The Menendez Trial and the Future of Bribery

The prosecution has finished presenting its case in the trial of New Jersey Senator Bob Menendez. Menendez and his co-defendant, Dr. Salomon Melgen, are facing multiple counts of bribery and related charges. The government alleges that in exchange for gifts from Melgen including private jet trips, luxury vacations, and large political donations, Menendez interceded on Melgen’s behalf in various disputes he was having with the federal government. (A more detailed analysis of the indictment is available here.)

Senator Menendez faces corruption charges

Senator Robert Menendez

When the government rested last week, the judge made some comments that appeared to question whether the bribery case could survive the Supreme Court’s 2016 decision in McDonnell v. United States. This led to widespread speculation that the judge might dismiss many of the charges. But on Monday the judge ruled there was enough evidence to go to the jury. The defense is now putting on its case.

Menendez makes two primary types of claims concerning the bribery charges. The first is that the things he agreed to do for Melgen did not qualify as “official acts” under McDonnell and thus could not support a bribery conviction. The second is that, even if Menendez did perform official acts, they were not in response to any gifts from Melgen but were simply done out of friendship or as part of Menendez’s routine Senate responsibilities.

The McDonnell case has been looming over the Menendez prosecution from the beginning. If the Senator is convicted, I think there is a good chance that at least some of the bribery charges will indeed be overturned on appeal. But I believe it will be based primarily not on McDonnell but on a different Supreme Court case decided almost two decades ago.

McDonnell and “Official Acts”

The Supreme Court in McDonnell held that in any federal bribery case the prosecution must prove the public official agreed to be influenced in the performance of an “official act” as defined in 18 U.S.C. 201, the federal bribery statute. The Court concluded that Governor McDonnell’s actions —  making phone calls, arranging meetings, and holding an event at the Governor’s mansion — did not rise to the level of “official acts” and could not support a bribery conviction. (For a critique of McDonnell and its “official act” holding, you can see my posts here and here.)

The “official act” argument says, in effect, that even if there were a deal or quid pro quo, what the public official did – the quo – was not substantial enough to justify a bribery charge. The official can admit there was a link between his actions and the gifts he received, but argue that those actions were trivial or were simply routine political courtesies.

The McDonnell opinion has already resulted in some high-profile convictions being thrown out, including that of former New York State Assembly Speaker Sheldon Silver. Senator Menendez has argued from the beginning of his case that the things he did for Dr. Melgen did not amount to official acts, and the judge has repeatedly rejected his arguments. As I wrote here, I think the judge is correct. If Menendez is convicted and those convictions are later overturned, I don’t expect it to be on the McDonnell “official act” ground.

Melgen is accused of bribing Senator Menendez

Dr. Salomon Melgen

Quid Pro Quo and the “Stream of Benefits” Theory 

Assuming Menendez did perform official acts, to be bribery those acts still needed to be done in exchange for the gifts he received from Melgen. This is the requirement of a quid pro quo, or corrupt intent. This is Menendez’s other main line of defense: he says that anything he did for Melgen was either out of friendship or was part of his general oversight and policy duties as a Senator, not in response to the gifts he received.

Some counts of the indictment related to Melgen’s hefty political contributions to Menendez allege a direct quid pro quo (Counts 9-14). They charge that in exchange for a particular donation, Menendez took a particular identified official act, such as advocating on Melgen’s behalf before the State Department or Department of Health and Human Services.

But a number of the charges (Counts 2-8) rely on a different bribery theory, known as “stream of benefits.” These counts charge that Menendez accepted gifts such as trips on Melgen’s private jet in exchange for “being influenced in the performance of official acts, as opportunities arose.” The specific official acts are not identified in the individual bribery counts, although a large number of official acts are described in the indictment as a whole.

Prosecutors use this “steam of benefits” theory in cases where the bribe payer essentially has the public official on retainer. In exchange for a series of gifts over time, the public official agrees do things to benefit the bribe payer when opportunities arise. It might not be possible to prove a direct link between any particular gift and any particular official act; what is charged is the continuing corrupt relationship, a sort of ongoing “you scratch my back and I’ll scratch yours” theory.

The Supreme Court has never weighed in on this stream of benefits theory. It has been widely accepted in the lower courts, including those in the Third Circuit where Menendez is on trial. But Menendez’s attorneys claim that McDonnell has changed the legal landscape here as well.

The trial judge made some comments last week suggesting he might find that the stream of benefits theory did not survive McDonnell. In the end, though, he agreed with the government that McDonnell’s requirement that an official act be specific and focused does not mean the act has to be identified at the time of the corrupt agreement. In other words, the deal may be, “I’ll give you a stream of benefits over time, and in exchange you agree to do things for me, as the opportunities arise, that qualify as official acts.” The parties have to agree that the public official will perform official acts, but they don’t have to agree up front what the precise official acts might be.

As far as the impact of McDonnell itself is concerned, that seems like the right answer. McDonnell did not discuss the stream of benefits theory and there’s no particular reason to believe that the “official act” requirement, standing alone, would invalidate that theory.

But I think the Supreme Court’s overall approach in McDonnell does suggest the Court might well reject the stream of benefits bribery theory if given the opportunity. That rejection would primarily be based not on the holding of McDonnell, but on the language of the federal bribery statute itself and the reasoning of a 1999 Supreme Court case, United States v. Sun-Diamond Growers of California.

The Sun-Diamond Decision

In Sun-Diamond the defendant, a large agricultural cooperative, was charged with giving illegal gratuities to the Secretary of Agriculture, Mike Espy. The crime of gratuities, 18 U.S.C. 201(c), appears in the same statute as federal bribery, 18 U.S.C. 201(b). It prohibits giving a public official a thing of value “for or because of any official act.” It differs from bribery in that no corrupt intent to influence the official is required; a gratuity can be a mere “thank you” for an official act that has already been performed.

Sun-Diamond was prosecuted on what was sometimes called a “status gratuity” theory. The government didn’t identify any particular official acts by Espy to which the gifts were linked. Instead, it argued it was enough that the gifts were based on Espy’s official position and were made with the hope of building up a reservoir of goodwill with Espy, perhaps to influence or reward some unspecified official act in the future.

The Supreme Court rejected this theory. It was not enough, the Court held, to charge Sun-Diamond with paying gratuities to Espy based on his status or for official acts not named in the indictment. The Court found that section 201(c)’s requirement that a gratuity be “for or because of any official act” means a specific official act must be identified. The Court particularly focused on the phrase “any official act,” holding that this language “seems pregnant with the requirement that some particular official act be identified and proved.” It specifically rejected the alternative, broader interpretation that “any official act” meant any one of the universe of potential official acts “without specification as to which one.”

Did the Stream of Benefits Bribery Theory Survive Sun-Diamond?

Sun-Diamond rejected a gratuity prosecution based on a stream of gifts not linked to any particular official acts. But in the wake of Sun-Diamond, lower courts have continued to uphold the stream of benefits theory in bribery prosecutions. Courts have held that the reasoning of Sun-Diamond does not apply to bribery cases because bribery requires proof of a higher level of intent, a corrupt quid pro quo. That’s true, but as one of my old law professors liked to say, is that a difference that makes a difference?

The language of the gratuities and bribery statutes is strikingly similar. The bribery statute in section 201(b)(2)(A) prohibits a public official from accepting anything of value in exchange for agreeing to be “influenced in the performance of any official act.” That phrase – “any official act” – is precisely the language that the Court in Sun-Diamond said required a particular official act to be identified and proved. It’s not clear to me how the different levels of intent required for the two crimes makes any difference at all when it comes to interpreting this statutory language. For either a gratuity or a bribe, the statute and reasoning of Sun-Diamond appear to require a link to a particular, identifiable official act.

There is another reason to be suspicious of lower court decisions upholding the stream of benefits theory after Sun-Diamond: most of those cases involved prosecutions for honest services fraud or Hobbs Act extortion, not section 201 bribery. Courts in those cases typically were applying general bribery law principles, not parsing the precise statutory language of 18 U.S.C. 201. One of the leading “stream of benefits” decisions, a 2007 case from the U.S. Court of Appeals for the Second Circuit called United States v. Ganim (authored by now-Justice Sotomayor when she was on the appeals court) made precisely that point. Judge Sotomayor noted that Sun-Diamond hinged on the precise wording of section 201 and that the same reasoning did not necessarily apply to other corruption statutes, including the Hobbs Act charges at issue in Ganim.

Menendez is also charged with honest services fraud, but the bulk of the bribery charges in his indictment are under 18 U.S.C. 201. McDonnell and Sun-Diamond make it clear that when interpreting section 201 the Supreme Court will not look to common-law bribery principles but will strictly interpret the precise statutory language. As a result, lower court cases upholding the “stream of benefits” theory in honest services fraud or Hobbs Act cases are of limited value when considering how the Supreme Court would rule in Menendez’s case. And McDonnell suggests that however the Court ends up defining bribery for purposes of section 201, it will apply that same bribery definition to honest services fraud and the Hobbs Act as well.

The Menendez defense argues that the stream of benefits theory does not survive McDonnell. I think the better argument is that it actually did not survive Sun-Diamond and the Supreme Court just has not yet had a chance to say so. The Court’s approach to statutory interpretation in McDonnell simply further highlights why it is unlikely to buy the stream of benefits theory for bribery.

The Defense: Playing the Long Game

The trial judge is likely to let the jury decide the Menendez charges. Even if the judge thinks some of the bribery theories may be invalid, he will likely feel constrained by Third Circuit precedent to let the case go to the jury.

Senator Menendez is in part playing a long game, hoping that even if he is convicted he ultimately will prevail on appeal. Don’t forget that Governor McDonnell was convicted at trial and his conviction was affirmed by a unanimous Court of Appeals before the Supreme Court ultimately took the case and unanimously reversed.

If the Menendez case ever were to reach the Supreme Court, I think there’s a good chance the Court would reject the stream of benefits bribery theory. A number of counts against Menendez and Melgen would remain, so that alone would not mean they would walk free. But it would represent yet another step by the Court to further narrow the scope of federal public corruption law – a process that began nearly twenty years ago in Sun-Diamond.

Update: On November 16, 2017, the Menendez trial ended in a hung jury.

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September Madness: The Problem with the NCAA Basketball Corruption Case

On Tuesday, September 26, the U.S. Attorney’s Office for the Southern District of New York announced with great fanfare that the office had filed charges against ten individuals in a fraud and corruption case involving college basketball. Acting U.S. Attorney Joon H. Kim outlined the charges against four NCAA Division I coaches, a senior executive at Adidas, and five others. A chart in the press release noted that each defendant faces a maximum of between 80 and 200 years in prison.

The charges are the result of a two-year investigation that involved wiretaps, a confidential cooperating witness, and FBI undercover agents. The three criminal complaints outline two different corruption schemes. Although the complaints name several universities as the victims of these schemes, there is no allegation that any university actually lost any money or property. There are no claims that any of the student athletes or their families were financially harmed. The public was not harmed in any way.

But the defendants did violate NCAA rules. Those rules require that student athletes be amateurs and prohibit them from receiving any outside compensation. The rules also prohibit coaches from facilitating any contacts between athletes and outside agents and from receiving any outside compensation for acts related to their athletes. These rules violations (which were, of course, created by the undercover investigation itself) exposed the universities to potential financial penalties and sanctions from the NCAA. That exposure is what’s at the heart of the prosecution. The government’s case effectively takes the rules of the NCAA, a private non-profit corporation, and leverages violations of those rules into federal felony charges.

There’s no doubt the behavior of the defendants was deplorable. But are criminal sanctions exposing them to decades in prison the proper remedy? I’m not saying the charges are legally flawed – not all of them, anyway. But I do question whether this case represents a good use of two years of the time and resources of the agents and prosecutors involved. And I question whether bringing multiple felony charges on these facts is a sound exercise of prosecutorial discretion.

At the U.S. Attorney’s press conference, the very first question was from a reporter who asked (I’m paraphrasing), “It seems like everyone involved was actually benefitting financially. Who’s the victim here?” (19:40)

It’s a good question.

The Complaints

 The Coach Bribery Scheme

The coach bribery scheme is charged in two separate criminal complaints. The first complaint charges three coaches: Lamont Evans, an assistant coach at Oklahoma State and former assistant coach at South Carolina; Emanuel Richardson, an assistant coach at Arizona; and Anthony Bland, an associate head coach at University of Southern California. It also charges Christian Dawkins, an employee of a sports management company that represents NBA basketball players, and Munish Sood, a financial advisor.

The complaint alleges that the three coaches accepted cash bribes from Dawkins and Sood. The total amount of the bribes ranged from about $13,000 to about $22,000. In return, the coaches agreed to introduce student athletes to Dawkins and Sood and to encourage the athletes to hire Dawkins and Sood once the athletes left college and began playing in the NBA. The deals were brokered by another former financial advisor, Marty Blazer. Blazer, who was facing securities fraud charges of his own, was cooperating with the FBI and recording many of the meetings and phone calls. The complaint also charges that the defendants made improper payments to student athletes and concealed those payments from their universities.

The second complaint related to the coach bribery scheme charges only one coach: Chuck Person, an associate head coach at Auburn. It also charges Rashan Michel, the owner of a clothing store in Atlanta that specializes in making custom suits for athletes. The basic nature of the scheme is the same: Person allegedly accepted more than $90,000 in bribes from Blazer (the cooperating witness) and Michel. In exchange, Person agreed to introduce student athletes to Blazer and Michel and to encourage the athletes to retain them once they left college. Once again, the complaint also charges that the defendants made improper, undisclosed payments to current student athletes.

The charges in the coach bribery scheme include multiple counts of honest services fraud, bribery, honest services fraud conspiracy, bribery conspiracy, wire fraud conspiracy, and travel act conspiracy.

The High School Players Scheme

The scheme set forth in a third complaint involves a conspiracy to pay high school basketball players and their families. The defendants are James Gatto, the global marketing director for basketball at Adidas; Merl Code, an individual identified as affiliated with Adidas and its high school basketball programs; and Jonathan Augustine, program director for an amateur high school basketball program sponsored by Adidas. Also charged in this complaint are Christian Dawkins and Munish Sood, the same sports manager and financial adviser charged in the first complaint of the coach bribery scheme.

The complaint alleges that these defendants conspired to make secret payments to three different high school athletes and their families. In exchange, the families agreed the student would attend particular universities sponsored by Adidas, and that the student would sign deals with Adidas and use the services of Dawkins and Sood after joining the NBA.

The defendants allegedly agreed to pay $100,000 to the family of a top high school graduate from the class of 2017, although apparently only the first installment of $25,000 was actually paid. In return, the student allegedly agreed to attend University of Louisville. They also allegedly conspired to funnel $150,000 to the family of another high school student graduating in 2018, this time to induce that student to attend what appears to be University of Miami. Unnamed coaches at the two universities also were allegedly involved in the schemes.

The charges in the high school players scheme include wire fraud, conspiracy to commit wire fraud, and money laundering.

Analyzing the Criminal Charges

 Bribery and Bribery Conspiracy

 The coach bribery scheme complaints charge bribery and bribery conspiracy using three different theories: 18 U.S.C. § 666, federal program bribery (applies because the universities receive more than $10,000 a year in federal funds); 18 U.S.C. § 1343 and 1346, honest services wire fraud (applies to an employee who takes bribes or kickbacks in breach of a duty owed the employer); and 18 U.S.C. § 1952, the travel act (applies to interstate travel to further violations of state bribery law).

Under each statute the bribery theory is basically the same: the outside advisors (or undercover agents posing as outside advisors) paid the coaches to induce them to violate their duties to their university employers by violating NCAA rules, thereby exposing the universities to potential sanctions.

The bribery charges highlight the centrality of the NCAA rules to these complaints. There is no direct harm to the universities, financial or otherwise. This isn’t a case where an employee took bribes to disclose trade secrets to a competitor or to award a contract to an unqualified contractor, or took some other step that directly harmed the employer. There is only potential harm, and only because of possible sanctions by the NCAA for violating its rules.

Wire Fraud and Wire Fraud Conspiracy

The wire fraud and wire fraud conspiracy allegations (18 U.S.C. § 1343) charge that the defendants defrauded the universities by causing them to pay scholarship money to athletes who were actually ineligible due to the secret payments that were made to them. The high school players scheme also charges that the universities were defrauded of their right to control their limited scholarship assets and how they would be disbursed. Again, any potential harm results only from the possible violations of NCAA rules and penalties that might result. Paying the scholarships didn’t harm the universities, because they received the services of the players they wanted in return. The only potential harm would come if the improper payments were later discovered and the schools were sanctioned.

Money Laundering

Money laundering charges (18 U.S.C. § 1956) appear only in the high school players scheme. The complaint alleges that Gatto and the other defendants tried to conceal the payments going from Adidas to the families by running them through other entities and bank accounts controlled by the defendants and by creating fictitious invoices to cover their tracks.

I think the money laundering charges may be flawed. Money laundering requires that the charged financial transaction involve the “proceeds” of a crime – money generated by a completed unlawful activity. If the parents had received the money and then done something with it to disguise where it came from, that might be a laundering transaction involving the proceeds of the bribery scheme. But here the charged transactions appear to involve the money used to pay the bribes themselves. That money is not yet proceeds of the bribe for money laundering purposes. It only becomes proceeds once the bribes have been paid and the money is in the hands of the families.

There are plenty of cases throwing out convictions where prosecutors charged money laundering when in fact the financial transactions did not involve proceeds of a completed crime but represented the underlying criminal activity itself. This requires a more detailed discussion that I will probably return to in a future post. But unless there are more facts out there that don’t appear on the face of the complaint, I believe it’s likely the money laundering charges will not survive.

The problem with the NCAA basketball corruption case

Criminalizing the NCAA Rules

Review of the charges makes it clear that the entire criminal case hinges on violations of the NCAA rules. The only harm to the alleged victims – the universities – stems from any sanctions that might potentially result from the violation of those rules. Take away the NCAA rules, and there is no criminal case.

As the complaints note, the NCAA rules provide that schools violating the rules may suffer penalties including limitations on post-season play, fines, and limitations on the ability to grant scholarships or recruit athletes. But the rules do not suggest that those who violate them may be subject to federal criminal prosecution.

The defendants could be forgiven for thinking that if they got caught violating the rules, the worst that would happen is they would be fired. Maybe the university would come after them to try to recoup any financial penalties. Their careers would certainly be over. But they likely didn’t believe that violating the internal rules of a private athletic organization would potentially subject them to decades in federal prison.

Prosecution seems even more questionable when you consider that virtually all of the conduct here likely would be legal if it related to professional athletes. The payments would be called finder’s fees or product endorsement deals. The purported criminality stems only from the NCAA’s insistence on maintaining the fiction that these athletes are amateurs and that high-level college basketball is actually about college, rather than about big business and providing farm teams for the NBA.

There’s a lot of behavior that can be squeezed into white collar violations but where criminal sanctions aren’t required. That’s where the exercise of prosecutorial discretion comes in. This case is really about the violation of NCAA rules. NCAA sanctions against the offending schools and individuals would be the more appropriate remedy.

The players weren’t harmed. Their families weren’t harmed. The teams weren’t harmed. The public wasn’t harmed. The coaches were still coaching, and the games were not affected. The universities were only potentially harmed — and only because of the rules of a private organization they voluntarily joined in support of athletics programs that earn them millions of dollars.

And this is where the Department of Justice chooses to devote its resources? Look, I love DOJ, but I can hear the critics now: “You can crash the entire financial system and no one gets prosecuted. But don’t you dare mess with college basketball!”

This year it appears the madness didn’t wait until March.

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