The NCAA Corruption Case and the Limits of Fraud

There’s an unusual criminal case pending in the Southern District of New York. The defendants are charged with a single count of conspiracy to commit wire fraud. Here are the characteristics of their alleged scheme:

  • The underlying conduct was not illegal
  • The defendants did not intend to harm the “victims” but actually wanted to help them
  • If the scheme had succeeded, the victims would have benefited
  • The defendants did not obtain any money or property from the victims and did not intend to
  • The defendants did not personally lie to or deceive the victims
  • Top-level employees of the victim organizations were encouraging the scheme and working with the defendants to help it succeed

The case is part of the NCAA basketball corruption scandal. The defendants, former Adidas executive James Gatto and two others, were indicted for taking part in a scheme to pay star high school players and their families to induce them to attend Division I universities with basketball programs sponsored by Adidas. The alleged victims of their scheme are the universities themselves — whose coaches actively worked with the defendants to help the scheme succeed.

The defendants have moved to dismiss the indictment. They claim the case improperly seeks to criminalize NCAA rules and that their conduct did not amount to a scheme to defraud. The judge will hear arguments on February 15, but the motion is unlikely to be granted. It would be extraordinary to get the case thrown out at this early stage. The allegations of the indictment are likely sufficient to get to trial.

But this case definitely stretches the limits of criminal fraud. If it goes to trial, I think the government will have a tough time persuading a jury (or a court of appeals) that the defendants had the requisite intent to defraud. And even if the case holds up legally, it raises serious questions about the exercise of prosecutorial discretion and the appropriate use of federal criminal sanctions.

The Defendants and the Schemes

The three defendants – James Gatto, Merl Code, and Christian Dawkins – were part of a group of ten individuals arrested in the NCAA investigation back in September. Gatto is the former global marketing director for basketball at Adidas. Code is a former consultant to Adidas, and Dawkins is a business manager who represents athletes. (I wrote about the charges against all ten after they were arrested, you can find that post here.)

The defendants were originally charged along with two other men, Brad Augustine and Munish Sood, in a criminal complaint containing four felony counts: wire fraud conspiracy, money laundering conspiracy, and two counts of wire fraud. By the time the indictment was handed down in November, the government had dropped two of the defendants and three of the charges. (It’s possible that Sood and Augustine have agreed to plead guilty and cooperate; in the indictment they are now referenced as unindicted co-conspirators CC-1 and CC-2.) The indictment now charges only Gatto, Code and Dawkins with a single count of conspiracy to commit wire fraud against two different universities: the University of Louisville and the University of Miami.

In the Louisville scheme, the defendants allegedly arranged to pay the family of a star high school basketball player $100,000 in exchange for his agreement to attend Louisville and later to sign with Dawkins and Adidas for sponsorships and professional representation. The indictment alleges that one or more coaches at Louisville knew about and encouraged the scheme. The plan was to cause Adidas to make the payment in $25,000 installments by creating phony invoices from a company controlled by Code. Code would then transfer the money to Dawkins, who would give cash to the student’s father. Adidas made two such payments of $25,000 before the scheme was halted by the arrests.

The indictment alleges the defendants were plotting to pay a second student to attend Louisville as well. In a meeting that included one of the Louisville coaches, Code was allegedly given cash to be funneled to that player’s family. That payment apparently had not yet been made when the defendants were arrested.

The Miami scheme involved a similar plot concerning a high school player who would graduate in 2018. The plan was to pay that student’s family $150,000 in exchange for his agreement to attend Miami and to sign up with Adidas and Dawkins. Once again, this plan was carried out with the knowledge and participation of one or more of the basketball coaches at Miami. Preliminary discussions and planning took place but no money actually changed hands before the defendants were arrested.

The planned payments to the students and their families were not illegal. But they would make the students ineligible athletes under the NCAA rules. Those rules require student athletes to be amateurs who do not receive any payments or other benefits for their participation in college sports. A university found to have ineligible players on its team is subject to sanctions including financial penalties, limitations on post-season play, and limitations on financial aid that may be awarded to other athletes. The potential harm that could result from such rules violations is what forms the basis of the government’s fraud allegations.

The Defense Motion to Dismiss

In their motion to dismiss, the defendants claim the indictment does not make out a conspiracy to defraud. Although they rely upon different legal theories, the argument boils down to this: there was no scheme to defraud because the defendants were trying to help the universities, not harm them. The defendants never sought to obtain anything from the universities for themselves, or to deprive the universities of any money or property. Far from deceiving the universities, they were working with the heads of their basketball programs toward a common goal. That work may have violated NCAA rules, but it was not criminal.

The government’s first response is that the defense claims are premature. Prosecutors argue that the indictment makes out a facial case of conspiracy to defraud, and at this stage that is all that is required. Many of the defense arguments, they claim, rely on disputed facts. Those arguments may be considered only after trial, when the evidence is in and all the facts are known.

On the legal merits, the prosecutors argue the indictment properly charges two fraud theories: 1) the defendants conspired to defraud the universities of property by causing them to pay scholarship money to athletes who would be ineligible under NCAA rules; and 2) the defendants conspired to defraud the universities of their right to control their assets by depriving them of information relevant to their decisions about where to spend their limited scholarship funds.

Was it a Fraud?

This is a strange fraud case. The universities arguably would have been deceived had the scheme been successful – although since the heads of their basketball programs were involved in the scheme, even that is debatable. But the law draws a distinction between being deceived and being defrauded.

To defraud typically means to obtain something of value from the victim, to profit at the victim’s expense. In this case the defendants were working with representatives of the victims towards a shared goal. They were not trying to obtain anything from the universities. In fact, the defendants would benefit from the scheme only if the universities also benefited.

The government argues the universities would have been deprived of money in the form of scholarships awarded to ineligible athletes. But in exchange for that money the universities would have received the services of the athlete in question. Usually if you get what you expected to get at the price you expected to pay, you have not been defrauded.

To avoid this problem the government basically analogizes the student athletes to a defective product. The universities didn’t get what they bargained for because they expected to get a NCAA eligible amateur athlete, not one who would potentially subject them to sanctions. In this case, though, the “product” was not inherently defective and would perform exactly as expected. There would only be a problem if the scheme was discovered by a third party – the NCAA. That risk may have been a by-product of the scheme, but inflicting that harm was certainly not the scheme’s goal.

Fraud also usually requires some deceit or deception by the defendant. The defendants point out there is no allegation they personally deceived the universities at all. Indeed, how could they be deceiving the universities when representatives of the universities were actively involved in the scheme?

The prosecutors respond that the defendants knew their scheme would eventually cause the students, parents and coaches to falsely represent to the universities that they were not aware of any NCAA rule violations. They also characterize the coaches as distinct from the universities, arguing they were not acting on behalf of the universities but as part of the plot to deceive them.

Separating the coaches from the universities in this way feels artificial. In this case, unlike in some of the other NCAA prosecutions, the coaches are not named as defendants, or even as unindicted co-conspirators. There is no allegation they were taking bribes or otherwise personally profiting from the scheme. Like the defendants, their only apparent purpose was to help the university’s basketball program obtain top players.

If the coaches had committed another crime in the course of working with the defendants, principles of corporate criminal liability would allow the government to prosecute the universities because the coaches were acting on their behalf. Although the universities would no doubt prefer to be portrayed as innocent victims, it’s more accurate to characterize them as willing participants in the scheme.

Prosecutors also allege that the defendants took steps to conceal the scheme by creating phony invoices and routing the payments to the families through a company owned by defendant Code. However, those steps were designed to conceal what was going on from Adidas, so that the defendants could induce Adidas to pay the money. They don’t demonstrate any effort to deceive the universities.

In sum – the defendants have a point. This case lacks the typical indicia of a criminal fraud case.

A Sound Exercise of Prosecutorial Discretion?

This has the feel of a case where prosecutors stretched to find a criminal theory to cover conduct that really shouldn’t be criminal. Given the breadth of the concept of fraud prosecutors may able to make a legal case, particularly on the “right to control” theory. They may be able to persuade a jury and even convince a court of appeals, although I have my doubts. But that doesn’t mean the case should have been brought.

It’s noteworthy that when the defendants were first arrested prosecutors charged them with four felonies and trumpeted the fact that each defendant faced up to eighty years in prison. Six weeks later when the case was indicted, prosecutors had dropped three of the four charges (including money laundering charges that, as I noted at the time of the arrests, were pretty clearly flawed). Usually it’s the other way around: you file a complaint on a single charge or handful of charges and then add additional charges during the grand jury process. This scaling back of the case suggests prosecutors may have realized that, in their desire to make a splash with the arrests, they overplayed their hand.

Particularly in white collar cases, the sound exercise of prosecutorial discretion requires using good judgment about what kinds of cases deserve criminal sanctions. In recent years there have been signs the Supreme Court is questioning whether it can still rely on prosecutors to exercise their discretion wisely. I fear that cases like this are only going to contribute to that trend.

White collar investigations often involves conduct where remedies other than criminal sanctions may be appropriate. This seems like one of those cases. These defendants deserved to suffer some consequences. They should lose their jobs and face professional disgrace. There’s no question the NCAA needs to clean house. But these defendants shouldn’t be facing a twenty-year felony for conspiring to “defraud” universities whose own coaches were actively working with them towards the same goal.

Update: On February 15, 2018 the judge, as expected, denied the defendants’ motion to dismiss. Trial is currently set for October 1.

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RICO and the Mueller Investigation

Special Counsel Robert Mueller’s investigation has produced guilty pleas from two individuals and the indictment of two more. It remains to be seen what additional charges, if any, will follow. Some have floated the idea that Mueller might consider charging violations of the Racketeer Influenced and Corrupt Organizations Act, or RICO, 18 U.S.C. §§ 1961-1968. Although originally aimed at organized crime, RICO can be a powerful tool in complex white collar cases as well.

So could Mueller be mulling RICO charges? RICO could potentially apply – depending on what Mueller finds, of course. But in the end I think he’s unlikely to play the RICO card.

Special Counsel Robert S. Mueller, III

The Different Areas of Mueller’s Investigation

The potential charges in Mueller’s investigation vary depending on which of several possible tracks the investigation follows. The first such track involves the heart of Mueller’s inquiry: any crimes directly related to Russian interference with the election and possible collaboration by Trump campaign officials. If prosecutors find evidence of those crimes, charges could include conspiracy to defraud the United States or conspiracy to violate federal election laws or computer hacking laws.

A second investigative track includes cover-up crimes: false statements, perjury or obstruction of justice in connection with the Russia probe. This could include lying to the FBI during interviews, lying on security clearance forms, false testimony before Congress or in the grand jury, or efforts to obstruct the investigation. Two cooperating witnesses, Michael Flynn and George Papadopoulos, have already pleaded guilty to false statements for lying to the FBI. There have been allegations that Jared Kushner and Attorney General Jeff Sessions may have unlawfully concealed contacts they had with Russians during the campaign. And claims that the president himself may have obstructed justice through such actions as firing James Comey have been a key part of the investigation.

There is a potential third track as well: the possibility that while investigating connections between Trump and Russia Mueller will uncover other crimes not directly related to the campaign. The charges filed against former Trump campaign manager Paul Manafort, for example, include allegations of years of money laundering involving Ukrainian connections that predated the campaign. The infamous Russia “dossier” includes claims about ties between Russian individuals and the Trump organization that could involve crimes such as international money laundering. In Michael Wolff’s controversial new book Fire and Fury, former Trump advisor Steve Bannon also predicts that money laundering involving Russia will end up a centerpiece of Mueller’s probe.

Mueller’s investigation could result in charges in any one of these areas. RICO is potentially a better fit for some than for others.

A Quick Primer on RICO

Congress passed the Racketeer Influenced and Corrupt Organizations act in 1970. As its name suggests, RICO’s primary purpose was to give the federal government new tools to prosecute criminal groups, such as organized crime families, seeking to infiltrate and control legitimate organizations. But the breadth of RICO’s language has made it possible for prosecutors to apply it in more routine white collar business and corruption cases as well.

RICO doesn’t really define a new crime. Instead, it prohibits engaging in a sustained pattern of already criminal activity in connection with a business or other “enterprise.” This has led one prominent commentator to characterize RICO as “the crime of being a criminal.” RICO provides hefty penalties of up to twenty years in prison, as well as forfeiture of any assets related to or derived from the criminal activity.

Every RICO case shares two requirements: proof of an “enterprise,” and proof of a “pattern of racketeering activity.”

Enterprise: In some RICO cases the enterprise is the organization through which the defendants commit their criminal acts, such as an organized crime family. In other cases the enterprise is more like a victim, such as a legitimate corporation or labor union that is infiltrated by the RICO defendants through their criminal activity.

Enterprise is defined in the statute to include any legal entity such as a corporation or partnership. An enterprise may also consist of a group of individuals associated together but not a legal entity, called an “association in fact” enterprise. Rejecting arguments that RICO should be limited to cases involving formal business organizations, the Supreme Court has made it clear that an association in fact enterprise need not have any legitimate purpose or formal structure. Any group of individuals who come together to commit a series of crimes may potentially be characterized as an association in fact enterprise. Another name for such a criminal group, of course, is a conspiracy – and the breadth of the enterprise definition has led some to suggest that RICO is simply a conspiracy statute on steroids.

Pattern of Racketeering Activity: Every RICO case also requires the government to prove a “pattern of racketeering activity.”  This requirement has two components: there must be acts of racketeering activity, and those acts must form a “pattern.”

Racketeering activity is defined in the statute to include a lengthy list of federal crimes. It includes many offenses traditionally associated with organized crime such as narcotics, illegal gambling, extortion, and trafficking in stolen goods. It also includes a number of white collar offenses such as bribery, mail and wire fraud, obstruction of justice, and money laundering. The inclusion of these crimes as “racketeering activity” is what makes RICO potentially applicable to many white collar cases.

Racketeering activity also includes crimes such as murder, kidnapping, extortion and arson that are punishable under state criminal laws. This was one of RICO’s more powerful innovations: federal prosecutors could now take a widespread group committing different crimes previously punishable only at the state level, package the crimes as a RICO case, and bring a single prosecution in federal court. In organized crime cases where local prosecutors were either unable or unwilling to bring charges, RICO allowed the federal government to step in and take those organizations down.

A “pattern” of racketeering activity requires at least two different instances of racketeering activity no more than ten years apart. In reality, a pattern usually involves far more than two acts. The Supreme Court held in H.J. Inc. v. Northwestern Bell Telephone Co. that a pattern requires proof of “continuity plus relationship” among the acts of racketeering. The acts must have the same or similar purpose, results, participants, victims or methods of commission or be otherwise interrelated, and must take place over some substantial period of time.

RICO contains four different prohibitions:

Section 1962(a) prohibits using the income generated by a pattern of racketeering activity to acquire an interest in, or to establish or operate, any enterprise. A violation of 1962(a) is a two-step process: the defendant earns money from a pattern of racketeering activity, and then uses that money to invest in or operate the enterprise. This is the type of offense at which RICO was primarily aimed: the infiltration of businesses and other organizations by those who earned their money through criminal operations.

Section 1962(b) is similar to 1962(a) but involves only a one-step process. It prohibits using the racketeering activity directly to acquire an interest in or control over an enterprise. This would apply, for example, to a criminal organization using extortion or bribery to control the behavior of those operating a business or government organization.

Section 1962(c) is by far the most commonly-used RICO provision. It prohibits any individual employed by or associated with an enterprise from conducting or participating in the conduct of the enterprise’s affairs through a pattern of racketeering activity. In Reves v. Ernst & Young the Supreme Court adopted the “operation or management” test for determining who is covered by this section. To participate in the conduct of an enterprise’s affairs a defendant must have some role in the operation or management of the enterprise and not just be a low-level employee following orders.

Finally, Section 1962(d) is a conspiracy provision, making it a crime to conspire to violate sections (a), (b), or (c).

RICO Charges and the Mueller Investigation

Due to RICO’s breadth, there is little doubt it could theoretically apply to a number of the allegations surrounding the Russia investigation. Whether RICO would make sense and exactly how it could apply would depend on the nature of the crimes Mueller ended up pursuing.

First, there are several different enterprises that would satisfy RICO. One would be the Trump campaign, Donald J. Trump for President, Inc.  As a corporation, the campaign itself qualifies as an enterprise. If Mueller determined that individuals conducted the campaign’s affairs through a pattern of racketeering activity, RICO section 1962(c) could apply.

Another potential enterprise would be the Trump Organization itself, or any one of its subsidiary corporations. If the investigation were focused more on the Trump Organization’s financial ties with Russian individuals, that could lead to charges that Trump and others participated in the conduct of the Trump Organization’s affairs through a pattern of racketeering activity under 1962(c), or used funds generated by a pattern of racketeering activity to operate the Trump Organization under 1962(a).

There also could be an association-in-fact enterprise made up of various individuals involved In the campaign. Again, this requirement is essentially equivalent to a conspiracy, so if individuals in the campaign were engaged in a pattern of criminal acts prosecutors could potentially name that group as an enterprise and charge their activity under RICO.

For the pattern of racketeering activity, the most obvious candidate is money laundering. If there are charges similar to those against Manafort involving ties between Russian individuals and the Trump Organization, long-term money laundering schemes could easily be charged as a pattern of racketeering activity used to fund and operate the Trump Organization.

If the criminal focus is on the campaign itself and a possible conspiracy with Russian individuals, a potential pattern of racketeering activity is less obvious. The most likely criminal violations, including election crimes and computer crimes, do not qualify as “racketeering activity.” Any crimes involving Russian interference with the election probably also took place over a relatively limited and discrete period of time and might lack the continuity necessary to form a pattern.

As far as cover-up crimes are concerned, obstruction of justice does qualify as racketeering activity, although false statements and perjury do not. If prosecutors found a long-running pattern of obstruction of justice related to the campaign and its aftermath, that might qualify as a pattern of racketeering activity. The enterprise could be the campaign itself or an association in fact of individuals involved in the campaign. The charge would be that the defendants conducted the affairs of that enterprise through a pattern of obstruction of justice designed to thwart investigations by the FBI or Congress.

Why RICO Charges Are Unlikely

RICO’s breadth makes it a potential charge in Mueller’s investigation, particularly if the investigation ends up focusing on international money laundering involving the Trump Organization. On the other hand, if all Mueller finds is a pattern of obstructive conduct, using RICO would seem like an unnecessary stretch. But in the end, regardless of what Mueller uncovers, RICO charges are probably unlikely.

One reason they’re unlikely is that Mueller simply doesn’t need RICO. If you’re prosecuting a gang for a series of state law crimes, or a massive global conspiracy like the FIFA corruption case, RICO can be a useful tool. But in most federal white collar cases, RICO really doesn’t get prosecutors much that they can’t already get through charges such as conspiracy, fraud, and money laundering. RICO’s twenty-year penalty used to be unusual, but now is the norm for more routine federal crimes including mail and wire fraud and obstruction. Other statutes, including money laundering, also allow prosecutors to seek forfeiture. It’s hard to see what RICO would add to Mueller’s already substantial arsenal. Why spend time and effort proving complicated concepts like a pattern of racketeering activity to a jury when you can just focus on the underlying crimes themselves?

A second reason is that all criminal RICO charges must be approved by the Organized Crime and Gang section in the Criminal Division at the Department of Justice. Main Justice requires all federal prosecutors to obtain this approval in order to ensure RICO is used only in cases where it is truly appropriate and necessary. The DOJ guidelines provide that RICO charges will not be approved in cases where other federal statutes can adequately address the misconduct.

The special counsel regulations provide that Mueller is subject to all DOJ rules, regulations, and procedures. That means he would have to seek review and approval of any RICO charges by Main Justice – something Mueller is probably (and understandably) reluctant to do. Mueller does not want the Sessions Justice Department second-guessing his prosecutorial decisions. He also would need to be concerned about leaks that might come out of DOJ if he submitted charges for their review. (This also may be the reason tax crimes were not included in the Manafort indictment, even though they seemed like fairly obvious charges. Charging tax crimes would have required Mueller to seek review and approval from the DOJ Tax Division.)

We have some hints from the Manafort indictment about how Mueller may view these questions. Given the nature of those charges, RICO would have been an easy fit. Prosecutors could readily have charged that Manafort and his co-defendant Richard Gates funded and operated Manafort’s consulting firms (the enterprises) through a pattern of racketeering activity (money laundering) over a number of years. But Mueller chose not to include RICO charges.

In the nearly half-century since RICO was passed, its significance for white collar cases has diminished. Federal prosecutors have more — and usually better — options now. RICO still carries a certain mystique, and Trump’s critics may find the idea of RICO allegations of a grand conspiracy appealing. But no matter what else the special counsel’s investigation turns up, we are unlikely to see a RICO indictment.

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