Case o' The Week: Ninth Unmoved by The Miller's Tale - Wire Fraud Jury Instructions

Prosecutorial misconduct puts fraud conviction on “Thin Ice.”

The "Thin Ice" Band, with Victim-Company Owner Russ Lesser, AUSA Greg Lesser, and James Miller

 United States v. Miller, 2020 WL 1317275 (9th Cir. Mar. 20, 2020), decision available here.

Players: Decision by DJ Rakoff, joined by Judges Watford and Bennett.  

Facts: James Miller took money without authorization by writing himself checks from the business for which he worked. Id. at *2. The business was owned by Russ Lesser.

   Russ Lesser’s son, AUSA Greg Lesser, owned a stake of the company. AUSA Greg Lesser called his friend in the FBI, who connected him to FBI Special Agent Joseph Swanson. Id. at *3 & n.2. “Shortly after,” Agent Swanson informed AUSA Lesser that the feds were investigating the case. Id.

  Miller was charged with wire fraud and filing false tax returns. Id. at *2. At trial, his defense was that he had always intended to (and eventually did) repay back the full amount he took from the company. Id. at *3. He requested a jury instruction that required proof that he had the intent to both deceive and cheat the company. That instruction was denied, and it was instead given in the disjunctive. Id.

  Miller was convicted.

Issue(s): “[W]hether the jury charge misstated the law by instructing that wire fraud under 18 U.S.C. § 1343 requires the intent to ‘deceive or cheat’ rather than the intent to ‘deceive and cheat.’” Id. at *1 (emphasis in original).

Held: “We conclude that the charge was erroneous. Several other circuit courts have long held that the crime of wire fraud requires the specific intent to utilize deception to deprive the victim of money or property, i.e., to cheat the victim, and we now align the law of the Ninth Circuit with that of the other circuits and with recent Supreme Court precedent. Nevertheless, we find that the erroneous instruction was harmless in this case.” Id.

Of Note: Miller also involves a jaw-dropping example of prosecutorial misconduct. As noted above, the son of the owner of the victim company was CD Cal AUSA Greg Lesser. Id. at *3. (AUSA Lesser owned a stake in his dad’s company). Id. AUSA Lesser called friends at the FBI to report Miller at the outset of the case, and Lesser remained involved in the investigation. Id. When AUSA Lesser’s supervisors learned of this involvement (three weeks into the investigation!), the CD Cal USAO conflicted out. The San Diego USAO prosecuted the case. Id.

  AUSA Lesser still, however, continued contact with FBI Special Agent Joseph Swanson, who was investigating the case. Id.

  The District Court denied Miller’s motion to dismiss for prosecutorial misconduct, and the Ninth – while finding that the improper conduct was “clear” – nonetheless upheld the district court. Id. at *7-*8.

  A disappointing holding, in a case involving shocking conduct by a self-interested federal prosecutor.

How to Use: The Ninth’s holding on the conjunctive fraud instruction is a welcome change, that brings the Circuit in line with other circuits and SCOTUS. Id. at *4-*6. 

  Before embracing a defense based on that instruction, however, read Miller carefully. Even with a conjunctive instruction, “Intent to repay . . . is not a defense to wire fraud.” Id. at *6. The “loan” defense to fraud, rejected by the Ninth in Treadwell, still doesn’t work – despite the new fraud instruction required by Miller. *6 & n.10

                                               

For Further Reading: The hottest NorCal hearing next week is an innocuous-looking civil proceeding before the Honorable Magistrate Judge Nathanael Cousins: Babu et al v. Ahern. See court calendar here. 

The Honorable Magistrate Judge Nathanael Cousins

  In Babu, civil rights plaintiffs representing inmates at Santa Rita Jail are hunting for the jail’s mysterious 80-page COVID-19 manual. This is a rumored document that the USAO and ND Cal Court have apparently been given, and that AUSAs expressly rely upon while fighting pretrial release, but that has still not been provided to any defense counsel. 

  Notably, last week a Santa Rita Jail nurse tested positive for COVID-19, see Mercury News Article here. As a result, two SRJ units with federal prisoners are now on quarantine.

  Three hundred and fourteen state and county defendants have now been released from Santa Rita Jail to respond to the COVID-19 risk. See article here. 

  In marked contrast, with the exception of former Presidents, federal pretrial inmates are not being released in NorCal in response to COVID-19.

  What fate awaits our desperate federal clients in Santa Rita Jail, if widespread release doesn’t happen soon? For a thoroughly terrifying description of the scenarios ahead for state prisons and jails, see David Montgomery, ‘Prisons are Bacteria Factories’; Elderly Most at Risk, available here. 

Image of the band, “Thin Ice” from https://easyreadernews.com/miller-indictment-divided-manhattan-beach/

Image of the Honorable Magistrate Judge Nathanael Cousins from https://www.law.com/therecorder/almID/1202719524838/Uber-Unlikely-to-Dodge-Discrimination-Suit/

Image of inmate shackled to hospital bed from https://www.pewtrusts.org/en/research-and-analysis/reports/2018/07/19/state-prisons-and-the-delivery-of-hospital-care

Steven Kalar, Federal Public Defender N.D. Cal. Website at www.ndcalfd.org

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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Case o' The Week: Never Made it to the Grand, But Throw Before Petit - Loftis, Uncharged Conduct, and FRE 404(b)

He’s making a list,

He’s checking it twice,

Now naughty’s admissible,

When fraudsters entice.

 United States v. Loftis, 2016 WL 7176657(9th Cir. Dec. 9, 2016), decision available here.

Left to right: The Hon. Judges Fisher, W. Fletcher, and N.R. Smith

Players:  Decision by Judge Fisher, joined by Judges W. Fletcher and N.R. Smith. Hard fought appeal by Montana AFPD John Rhodes.

Facts: Loftis is charged with wire fraud, for allegedly victimizing investors through falserepresentations. Id. at *1. Though the government posits a broad scheme, spanning six years and several states, charged transactions involved just three investors and all took place in Montana. Id.

  Before trial it became clear that the government intended to introduce evidence of crimes beyond the charged offenses. Loftis thus moved in limine for exclusion of uncharged conduct. Id.

  The district court granted the motion in part, finding some evidence excludable under FRE 404(b). While “[t]he extent to which the district court properly applied [the evidentiary] principles is not clear,” id. at *4, the court held that some evidence would be excluded under FRE 404(b) unless the government showed the uncharged conduct evidence was “inextricably intertwined” with the Montana scheme. Id. at *1.

  The government filed an interlocutory appeal; trial was stayed. Id.  

Issue(s): Did the district court properly exclude evidence of uncharged offenses, absent a showing from the government that the crimes were inextricably intertwined with the scheme employed in Montana?

Held: 1. FRE 404(b) and “other” acts: “We hold the evidence of uncharged transactions is not evidence of ‘other’ crimes or acts under Rule 404(b), because it is evidence of part of the crime charged in the indictment—the overall scheme to defraud.” Id. at *2 (emphasis in original, footnote omitted). ‘Because the evidence from other investors is charged conduct, the government is not required to rely on the inextricably intertwined doctrine to avoid Rule 404(b).” Id. at *4.

  2. “Inextricably intertwined:” “[However,] . . . even if the uncharged transactions at issue were not part of the crime charged, they would not be subject to exclusion under Rule 404(b) because they are ‘part of the same transaction’ as the charged transactions. The inextricably intertwined doctrine, therefore, affords a second basis for concluding the evidence should not be treated as ‘other’ crimes or ‘other’ acts evidence under Rule 404(b).” Id.

Of Note: While this is a disappointing outcome, Judge Fisher does take pains to emphasize why the evidence is admissible. Wire fraud’s first element requires the government to prove “the existence of a scheme to defraud.” Id. at *3. Hence, evidence from uncharged crimes is admissible as proof of that first element – it is not, by definition, “other crimes” and is not precluded under FRE 404(b). Id.

 This doesn’t mean that in a fraud case the government can throw everything at the barn to see what sticks – “these holdings apply only when the charged and uncharged transactions can fairly be characterized as parts of a single fraudulent scheme.” Id. at *4 (emphasis added).

  Put differently, when our creative clients have other, different scams running, those crimes fall outside of Loftis – they don’t bear on the first element of the charged wire (or mail) fraud.

How to Use: Fish gotta swim, birds gotta fly, AUSAs gotta overprove their case: it’s the nature of things.

  What are you supposed to do when a gung-ho prosecutor invokes Loftis and smuggles in a mountain of inflammatory junk to “prove” a fraudulent scheme (a scheme that is often painfully clear from the charged offenses?) Counter-invoke Judge Fisher’s explicit caveat: Loftis doesn’t address exclusion of this evidence on other bases, such as FRE 403. Id. at *4. (And remind the DJ that excluding cumulative evidence will shave weeks off an interminable fraud trial . . . .)  

                                               

For Further Reading: What about snitches running their own “uncharged conduct” schemes? Under Loftis, aren’t their shenanigans evidence of fraud crimes (and hence their motive for falsely incriminating your poor client to earn that 5K break?) For an interesting rift on this theme, see Jessica Broderick, Reverse 404(b) Evidence: Exploring Standards When Defendants Want to Introduce Other Bad Acts of Third Parties, at 79 U. Colo. L. Rev. 587 (2008), available here. 

Image of the Honorable Judges Fisher, W. Fletcher, and NR Smith (the Loftis panel) from http://www.ca9.uscourts.gov/media/view_video.php?pk_vid=0000010315

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

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