Michelson agreed and the two formed C&M Investment Group Ltd.; “C” for Campbell and “M” for Michelson.

At the time, Michelson considered Campbell one of his best friends – the two attended each other’s weddings and often went on ski trips or other vacations together.

Campbell recommended that Michelson entrust the acquisition and operation of the farms to Powers, saying he was “highly qualified to manage teak farms.” Powers allegedly promised 25 percent to 30 percent annual return on investment.

Michelson claims that over the next seven years, Powers would find properties ideal for teak farming, negotiate the price for the property and then advise C&M on the purchase price.

Michelson alleges Powers was entitled to as much as 6 percent commission on land sales. However, Powers claims there was no talk of commission, and that he was paid by including a markup in the sales price of the properties.

Michelson, however, alleges that one such markup was 870 percent.

In any case, Powers points out that “C&M was free to accept or reject the proposed purchase price of each property … and C&M also was free to terminate pending acquisitions if it thought the price was too high.”

Over those years, Powers purchased more than 147 properties in Costa Rica for C&M. The total was more than 23,000 acres – 17,400 football fields, or about 35 square miles – which would be about six times the size of Griffith Park.

Michelson claims he began asking Powers for records detailing how C&M’s money was being spent, including the actual purchase prices of the properties and Powers’ fees. However, Michelson alleges that Powers refused to disclose any records and claimed that there was no evidence of how he paid for the properties because he had paid for them in cash.

‘Fraud uncovered’

Once the suit was filed, Michelson’s legal team began investigating Powers’ activities in Costa Rica. As a result, his attorneys “uncovered a fraud on an even wider and more pernicious scale than originally understood,” according to subsequent filings.

Michelson alleges that Campbell, who often traveled to Costa Rica, was conspiring with Powers to inflate the purchase prices of properties and that the two were keeping the excess money.

Michelson alleges that bank records show Campbell received regular kickbacks from Powers in exchange for providing false reassurances to Michelson about the value of the land purchases and the legitimacy of Powers’ transactions. After discovering the alleged kickbacks, Michelson expanded the suit against Powers to include Campbell as a defendant.

Michelson alleges that Powers and Campbell systematically asked him to wire millions of dollars for fictitious operational expenses and instead used the money for their own personal gain, including the purchase of exotic and vintage cars.

The suit details the car purchases:

• In April 2005, Powers wired $100,000 to Maranello Motorsports, a Ferrari dealer in Australia.

• In May 2005, $65,230 was sent to Ed Lepelis, a New Jersey Corvette restorer, for a 1958 Corvette for Campbell.

• In May 2005, $450,000 was sent to McLaren Cars Ltd. for undetermined transactions.

• In May 2005, Powers allegedly sent $122,000 to an auction house in Monaco for a 1958 Lancia Aurelia, which he imported to Costa Rica in July 2005.

• In August 2005, $80,000 was allegedly sent to Scott Gibbons for a 1960 Ferrari 250 PF Cabriolet, and an additional $100,000 was sent to Gibbons the following month for the same car.

However, Powers claims in court documents that the ensuing litigation “merely reflects Dr. Michelson’s incredible avarice.”

Michelson’s attorney, Dauchot, said the case isn’t about wealth or greed. He said Michelson is acting on principle; the $20 million sought represents a small percentage of Michelson’s wealth. The case, he added, is based on Michelson’s belief that he was betrayed by friends.

“There is a sadness to this story,” Dauchot said. “If you look at the relationship between Gary Michelson and Neil Campbell, they were very good friends. These two individuals spent a lot of time together. They water-skied together.”

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