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.

Update: On October 24, Gatto, Code, and Dawkins were found guilty after a jury trial. They have vowed to appeal.

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Misguided Prosecutions and Washington “Gaffes”

There’s a well-known saying in Washington that the definition of a “gaffe” is when a politician inadvertently tells the truth. Assistant Attorney General Leslie R. Caldwell is not a politician, but she had her own “Washington gaffe” moment earlier this month while speaking on a panel sponsored by the Federalist Society (YouTube video available here).

Caldwell, who serves (for a few more weeks, at least) as the head of the Criminal Division at the U.S. Department of Justice, appeared on the panel with four white collar defense attorneys on December 8 at the Washington Press Club. The topic was overcriminalization – not as in too many criminal statutes being on the books, but overcriminalization in the form of federal prosecutors bringing cases that never should have been pursued as criminal matters.

The defense attorneys on the panel had represented corporate and individual defendants in recent major cases involving FedEx, a medical device company called Vascular Solutions, and pharmaceutical company Warner Chilcott. Those cases ended either in acquittals or, in the case of Fed Ex, with the government dismissing the case mid-trial. Each defense attorney told a version of the same basic story: the prosecution was an outrageous miscarriage of justice, criminal charges never should have been filed or even considered, and no one within the relevant prosecutor’s office had been willing to give the defense a fair hearing about why the case should not be indicted.

When AAG Caldwell took the podium as the final speaker, she appeared to throw her colleagues in the U.S. Attorneys’ Offices under the proverbial bus. She went out of her way to distinguish the Criminal Division at Main Justice in DC from the ninety-four U.S. Attorney’s Offices around the country. She said that while the attorneys in the Criminal Division operate with professionalism and integrity, she has seen “wide variation around the country” in the U.S. Attorney’s Offices in terms of their level of experience and quality of supervision.

Although not commenting on the specific cases discussed by the other panelists, AAG Caldwell agreed that sometimes cases get filed that should not have been filed; “I’m not going to dispute that.” She discussed a couple of additional examples where U.S. Attorney’s Offices had proposed misguided prosecutions. In one instance, prosecutors wanted to indict two partners at a law firm for obstruction of justice for seeking additional time to respond to a grand jury subpoena; in another, prosecutors proposed to charge all the adult residents of a small town in a RICO conspiracy. Because RICO cases and indictments of attorneys — unlike most cases — require review by Main Justice, those cases were able to be quashed by the Criminal Division.

Finally, Caldwell encouraged defense lawyers who believe prosecutors are pursuing inappropriate cases to seek review by Main Justice if they cannot get their concerns addressed. She said the Criminal Division recognizes that “not all U.S. Attorney’s Offices are created equal,” and that defense attorneys should not hesitate to go over the U.S. Attorney’s head and appeal to Washington in appropriate cases.

Caldwell’s suggestion that prosecutors in the U.S. Attorney’s Offices around the country do not always measure up to those in her own Criminal Division apparently did not sit well with her Justice Department colleagues. Two days later she issued a letter of apology to all DOJ attorneys. She wrote that while speaking at the panel she had defended the Department “in a way that inappropriately suggested that the care taken by U.S. Attorney’s Offices and others in making prosecutorial decisions was less than that taken by attorneys in the Criminal Division.” She said she deeply regretted the remarks, which she called “a mistake.”

doj seal

Caldwell’s Comments: Mistake or D.C. Gaffe?

For AAG Caldwell to make her points in that particular forum and format may indeed have been a mistake – but was she wrong?

Before considering that, a couple of observations about the panel discussion. First, the Federalist Society’s agenda was pretty transparent, and the ratio of four defense attorneys to one prosecutor was not exactly an attempt to be “fair and balanced.” The defense attorneys were naturally presenting the details of their cases from their own perspective. They did prevail, so no doubt their claims have some merit. But there are always two sides to such stories, and I think it would be surprising if the facts were indeed so black and white. The panel would have been more interesting if prosecutors in some of those cases could have been persuaded to participate and explain why they believed the case was justified.

Second, as one of the panelists pointed out, there are between eighty and ninety thousand criminal defendants prosecuted each year by the Department of Justice and all but a relative handful end up with either a guilty plea or a conviction at trial. So while talking about a few high-profile cases where the defense prevailed is interesting and worthwhile, it would be wrong to conclude that those cases represent anything close to the norm. As they say in journalism, no one writes stories about all the planes that don’t crash. Examples where the prosecution’s case falls apart are interesting and newsworthy in part because they are so unusual.

But back to AAG Caldwell’s comments. It really shouldn’t be controversial to admit that occasionally cases get filed that should not be filed. Law is a human enterprise and thus inherently flawed. There are thousands of prosecutors working for the Department of Justice across the country on tens of thousands of case each year. People sometimes are going to screw up.

It also should be relatively uncontroversial to observe that the U.S. Attorney’s offices vary in terms of their levels of experience and quality. Those offices operate with a great deal of autonomy, and are staffed by individuals with varying backgrounds and experiences from different parts of the country with different legal communities and traditions. Obviously some offices are going to be better run and more experienced than others.

With relatively few exceptions, AUSAs are free to investigate and indict their cases with no oversight from D.C. I don’t know whether the average line attorney in the Criminal Division in Washington is smarter than the average AUSA around the country, but I do know the attorney in Washington is going to have his or her cases supervised and reviewed by veteran prosecutors who have seen many similar cases and issues in the past. That level of seasoned review and quality control is not always available within every U.S. Attorney’s Office, where they may not see nearly as many large or complex cases.

It’s not fair to suggest that Main Justice itself is immune from making mistakes or bringing bad cases, but I think it’s perfectly fair to suggest that such cases are more likely to originate in the U.S. Attorney’s offices.

So although I’m sure she wishes she had phrased them differently, I think AAG Caldwell’s comments were basically correct. And they highlight an issue I think DOJ needs to take seriously: a need for renewed focus and training nationwide on the sound exercise of prosecutorial discretion.

Emphasizing the “Discretion” in Prosecutorial Discretion

There have been a number of high-profile examples recently of cases that appear to have involved bad charging decisions. If the government loses, as in the cases discussed during the Federalist Society panel, that is generally the end of it — other than providing great war stories for defense counsel. But when the defendant in such a case is convicted, the government is faced with defending its charging decisions on appeal. As I wrote in this recent post, that has led the U.S. Supreme Court recently to question whether prosecutors can be trusted to exercise their discretion appropriately.

For example, in Bond v. United States a woman who was angry at her husband’s lover sprinkled a caustic chemical on her doorknob and mailbox, which caused a minor skin irritation easily treated with cold water. Federal prosecutors responded by charging Bond with a felony aimed at punishing the use of chemical weapons. In Yates v. United States, a commercial fisherman received a civil citation for catching several dozen undersized red grouper and was ordered to take the fish back to port to be seized by authorities. When instead he threw the fish overboard, he was indicted for obstruction of justice under a statute that carries a maximum twenty-year penalty. Both these cases made it to the Supreme Court, and in both cases the Court expressed incredulity that prosecutors had chosen to bring the charges.

Cases where inappropriate charges are filed do not cast the Department of Justice in a favorable light. For the individual defendants, of course, they can result in tremendous injustice, which is contrary to DOJ’s fundamental mission. And if courts lose faith in the judgment and charging decisions of prosecutors, they will try to find ways to rein the government in – even if, as in Yates, that means adopting an interpretation of a statute that seems contrary to its plain language and common sense. This can make it more difficult for all prosecutors to do their jobs.

Members of the Federalist Society panel also talked about prosecutor myopia, where prosecutors could only see the facts a certain way and remained convinced, up to the end, that their cause was righteous. I think this is a real phenomenon; those who are trained in criminal prosecution may tend to see criminal remedies as the best option. As the saying goes, when your only tool is a hammer, every problem looks like a nail. But particularly when it comes to white collar crime and regulatory offenses, it’s critical for prosecutors to recognize there are many possible alternative remedies and that criminal prosecution may not be the best solution.

Cases like Yates, Bond, and those discussed at the Federalist Society panel, along with AAG Caldwell’s observations about the varying levels of experience within the U.S. Attorney’s Offices, suggest that DOJ could benefit from a renewed emphasis on the proper exercise of prosecutorial discretion. Washington may not be able to review all proposed indictments, but Main Justice could ensure that all prosecutors around the country are thoroughly trained in the “discretion” aspect of their jobs.

Prosecutors need to know the criminal law, of course, but they also need to have hammered into them, from day one, that deciding when not to apply criminal law is a huge part of their jobs. All prosecutors know this on some level, but there’s a difference between knowing it and having it ingrained and repeatedly stressed as a part of your professional identity and institutional culture. If there is too much emphasis on indictment numbers and “stats,” prosecutors may lose sight of the fact that often they are doing their jobs by declining to file charges, even after a lengthy investigation.

It’s not unheard of for prosecutors and investigators who have worked on a case for months or years to “fall in love” with their case or their witnesses and lose some ability to evaluate it objectively. That’s where some level of review by experienced and uninvolved prosecutors could be particularly useful.

I think it would be interesting if DOJ established some more formal mechanism whereby defense attorneys like those who appeared at the Federalist Society panel could obtain Main Justice review of proposed major indictments they feel are misguided. Currently defense attorneys can try to seek such a review, but there is no official process and no guarantee that anyone will listen. It would be easy for such a system to be abused, of course, and so setting up guidelines might be tricky. But if there were some official avenue for review of major cases, perhaps some mishaps such as those discussed by the panel could be avoided.

If inappropriate cases get filed it isn’t good for anyone: certainly not for those charged, not for the Department of Justice that ends up with a black eye, and not for the justice system as a whole. The culture within any institution is set at the top, and the Department of Justice needs a culture that emphasizes the importance of the sound exercise of prosecutorial discretion. If DOJ recognizes, as AAG Caldwell observed, that not all U.S. Attorney’s Offices are created equal and some lack appropriate expertise and experience, it would be wise to take some nationwide steps to remedy that situation and provide some safeguards.

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