Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-10562/USCOURTS-ca9-14-10562-0/pdf.json

Parties Involved:
Michael Sims
Appellant
United States of America
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

MELVIN RUSSELL “RUSTY” SHIELDS,

Defendant-Appellant.

No. 14-10561

D.C. No.

5:12-cr-00410-

RMW-1

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

MICHAEL SIMS,

Defendant-Appellant.

No. 14-10562

D.C. No.

5:12-cr-00410-

RMW-2

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

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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to their convictions in a concurrently-filed unpublished 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.

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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.

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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 

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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 

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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).

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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).

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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.

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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 

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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 

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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.

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