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United States v. Gatto

United States District Court, S.D. New York

February 28, 2018

JAMES GATTO, et al., Defendants.

          Aline R. Flodr Edward B. Diskant Noah David Solowiejczyk Robert Lee Boone Eli Jacob Mark Assistant United States Attorneys GEOFFREY BERMAN INTERIM UNITED STATES ATTORNEY Michael Steven Schachter Casey Ellen Donnelly David Angeli WILLKIE FARR & GALLAGHER Attorneys for Defendant James Gatto

          Jennifer L. Brown FEDERAL DEFENDERS OF NEW YORK INC. Steven A. Haney, Sr. HANEY LAW GROUP PLLC Attorneys for Defendant Christian Dawkins

          Andrew A. Mathias William W. Wilkins Mark C. Moore NEXSEN PRUET, LLC Johanna Rae Hudgens WINSTON & STRAWN LLP James Lawrence Bernard Joel Cohen STROOCK & STROOCK & LAVAN LLP Attorneys for Defendant Merl Code


          Lewis A. Kaplan United Spates District Judge

         This matter is before the Court on defendants' joint motion to dismiss the indictment. The Court denied the motion in open court on February 15, 2018, but stated that it would render an opinion in due course. This is that opinion.


         The following facts are alleged in the indictment, [1] the truth of which the Court is bound to assume when considering a motion.[2] The Court does not consider “[c]ontrary assertions of fact by the defendants.”[3]

         A. The Parties

         This indictment charges a conspiracy among defendants, certain basketball coaches of the Universities of Louisville and Miami, and certain student basketball players and/or their families.

         Defendant James Gatto is an executive at “Company-1, ” a multi-national corporation that designs and manufactures shoes, clothing, and accessories for various sports, including basketball. Company-1 sponsors the athletic programs of a number of universities with highly ranked National Collegiate Athletic Association (“NCAA”) Division I men's basketball teams.[4]During the relevant period, defendant Gatto oversaw significant components of Company-1's high school and college basketball programs, defendant Merl Code consulted for Company-1 on its high school and college basketball programs, and defendant Christian Dawkins was an aspiring business manager for professional athletes.[5]

         B. NCAA Regulations

         The NCAA is a non-profit organization that regulates athletics for colleges and universities. NCAA member schools are organized into three separate divisions: Divisions I, II, and III. Division I is the “highest level of intercollegiate athletics sanctioned by the NCAA.”[6] Schools with Division I athletics programs typically have the largest athletics budgets and offer the most athletic scholarships, subject to NCAA regulations.[7]

         One of the hallmarks of the NCAA is that the students who compete in NCAA programs must be amateur, rather than professional, athletes. To preserve the amateur status of any student-athlete that plays for an NCAA Division I school, the schools and current and prospective student-athletes are subject to certain rules, including that (1) any financial assistance to student-athletes other than from the school itself or from the athletes' parents or legal guardians is prohibited unless expressly authorized by the NCAA, and (2) student-athletes, prospective student-athletes, and their relatives are prohibited from accepting any benefits, including money, travel, clothing or other merchandise, directly or indirectly from a financial advisor or an agent (which is defined broadly to include anyone “who, directly or indirectly . . . seeks to obtain any type of financial gain or benefit . . . from a student-athlete's potential earnings as a professional athlete”).[8]

         Student-athletes who are recruited in violation of NCAA rules are ineligible to play.[9]In addition, the indictment lists various penalties to which any school or individual found to be in violation of an NCAA rule may be subject, including limitations on the school's participation in post-season play in the relevant sport, limitations on the school's funding from the NCAA, and various financial penalties.[10]

         Accordingly, student-athletes and coaches are required to make certain representations related to NCAA rule violations to the Division I schools for whom they play and work. Student-athletes are required annually to attest to their amateur status and to report any violations of NCAA rules involving the student-athlete and the school.[11] Coaches are required to certify annually that they have reported to their school any knowledge of NCAA rule violations involving the school.[12]

         C. The Alleged Scheme

         The indictment alleges that defendants and their co-conspirators schemed to pay bribes to certain high school basketball players bound for NCAA Division I universities and/or their families in exchange for commitments by the students to matriculate at specific universities and then retain Dawkins' services and sign with Company-1 once they turned professional.

         The allegations against defendants specifically relate to the University of Louisville and the University of Miami, both Division I schools.[13] With respect to the University of Louisville, the indictment alleges that defendants conspired to funnel approximately $100, 000 from Company-1 to the family of a high school basketball player who had not yet committed to a particular university. The $100, 000 payment was to be made to the family indirectly through a third-party in four installments, but the student's family received only one such installment payment before defendants were arrested.[14] Similarly, the indictment alleges that defendants conspired to funnel approximately $150, 000 to a high-school basketball player and/or his family at the request of certain coaches at the University of Miami in order to induce that player to matriculate at the University of Miami.[15]

         Defendants are charged with conspiring to use interstate or foreign wires in furtherance of the scheme to defraud by making, agreeing to make, and concealing bribe payments to the high-school basketball players and/or their families in exchange for the players' commitments to play basketball at the University of Louisville and the University of Miami, thereby (1) causing the universities to agree to provide athletic scholarships to student-athletes who in fact were ineligible to compete as a result of the bribe payments, and (2) depriving the universities of significant and necessary information regarding the players' and coaches' non-compliance with NCAA rules, thereby interfering with the universities' ability to control the use of their assets, including the decision of how to allocate a limited amount of athletic scholarships, and exposing the universities to tangible economic harm, including monetary and other penalties imposed by the NCAA.[16]


         Although they do not put it in precisely these terms, defendants move to dismiss the indictment pursuant to Fed. R. Crim. P. 12(b)(3)(B)(v) and 47. They contend that the indictment fails to allege a crime because it fails to allege that:

• The purpose of the alleged scheme was to injure the universities. To the contrary, defendants claim that the indictment alleges that their goal was “to help them.”
• The defendants “sought to obtain money or property for themselves from . . . the alleged victims.”
• The defendants' purpose was to deprive the universities of money or property.
• The alleged scheme “was to be accomplished by means of material misrepresentations.”[17]

         These arguments disregard allegations contained in the indictment, depend upon assertions outside the indictment, are premature, or all three.

         A. Criminal Rule 7

         Fed. R. Crim. P. 7(c)(1) states that an indictment “must be a plain, concise, and definite written statement of the essential facts constituting the offense charged.” “To satisfy the pleading requirements of Fed. R. Crim. P. 7(c)(1), an indictment need do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.”[18] It is sufficient if the indictment, “first, contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend, and, second, enables him to plead an acquittal or conviction in bar of future prosecutions for the same offense.”[19] The “indictment ‘need not be perfect, and common sense and reason are more important than technicalities.'”[20]

         Defendants here are charged with conspiracy to commit wire fraud. The federal wire fraud statute imposes criminal penalties on anyone who:

“[H]aving devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice.”[21]

         The 23-page indictment in this case tracks the language of Section 1343, which is incorporated by reference into Section 1349.[22] As discussed below, the indictment contains also extensive factual allegations as to when, how and with whom the alleged scheme was undertaken. These allegations are more than sufficient to inform defendants of the particulars of the alleged conspiracy in which they are charged with having participated.

         B. Injury to the Universities as Object of the Alleged Scheme

         The elements of wire fraud include “(1) a scheme to defraud (2) to get money or property (3) furthered by the use of interstate . . . wires.”[23] In order to establish a “scheme to defraud, ” the government must show “that some actual harm or injury was contemplated by the schemer.”[24]

         Defendants contend that this indictment fails by reason of the lack of any allegation that the purpose of the fraudulent scheme was to injure the universities that allegedly were its victims. Indeed, they maintain that the indictment asserts that the object of the alleged scheme was to assist the universities by attracting basketball talent. But the defendants ignore some of the indictment's allegations and misconstrue others.

         The indictment alleges that the defendants and their co-conspirators, who included, among others, certain basketball coaches as well as prospective basketball players and/or their family members, “conspired . . . to obtain athletic-based financial aid for the student-athletes from [the] .. . universities .”[25] It alleges in particular that the objects of the conspiracy included “causing the universities to agree to provide athletic scholarships to student-athletes who . . . were ineligible to compete as a result of the bribe payments.”[26] Those allegations, the truth of which must be assumed for purposes of this motion, are fatal to this branch of defendants' motion.

         Nor may these allegations be ignored because the indictment alleges that (a) payments to certain prospects or their families were intended to “assist” one or more coaches in securing the prospects' commitments to the schools, [27] (b) the plan to funnel money to a particular University of Louisville prospect was developed “at the request and with the assistance of one or more coaches at the University of Louisville, ”[28] and (c) defendant Gatto told defendant Code that he already had learned from a coach at the University of Miami about the university's “request for assistance in securing” the commitment of a particular student to attend that institution.[29] Of singular importance, the indictment makes abundantly clear that NCAA rules prohibited the payments, [30] that the coaches and other conspirators concealed the bribes from the universities “in order for the scheme to succeed and for the student athletes to receive athletic scholarships, ”[31] and that the universities stood to suffer substantial penalties if the payments were uncovered.[32] Assuming proof of these facts, a jury would be entitled to infer that the coaches were not acting solely in the interests of their employers. Indeed, the government would be entitled to prove that the coaches had substantial personal interests -financial, reputational, career, and competitive interests - in fielding the most successful teams possible and that those interests were not entirely aligned with the interests of their employers. In other words, it is quite possible that the coaches' motives were either entirely selfish or mixed -combining desires to “help” their schools by fielding winning basketball teams with actions contrary to their schools' interests because they violated the school's policies and subjected the schools to a risk of severe penalties that the schools would not have run had they known all of the facts.

         The law on this point is abundantly clear. “[T]he principle that directors and officers may act on behalf of a corporation does not extend to acts of self-enrichment.”[33] Thus, the defendants' attempt to equate the actions and statements of the coaches with actions of the universities is at best premature. Whether the government ultimately can establish that the coaches did not act in the sole and exclusive interests of their employers[34] is a matter for trial, not a Rule 12 motion.

         This conclusion is consistent also with the case law to which defendants cite.

         In United States v. D'Amato, the Second Circuit overturned a mail fraud conviction for insufficient evidence that the defendant had intended to harm the corporation he had been charged with defrauding. The court reasoned that “a person hired to perform services for [a] corporation . . . cannot be found to intend to harm a corporation or its shareholders through otherwise lawful misleading conduct if he or she follows the instructions of an appropriate corporate agent who appears to be unconflicted and acting in good faith.”[35] But it is premature for defendants in this case to challenge the indictment on the theory that the basketball coaches were “unconflicted and acting in good faith.”[36]

         United States v. Braunstein, [37] a Ninth Circuit case on which defendants rely, is readily distinguishable. The defendant in that case was a computer distributor who bought computers from ALAC, a Latin American subdivision of Apple, Inc. Although the defendant ostensibly was obliged to sell the computers only to distributors who would resell them in Latin America, he in fact sold the computers to a distributor who resold them in the United States at below-market prices. The indictment eventually was dismissed voluntarily, but the Ninth Circuit awarded attorneys' fees to the defendant after concluding that “ALAC could not be deceived about practices that it actively endorsed” and, indeed, that the government “had reason to believe . . . that employees at ALAC knowingly sold computer products to distributors who resold the same products . . . outside of Latin America.”[38]

         This stage of these proceedings is a dramatically different case from Braunstein. The indictment alleges specifically that defendants and their co-conspirators concealed their scheme from the universities. That assertion is taken as true for purposes of this motion. And it at least permits the inference that the defendants well knew that responsible, unconflicted university officials had not and would not have approved their actions. Accordingly, defendants' challenge on this point fails.

         C. Obtaining Money or Property from the Universities

         Defendants contend also that the indictment should be dismissed because it fails to allege that defendants “schemed to obtain money or property from [the Universities of] Louisville or Miami.”[39] But they misconstrue the law in the Second Circuit and ignore allegations of the indictment.

         Defendants rely principally on United States v. Walters, [40] in which the defendant, an aspiring sports agent, was convicted of mail fraud after he bribed college football players to let him represent them upon turning professional. The Seventh Circuit reversed the conviction. It held that although a jury could have concluded that the colleges would have saved athletic scholarship funds but for the scheme, the colleges “were not out of pocket to Walters” because “he planned to profit by taking a percentage of the players' professional incomes, not of their scholarships.”[41] It added that “only a scheme to obtain money or other property from the victim by fraud violates § 1341.”[42]

The fraud theory in Walters bears some superficial resemblance to this case in that the government alleged that the defendant in Walters had caused the universities to pay scholarship funds to athletes who had become ineligible as a result of the their agency contracts with defendants. But Walters neither controls nor is persuasive here for two independent reasons.

         1. Distinguishing

         Walters on the Law Setting aside for the moment the factual distinctions between Walters and this case, a defendant in this circuit, “‘does not need to literally “obtain” money or property to violate the [mail and wire fraud] statute[s].'”[43]

         In Porcelli I[44], the Second Circuit upheld the mail fraud conviction of a gas station operator, Porcelli, who failed to remit sales tax on the gas that he sold to New York State. The government had not proved that Porcelli actually collected the taxes that he was obliged to pay to the State, but the Circuit nonetheless held that New York State's intangible interest in the unpaid sales tax was state property within the ambit of the mail fraud statute and that “Porcelli . . . obtained cash . . . whether or not he actually collected the sales tax on his gasoline sales” because “[i]f he did not collect the tax, then he obtained funds that an honest retailer, selling for the same price, would have remitted to the State.”[45] Porcelli thus had deprived the State of property because he was “obliged to pay the tax whether or not he collected it from the customers.”[46]

         In a subsequent challenge to his conviction, Porcelli argued that (1) the Supreme Court's then-recent decision in Scheidler v. National Organization for Women, Inc., [47] which construed the Hobbs Act to require that a defendant actually “obtain” money or property from the alleged victim, should be carried over to the mail fraud statute, and (2) in the context of his case, it was impossible for Porcelli to have obtained money or property because he “already possessed the money or property of which he was convicted of scheming to acquire.”[48] The Second Circuit rejected that argument because “in contrast to the Hobbs Act, neither the mail or wire fraud statute requires that a defendant ‘obtain' property before violating the statute.”[49] In other words, regardless of the verbiage used in Porcelli I - that is, “[i]f he did not collect the tax, then he obtained funds that an honest ...

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