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Ninth Circuit:
Lie Must Go to the Nature of the Bargain to Support Mail-Fraud Conviction
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday vacated the convictions for mail fraud and conspiracy of six businesspersons whose sales representatives lied in the course of wooing customers but, a three-judge panel declared, a falsehood, in order to give rise to criminal liability, must go to the nature of the bargain.
According to a 2021 statement by the U.S. Attorney’s Office for the Central District of California, the defendants participated in “a decades-long, multimillion-dollar telemarketing scheme that defrauded more than 50,000 victims, including small businesses and charities.”
Judge Michelle T. Friedland authored the opinion vacating judgments of conviction which Senior District Court Judge James V. Selna of the Central District of California ordered entered, pursuant to a jury verdict. Judges Milan D. Smith Jr. and Eric D. Miller joined in the opinion.
Defendants James Milheiser, Jonathan Brightman, Leah Johnson, Francis Scimeca, Sharon Virag and Tammi Williams each owned or managed a telemarketing sales company that sold printer toner. Each company worked closely with the same toner supplier, G.N.M. Financial Services, Inc., which controlled the sales companies’ price ranges and fulfilled their orders.
The practice they engaged in was having a sales representative telephone a business, falsely imply that the call was being made on behalf of the business’s existing toner supplier, and representing, untruthfully, that the price of toner had just gone up, but the business, by making purchases by the end of the day, could lock in the old price. Each defendant’s company did, in fact, provide the toner at the price agreed upon during the sales call.
The defendants were charged with mail fraud under 18 U.S.C. §1341 and conspiracy to commit mail fraud under §1349 based on a sales tactic.
Closing Argument
During closing argument, the government argued that if the jury found that the defendants had made a misrepresentation that would be expected to, and did in fact, cause a business to part with money, fraud was proven.
An assistant U.S. attorney told jurors:
“The heart of it is when you lie to somebody on an important fact that causes them to give you money, you have defrauded them. That is mail fraud in a nutshell, with the exception you have to use the mail….
“So it’s a scheme that has to be material. That’s just a lawyer word for it’s important. It’s important in the sense that it’s something I would say to you that would cause you to part with money. Right? That’s all it means.”
The jury instructions supported the government’s theory.
There was no evidence presented at trial suggesting that the toner was not received by the requesting business or that the toner was defective.
At the close of evidence, Defendants moved for a judgment of acquittal, citing out-of-circuit precedent which holds that only misrepresentations going to the “heart of the bargain” can support a conviction. Selna denied the motion as well as a subsequent request for a jury instruction to the same effect.
The jury deliberated for four days and ultimately found the defendants guilty on all charged counts. Defendants moved for a new trial or acquittal, which Selna denied, and timely appealed their convictions.
Nature of Bargain
Friedland declared:
“We hold that the Government’s theory of fraud was overbroad because it did not require the jury to find that Defendants deceived customers about the nature of the bargain. The Government has not argued that any error in this regard was harmless, and the criteria for considering harmlessness sua sponte are not satisfied here.”
She explained:
“[A] misrepresentation does not constitute fraud if the person was not deceived about something essential to the bargain itself.”
The judge went on to say:
“We agree with the Second, Eleventh, and D.C. Circuits that not just any lie that secures a sale constitutes fraud, and that the lie must instead go to the nature of the bargain….
“A misrepresentation will go to the nature of the bargain if it goes to price or quality, or otherwise to essential aspects of the transaction. We therefore vacate Defendants’ convictions.”
Friedland said in a footnote:
“An additional defendant, Gilbert Michaels, passed away during this appeal, and our court granted an unopposed motion to remand his appeal with instructions to vacate the judgment against him and dismiss his indictment.”
According to the U.S. Attorney’s office, Michaels orchestrated the scheme.
The case is United States v. Milheiser, 21-50162.
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