Case o' The Week: Ninth Bangs on Rusty Shields -- Shields and "Duty to Disclose" Instructions in Wire Fraud Cases

 Rusty Shields offers some protection for "omission" theory, wire fraud cases.  

United States v. Melvin Russell "Rusty" Shields, 2016 Westlaw 7384022 (9th Cir. Dec. 21, 2016), decision available here.

Players:  Decision by Judge M. Smith, joined by Judge Tashima and District Judge Korman. Hard-fought appeal by ND Cal CJA colleagues Erick Guzman and Ethan Balogh. 

Facts: Shields and co-D Sims were charged with wire fraud relating to real estate. Id. at *1. Funds were solicited for Arizona and Florida projects, with promises of safe and secure investments. Investments, however, were actually diverted to other projects. Id. 

  The jury was not instructed that it had to find that the defendants had a duty to disclose omitted information. (And the defense didn’t object at that failure to instruct). Id. at *2. Both men were convicted after trial. Id. at *1.  

Issue(s): “Defendants argue that their wire fraud convictions should be reversed because the court erred in not instructing the jury that in order to find the defendants guilty based on a material non-disclosure, it must first find that defendants had a duty to disclose the omitted information.” Id. at *2 (footnote omitted).

Held: “Defendants are correct that a nondisclosure can support a wire fraud charge only when there exists an independent duty that has been breached by the person so charged.” Id. at *2 (quotations and citations omitted).

Hon. Judge Milan Smith

  “In light of [our] precedents, we conclude that it was error not to instruct the jury that it must find a relationship creating a duty to disclose before it could conclude that a material non-disclosure supports a wire fraud charge.” Id. at *3.

  “We conclude that the district court erred by not instructing the jury that it must find a relationship creating a duty to disclose in order to convict defendants of wire fraud based on any material omissions. We hold that, in order for an omission to support a wire fraud charge, the jury must be instructed that it must first find that the defendant and the defrauded party had a trusting relationship in which the defendant acted for the benefit of another and induced the trusting party to relax the care and vigilance which it would ordinarily exercise.” Id. at *4 (internal quotations and citation omitted).

Of Note: Plain error snatches defeat from the jaws of victory for Shields. See id. at *3. In the plain error discussion, Judge Smith explains how the jury would have likely found that the defendants induced the needed “trusting relationship.” Id. at *3. 

  The plain error analysis (relying on the government's pitch) seems a tad circular – the defendants failed to disclose their previous bankruptcies, in order to induce trust from the investors, the better to defraud investors by – among other things – failing to disclose the defendants' previous bankruptcies?

  Shields is the first Ninth Circuit decision that holds jury must find that a duty to disclose exists in wire fraud "omissions" cases – but it is not the opinion to read to understand what it takes to prove that duty.

How to Use: An “omissions” theory of wire fraud posits that a defendant failed to disclose material facts to the victims of the fraud. In Shields, the Ninth adopts the “duty” requirement set forth in Milovanovic, and applies it to wire fraud when the government proceeds on an omissions theory. “Specifically, the relationship creating a duty to disclose may be a formal fiduciary relationship, or an informal, trusting relationship in which one party acts for the benefit of another and induces the trusting party to relax the care and vigilance which it would ordinarily exercise.” . . . This is a factual determination to be made by a properly-instructed jury.” Id. at *3 (internal quotations and citations omitted). 

  Beware that the Ninth's Model Criminal Instruction 8.124 (Wire Fraud) doesn’t include a requirement that the jury finds that this duty existed. See Model Instructions here. Make sure to argue to modify the model instructions, when defending wire fraud charges on an “omissions” theory.

                                               

For Further Reading: Why did Shields have a duty to disclose to his investors? What happened to arms-length bargaining? Does Shields create new disclosure worries for other types of investments? 
  For an interesting discussion on how court-created disclosure duties can run afoul of traditional bargaining postures, see Kathryn Zeiler, Common-Law Disclosure Duties and the Sin of Omission: Testing the Meta Theories (2005), available here. 

Image of rusty shield from http://www.dundjinni.com/forums/uploads/Kepli/A15_RustyShield_FL_kpl01.png

Image of the Honorable Judge Milan Smith from https://law.ucdavis.edu/blogs/deans/posts/neumiller-competition-2012.html

Steven Kalar, Federal Public Defender ND Cal. Website at www.ndcalfpd.org

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