When a Lie Is Not Federal Fraud: U.S. v. Milheiser
Federal prosecutors often charge defendants with mail fraud or wire fraud whenever a business transaction involves lies. But the Ninth Circuit recently held that not every lie is a federal crime. In United States v. Milheiser, the court limitated federal fraud prosecutions by holding that the lie must go to the “nature of the bargain.”
RULE: For MAIL FRAUD – the defendant has to deceive the victim about the “NATURE OF THE BARGAIN”.
For anyone dealing with federal fraud cases, this decision is important. An experienced Criminal Defense Attorney Los Angeles knows how courts distinguish ordinary deception from actual federal criminal fraud.
The Facts in United States v. Milheiser
In Milheiser, six printer toner salesmen pretended to be the regular suppliers for businesses and told customers they should lock in prices before prices increased. The government proved at trial (correctly) that the salesmen lied to their customers.
But the customers still received the printer toner at the promised price and the toners were not defective. The USA took the case to trial and won against 6 defendants. The defendants appeals and the court of appeals (9th circuit) held that the lies proven in this case were not enough to support federal mail fraud convictions because “the lies did not go to the nature of the bargain”.
The court summarized the principle clearly:
“Not just any lie that secures a sale constitutes fraud.”
The Court’s Rule
Does the lie affects the “nature of the bargain”?
The Court said NO! The lies must go the nature of the bargain! So only essential issues about the bargain (such as: price, quality, or quantity of the goods or services being sold).
In this case, the court held that although the sales tactics were deceptive, the lies did not affect the nature of the bargain because:
- the toner was genuine,
- the agreed price was honored,
- the customers received the product they expected, and
- there was no economic injury.
The court overturned the conviction and agreed with the defendants that the government’s fraud theory was overbroad!
Why This Matters:
Federal fraud statutes are extremely broad, and prosecutors can try to cover any dishonest conduct involving money. But the Court warned against turning every lie into federal criminal fraud case.
The court stated:
“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.”
This distinction is critical in federal investigations especially when business disputes are involved. The government must prove more than a lie. It must prove that the deception affected the value or substance of the transaction itself. The key to understanding here is that the government’s theory of fraud can be too broad and cover conduct that is not criminal.
The Ninth Circuit’s Earlier Fraud Decisions
The Ninth Circuit relied on several earlier decisions rejecting overly broad fraud theories.
In United States v. Yates, the government argued that bank executives committed fraud by concealing the true financial condition of a bank from its Board of Directors. The Ninth Circuit rejected that theory, explaining saying “..we have rejected the notion that depriving an individual of accurate information alone constitutes fraud.
The court warned that otherwise virtually all deception could become federal fraud.
Similarly, another case involved a defendant who purchased products from American manufacturers while concealing that the products would be sent to the Soviet Union. The manufacturers testified they would not have sold the products had they known the truth. Yet the court still found no federal fraud because the manufacturers suffered no economic loss and received the full benefit of the bargain. In other words, the lie about destination of the product did not go to “nature of bargain”
These decisions reinforce the principle that deception alone is insufficient. The misrepresentation must concern something material to the bargain itself.
Other Federal Circuits Agree
Other federal appellate courts follow similar reasoning.
For example:
- In United States v. Regent Office Supply Co., the court held that fraudulent misrepresentations must go to the “nature of the bargain.”
- In United States v. Takhalov, nightclub owners hired women to lure men into purchasing drinks without disclosing the women were paid employees. The Eleventh Circuit ruled that this deception alone was not fraud because the customers still received exactly what they purchased.
The courts have repeatedly recognized that some lies may influence a person’s decision-making without changing the actual economic bargain and thus comming a crime.
The Ninth Circuit even gave an example that falsely claiming to be “the long-lost cousin of a prospective buyer” may help secure a sale, but it does not change the nature of the bargain itself.
Another example given is a federal employee who lied about his security clearance but otherwise was a good employee did not commit a crime of fraud – the lie was not about the nature of the bargain. So misrepresentation that does not goes the to “nature of bargain” is not material. Burt in another case the court upheld a conviction when the misrepresentation was about where the defendant told he was located (Washington DC) to cause the investors to contribute money to his enterpise. So the lie might not be related to “money” directly but still can goi to the nature of bargain.
But Material Misrepresentations Still Can Be Fraud
The Ninth Circuit made clear that some lies can support federal fraud charges if they affect an essential part of the transaction.
For example, a misrepresentation about where a defendant was physically located (in Washington DC) was found material because it influenced investors’ decisions to contribute money to an enterprise.
So while the lie may not always directly concern money, it still must relate to something fundamental about the transaction itself.
The Importance of Harmless Error
The Milheiser decision also contains an important procedural point. The Ninth Circuit noted that the government potentially could have argued that any instructional error was harmless. However, because the government failed to raise that argument, the court declined to consider it on its own and reversed the convictions.
That portion of the decision shows how critical appellate strategy can become in federal criminal cases.
Federal Fraud Defense in Los Angeles
Mail fraud and wire fraud are among the most commonly charged federal offenses. Prosecutors frequently attempt to show that a defendant used misrepresentations to obtain money or property from another person.
If you are being investigated or charged with a fraud offenses, speaking with an experienced Los Angeles Criminal Attorney right away will help you set up a defense as soon as possible.
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