United States v. Melvin Shields ( 2016 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA, No. 14-10561
Plaintiff-Appellee,
D.C. No.
v. 5:12-cr-00410-
RMW-1
MELVIN RUSSELL “RUSTY” SHIELDS,
Defendant-Appellant.
UNITED STATES OF AMERICA, No. 14-10562
Plaintiff-Appellee,
D.C. No.
v. 5:12-cr-00410-
RMW-2
MICHAEL SIMS,
Defendant-Appellant.
OPINION
Appeals from the United States District Court
for the Northern District of California
Ronald M. Whyte, District Judge, Presiding
Argued and Submitted October 20, 2016
San Francisco, California
Filed December 21, 2016
2 UNITED STATES V. SHIELDS
Before: A. WALLACE TASHIMA and MILAN D.
SMITH, JR., Circuit Judges, and EDWARD R.
KORMAN, * Senior District Judge.
Opinion by Judge Milan D. Smith, Jr.
SUMMARY **
Criminal Law
The panel affirmed Melvin Shields’s and Michael Sims’s
convictions arising from the capitalization and operation of
their real estate development business, which lost millions
of investors’ dollars.
The panel held that the district court erred by failing to
instruct the jury that it must find a duty to disclose in order
to convict defendants of wire fraud based on any material
omissions, but that this was not reversible plain error
because the instruction was not clearly required by this
court’s precedent and the error most likely did not affect the
outcome of the proceedings.
The panel rejected the defendants’ remaining challenges
to their convictions in a concurrently-filed unpublished
memorandum disposition.
*
The Honorable Edward R. Korman, Senior United States District
Judge for the Eastern District of New York, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
UNITED STATES V. SHIELDS 3
COUNSEL
Erick Guzman (argued), Santa Rosa, California, for
Defendant-Appellant Melvin Russell Shields.
Ethan Atticus Balogh (argued) and Evan C. Greenberg,
Coleman & Balogh LLP, San Francisco, California, for
Defendant-Appellant Michael Sims.
Annie M. Voigts (argued), Assistant United States Attorney;
Barbara J. Valliere, Chief, Appellate Division; Brian J.
Stretch, United States Attorney; United States Attorney’s
Office, San Francisco, California; for Plaintiff-Appellee
United States.
OPINION
M. SMITH, Circuit Judge:
Melvin Shields and Michael Sims appeal their jury
convictions following a joint trial arising from the
capitalization and operation of their real estate development
business, which lost millions of investors’ dollars from 2007
to 2009. Shields was convicted on 32 counts, including
conspiracy, wire fraud, bank fraud, securities fraud, and
making a false statement to a bank. Sims was convicted on
two wire fraud counts. Defendants challenge their
convictions based on several claimed trial errors, including
admission of prejudicial evidence, failure to sever the joint
trial, ineffective assistance of counsel, inadequate jury
instructions, and denial of the right to be present at a critical
stage. We affirm.
4 UNITED STATES V. SHIELDS
Although we hold that the district court erred by failing
to instruct the jury that it must find a duty to disclose in order
to convict defendants of wire fraud based on a material
omission, that omission was not reversible plain error.
In an unpublished memorandum disposition filed
concurrently with this opinion, we reject the defendants’
remaining challenges to their convictions.
FACTS AND PRIOR PROCEEDINGS
In 2006, Melvin Shields, Michael Sims, and Sam
Stafford founded S3 Partners LLC, a real estate development
business. The men claimed to be “three veteran
entrepreneurs, each with a track record of success in his
chosen field,” and from 2007 to 2009 they collectively
solicited and obtained millions of dollars from investors,
allegedly to fund various real estate projects. Shields
focused primarily on managing the money raised, Sims on
soliciting investors, and Stafford on real estate development.
Ultimately, the S3 projects all failed, relationships among
the partners soured, and the investors received little or no
return on their investments. Shields asserts that this occurred
because of the collapse of the real estate market in 2008;
Sims claims that the failures were caused by his partners’
malfeasance; and the government asserts that the failures
were caused by the partners’ fraudulent practices of lying to
investors and diverting invested funds.
This appeal arises out of two of the S3 projects,
respectively known as Stagecoach and Alafia. In January
2007, Stagecoach began developing retail units at a shopping
center in Arizona. Although investors were solicited to
invest in Stagecoach, only a portion of the investor funds and
a bank loan obtained for Stagecoach were actually spent on
UNITED STATES V. SHIELDS 5
the Stagecoach project; the balance of the funds was used for
other projects and general S3 expenses. Alafia was formed
in July 2007 for the purpose of buying and expanding an
existing assisted living facility in Florida. Potential
investors were promised that an investment in Alafia was
safe and secure, that they were guaranteed a 15% annual
return on their investments, and that they would own the
assisted living facility as tenants in common. However,
before final ownership documents were signed by the
investors, the owner of the Alafia facility refused to sell the
assisted living facility to S3, so the purchase could not be
consummated. Notwithstanding that fact, S3 used the funds
solicited and collected for the Alafia project to fund other S3
projects, and unrelated expenses.
The government filed a 40-count superseding indictment
against the S3 partners on September 18, 2013, accusing
them of conspiracy, wire, mail, securities, and bank fraud;
and making false statements to a bank. Stafford pleaded
guilty to the conspiracy count and agreed to testify at trial.
Shields and Sims were jointly tried on 39 counts, and on
December 23, 2013 a jury convicted Shields on 32 counts
and Sims on 2 counts. Shields and Sims were sentenced to
seventy-eight and thirty months in prison, respectively, and
each timely appealed. We have jurisdiction pursuant to
28 U.S.C. § 1291.
ANALYSIS
I. The District Court Erred by Failing to Instruct the
Jury on the Duty to Disclose In Order for a Material
Omission to Support a Wire Fraud Conviction.
Defendants argue that their wire fraud convictions
should be reversed because the court erred in not instructing
6 UNITED STATES V. SHIELDS
the jury that in order to find defendants guilty based on a
material non-disclosure, it must first find that defendants had
a duty to disclose the omitted information. 1 Defendants
claim that this could have affected the verdict because the
government relied on omissions as stand-alone examples of
fraud, and because they did not have relationships with their
investors that would support a duty to disclose.
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.” Eller v. EquiTrust Life Ins. Co., 778 F.3d 1089,
1092 (9th Cir. 2015) (internal quotation marks omitted); see
also Chiarella v. United States, 445 U.S. 222, 230 (1980)
(holding, in a securities fraud case, that “a relationship of
trust and confidence” is required to create a duty to disclose);
1
The jury instructions for wire fraud required that the jury find:
(1) “the defendant knowingly participated in a scheme
or plan to defraud . . . with all of you agreeing on at
least one particular false or fraudulent pretense,
representation, or promise that was made”;
(2) “the statements made or facts omitted as part of the
scheme were material”;
(3) “the defendant acted with the intent to defraud”;
and
(4) “the defendant used or caused to be used a wire
communication to carry out or attempt to carry out an
essential part of the scheme.”
(Emphasis added).
UNITED STATES V. SHIELDS 7
United States v. Dowling, 739 F.2d 1445, 1449 (9th Cir.
1984), rev’d on other grounds sub nom Dowling v. United
States, 473 U.S. 207 (1985) (holding that “a non-disclosure
can only serve as a basis for a fraudulent scheme when there
exists an independent duty that has been breached by the
person so charged,” such as a fiduciary or statutory duty). 2
Similarly, in United States v. Laurienti, 611 F.3d 530, 543
(9th Cir. 2010), we held that a jury must find that a broker
had a “trust relationship” with his client for non-disclosure
of bonus commissions to support a securities fraud
conviction, and that the district court erred by not instructing
on this element. Finally, in United States v. Milovanovic,
678 F.3d 713, 723–24 (9th Cir. 2012), we explained that the
term “fiduciary” is a broad one in the honest services mail
fraud context, encompassing “informal,” “trusting
relationship[s] 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.” Further,
“[t]he existence of a fiduciary duty . . . is a fact-based
determination that must ultimately be determined by a jury
properly instructed on this issue.” Id. at 723 (emphasis
added).
In light of such precedents, we conclude that it was error
to not 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. We adopt the
definition of such a relationship identified in Milovanovic
and apply it to wire fraud charges when an omissions theory
of fraud is alleged. Specifically, the relationship creating a
duty to disclose may be a formal fiduciary relationship, or an
2
Dowling concerns mail fraud, but “[i]t is well settled that cases
construing the mail fraud and wire fraud statutes are applicable to
either.” United States v. Shipsey, 363 F.3d 962, 971 n.10 (9th Cir. 2004).
8 UNITED STATES V. SHIELDS
“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.”
Id. at 723–24. This is a factual determination to be made by
a properly-instructed jury. Id. at 723. Although the jury in
this case was not instructed on the need for a duty to disclose,
we affirm the wire fraud convictions nonetheless because the
omission was not reversible plain error.
II. Plain Error Analysis
Defendants did not request jury instructions on a duty to
disclose, nor object to the instructions actually presented to
the jury at trial, so we review for plain error. United States
v. Fuchs, 218 F.3d 957, 961 (9th Cir. 2000). “A trial court
commits plain error when (1) there is error, (2) that is plain
[i.e., “clear and obvious”], and (3) the error affects
substantial rights [i.e., “affects the outcome of the
proceedings”].” Id. at 962. “We may exercise our discretion
to notice such error, but only if the error seriously affects the
fairness, integrity, or public reputation of judicial
proceedings.” Id. For example, we held in Fuchs that a
failure to instruct on the statute of limitations was plain error
in a conspiracy case. Id. at 962. The error was plain in Fuchs
because the instruction was clearly required by Supreme
Court precedent and defendants had previously moved to
dismiss the indictment on statute of limitations grounds. Id.
The error affected substantial rights in Fuchs because “the
acts that most strongly support[ed] a finding of conspiracy
fell outside the statute of limitations.” Accordingly, we
reversed because “[a]llowing defendants’ convictions to
stand, given the likelihood that the jury may not have
convicted had [it] been properly instructed, would be a
‘miscarriage of justice.’” Id. at 963.
 UNITED STATES V. SHIELDS 9
In contrast, the error in this case was not plain. The
district court’s instructions were based on the Ninth Circuit
Model Jury Instructions for wire fraud (instruction 8.124),
which did not include a duty to disclose instruction, and
allowed for conviction based on material omissions. The
district court followed the Model Instructions, the
defendants did not object, and there was then no controlling
case law stating that there was a duty to disclose in order to
convict for wire fraud where a material omission was
involved. Thus, the error was not “clear and obvious.”
It is also unlikely that the error affected the outcome of
the proceedings because a jury convicting based on
defendants’ material omissions would most likely have
concluded that relationships existed among the defendants
and investors wherein defendants (1) purportedly acted for
the benefit of investors, and (2) “induce[d investors] to relax
[their ordinary] care and vigilance.” Milovanovic, 678 F.3d
at 724.
Defendants’ appellate briefs claim that the government’s
focus on non-disclosure of their previous personal
bankruptcies may have impermissibly supported their
convictions. In summation, the government stated that,
while a bankruptcy is “not [] a terrible moral failing or . . .
wrong . . . standing by itself,” in light of (1) their
representations to investors that they were authorities in
investing, and (2) the fact that the testifying investors said
that knowing about the bankruptcies would have affected
their decisions to invest, the omission “standing by itself was
an example of fraud.” (Emphasis added). If a jury
concluded that this omission was material (i.e., pursuant to
the jury instructions it was “capable of influencing a person
to part with money”), the jury would have likely concluded
that defendants presented their financial histories to
10 UNITED STATES V. SHIELDS
investors in a positive light to convince investors to trust
defendants with their money, making a trusting relationship
likely.
Additionally, the error most likely did not affect the
outcome of the proceedings because other affirmative acts
also support the convictions. Specifically, the record shows
that Sims misled Alafia investors by affirming the accuracy
of a misleading brochure, stating that investors were
guaranteed a 15% annual return on their investments, and
that the project was viable. The record also reflects that Sims
misled Stagecoach investors by soliciting an investment
specifically for Stagecoach, but then immediately diverting
the money into his company’s account and spending it to
reimburse his company for S3 expenses, including an
interest payment to his daughter. Moreover, Sims testified
that he knew in advance that he was going to spend the
money he received from the investors, that he did not inform
the investors of his intentions, and that he knew he thereby
erred. The record also reflects that Shields solicited
investors’ funds for specific projects, and led investors to
believe that their money would be used for such projects,
when Shields (the primary S3 money manager) clearly knew
and intended that the funds would be comingled with other
projects and used for S3 expenses and other purposes.
CONCLUSION
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
UNITED STATES V. SHIELDS 11
defendant] act[ed] for the benefit of another and induce[d]
the trusting party to relax the care and vigilance which it
would ordinarily exercise.” Milovanovic, 678 F.3d at 724.
However, we AFFIRM the district court, because this
was not reversible plain error. The error was not “clear and
obvious” because it was not clearly required by our
precedent, and the error most likely did not affect the
outcome of the proceedings.