US v. Milheiser - 9th Circuit Wire Fraud Decision
The 9th Circuit last week released its opinion in United States v. Milheiser, 16-CR-00076, in which the Court overturned six convictions of defendants who had been convicted of mail fraud and conspiracy to commit mail fraud arising from the defendants’ sales companies’ aggressive tactics in selling printer toner. The 9th Circuit adopted the “benefit of the bargain” theory of wire fraud, under which individuals cannot be convicted of wire fraud if the alleged victims received the “benefit of the bargain,” even if they were induced to make a purchase through misrepresentations. There is a full-link to the opinion below.
The facts of this case are fairly straightforward. The Government here charged many employees of several sales companies who were using misleading practices to sell printer toner to various businesses. The sales companies falsely implied that they were the regular suppliers of toner, and once the businesses were convinced that was true, the sales representatives falsely told the businesses that there was a price increase in printer toner, but if they purchased a re-supply now, they could lock-in the low price that they had received previously. Anyone in the sales industry (or anyone who has purchased a used car) is familiar with this strategy. The thrust of the government’s prosecution was that any misrepresentation that led a business to part with money under deceptive pretenses should qualify as fraud. The trial included cooperating defendants as well as customers who testified that they would not have purchased the product had they known these representations were untrue. Critically, the sales people did supply the toner and there was nothing wrong with the quality of the toner.
The jury convicted, and the 9th Circuit reversed, incorporating, for the first time into 9th Circuit law, the “benefit of the bargain” theory of wire fraud. Effectively, as the Second, Eleventh and DC Circuits have ruled, “not just any lie that secures a sale constitutes fraud, and that the lie must instead go to the nature of the bargain.” As the Court explained, “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. Whether a misrepresentation goes to the nature of the bargain may depend on the specific transaction at issue. “ Here, the 9th Circuit ruled, the misrepresentations that resulted in the purchase of the toner did not go to the nature of the bargain, because the customers received the toner that they purchased from the company.
This “benefit of the bargain” theory is critically important for many other types of wire fraud cases. As an example, we used the benefit of the bargain theory in our motion to dismiss in the “Atlas Trading” case, as set forth below:
“According to the Indictment, the alleged “victims” in the case – retail traders – followed Rybarczyk and the other Defendants on social media in order to glean stock tips and gain insights into how to trade. When Rybarczyk and other Defendants tweeted, the “victims” then purchased, on the open market, the stocks that the Defendants posted about on social media. To be certain, and solely for the purposes of this motion to dismiss, the Court must assume that had the victims known that the Defendants were selling shares at the time of their tweets, they would not have purchased the stock. But this is not securities fraud. The “victims” received exactly the “benefit of the[ir] bargain” here—a certain number of shares for a given price, all obtained on the open market. See United States v. Davis, No. 13-CR-923 (LAP), 2017 WL 3328240, at *9 (S.D.N.Y. Aug. 3, 2017) (“Our cases have drawn a fine line between schemes that do no more than cause their victims to enter into transactions they would otherwise avoid—which do not violate the mail or wire fraud statutes—and schemes that depend for their completion on a misrepresentation of an essential element of the bargain—which do violate the mail and wire fraud statutes.”) (internal quotation marks omitted).
The distinctions set out in these cases between material representations going to the heart of the transaction and those misrepresentations concerning collateral issues are critical because, as courts routinely recognize, fraud statutes such as Section 1348 were not meant to capture the kind of self-interested posturing that routinely occurs in transactions involving the financial markets. See, e.g., United States v. Coffman, 94 F.3d 330, 334 (7th Cir.1996) (noting in wire fraud case that nearly “all sellers engage in a certain amount of puffing; all buyers ... know this; it would not do to criminalize business conduct that is customary rather than exceptional”); see also United States v. Colton, 231 F.3d 890, 901 (4th Cir. 2000) (“Not all conduct that strikes a court as sharp dealing or unethical conduct is a ‘scheme or artifice to defraud.’”); Weimert, 819 F.3d at 357 (“Congress could not have meant to criminalize deceptive misstatements or omissions about a buyer’s or seller’s negotiating positions.”). To be sure, the statutes could technically be read to apply to cover nearly any misstatement, “at least if a negotiator’s present state of mind is treated as a fact,” Weimert, 819 F.3d at 357 (running through the elements of wire fraud and showing that “[f]rom strands of case law, it is true, one can piece together a mail or wire fraud case based on” such limited deceptions), but context, once again, is key.”
