Sports Litigation Alert

Tuesday, January 1, 2019

Beware: Breaking NCAA Rules Could Result In A Visit From the FBI (and Worse)

By Bob Latham, Nate St. Clair, and Brian Oates

College sports in the United States is a cash cow, with billion-dollar television deals, hundred-million dollar apparel deals, and some coaches earning in excess of seven-million dollars annually. This revenue generation has sparked a debate as to whether college athletes should be paid directly. Through it all though, the National Collegiate Athletic Association (NCAA) continues to hold the line on its amateurism rules, which limit player benefits to tuition, room, board and small cost-of-living stipends.

With so much money generated, it should not be surprising that third parties want to get in on the action in an effort to reap financial reward. Indeed, the notion of third parties interfering with sports is nothing new in the United States. One quickly conjures up thoughts of the infamous 1919 Chicago “Black Sox” baseball team and the eight men who agreed to throw the 1919 World Series in exchange for payments from gamblers.

In the unique paradigm of NCAA sports, where student-athletes are unpaid while many others involved are paid handsomely, the landscape is ripe for issues to arise. There are typically two sources for such issues: the schools themselves or third parties.

One of the most famous examples of a school violation is the Southern Methodist University football team, who in the 1980s maintained a fund to pay recruits and players. SMU was given the so-called “death penalty,” resulting in the school’s football program being shut down for several years. Another well-known case arose when the NCAA found that Heisman trophy winning running back Reggie Bush had received several hundred thousand dollars in gifts from a sports agent. Bush was stripped of his Heisman trophy, and the University of Southern California was stripped of their team wins during part of Bush’s tenure with the program.

There is typically one constant throughout these violations: nobody is held criminally liable. The Federal Bureau of Investigation (FBI) does not investigate, and the United States Attorneys’ Office does not indict. The SMU boosters who contributed to the fund for players and the sports agent who paid Reggie Bush and his family are walking free. This is because historically such conduct has been viewed as simply an NCAA rule violation — not criminal conduct.

That dynamic appears to be changing however, as the FBI and the U.S. Attorneys’ Office seem to be intent on protecting amateurism in college sports. On October 24, 2018, a jury in a New York federal court returned a unanimous guilty verdict against Jim Gatto, adidas’ former Director of Global Sports Marketing, Merl Code, a former adidas consultant, and Christian Dawkins, an aspiring sports agent, in the case of United States v. Gatto, et al. What were these individuals found guilty of? Providing cash payments to families of young basketball athletes to attend schools sponsored by adidas. The defendants took the position that their behavior may have violated NCAA rules, however, they determined that such behavior was not a federal crime. Michael Schachter, one of Gatto’s lawyers surmised, “The NCAA’s rules are not the laws of this country. The NCAA is not the US Congress.”

But the U.S. Attorneys’ Office disagreed, arguing that the defendants’ payments deprived schools of the right to recruit athletes who were actually amateurs and eligible to play NCAA basketball. According to prosecutors, the schools were the victims and unwittingly played ineligible athletes, risking NCAA penalties. Robert Khuzami, one of the prosecutors on the case, in somewhat dramatic fashion claimed that “the defendants deceived universities into issuing scholarships under false pretenses; they deprived the universities of their economic rights and tarnished an ideal which makes college sports a beloved tradition by so many fans all over the world.” Further, prosecutors told the jury that the defendants’ actions caused athletes to mislead university compliance officials, resulting in the school’s representations made on compliance forms to the NCAA to be false.

Needless to say, the jury agreed with the prosecutors. Gatto was found guilty of one count of wire fraud conspiracy and two counts of wire fraud. Code and Dawkins were found guilty of a single count of wire fraud conspiracy and a single count of wire fraud. Specifically, Gatto, Code, and Dawkins were found to have violated 18 U.S.C. § 1343, which prohibits any scheme designed to defraud or obtain money or property by means of false or fraudulent pretenses, representations, or promises. Defendants’ conduct was apparently found by the jury to have defrauded the universities by causing them to pay scholarship money to athletes who were ineligible due to the defendants’ secret payments to them. In other words, defendants’ scheme resulted in the misrepresentation of the athletes’ amateur status to the universities and, as a result, the universities transferred scholarship money to the athletes. All three are expected to spend time in a federal prison, though they continue to maintain their innocence and have vowed to appeal.

The verdict received widely different reactions. Duke University head men’s basketball coach, Mike Krzyzewski, said that the verdict “means something good for our sport.” Coach “K” went on to say, “I think anybody who breaks the rules in any aspect of our society, you’d like to see them held accountable. So if that jury found them guilty of breaking rules, then they should be held accountable.” Meanwhile, a representative of Rick Pitino provided a response that is seemingly more in Pitino’s interest than a reflection on the impact to the NCAA. Pitino, the former University of Louisville head coach who was fired as part of the fallout from Gatto’s arrest, was frequently mentioned at trial, and his lawyer issued a statement saying, “Nobody with any degree of credibility implicated Pitino. His banishment from the college game is unfair, unwarranted and unjust.”

From afar, one person watched the Gatto trial with particular interest. Emanual “Book” Richardson, a former assistant basketball coach at the University of Arizona, has been charged, along with three other men’s basketball coaches, with soliciting bribes. His lawyer was very troubled with the Gatto verdict, stating, “The current state of play in college basketball is that any violation of NCAA rules is likely a federal criminal violation.” In addition, Chuck Person, a former NBA basketball player and former assistant basketball coach at Auburn University, was charged with accepting bribes in return for directing college basketball players to retain the services of a financial advisor when they entered the NBA.

The charges against Book, Person, former University of Southern California coach Tony Bland, and former Oklahoma State University coach Lamont Evans, are slightly different than those the jury found Gatto, Code, and Dawkins guilty of violating. This difference stems primarily from the employment status of the various defendants: Gatto, Code, and Dawkins all worked for private employers, while Book, Person, Bland, and Evans were all employed by public universities.

The U.S. Attorneys’ Office is pursuing three U.S. Penal Code violations against Book, Person, Bland, and Evans. First, these defendants are charged with federal program bribery, codified in 18 U.S.C. § 666, which applies because the universities that employed defendants received more than $10,000 a year in federal funds. As part of this charge, prosecutors will have to show that the defendants abused their authority over student-athletes in connection with university business. Second, the defendants are charged with honest services wire fraud, found in 18 U.S.C. § 1343 and 1346, which applies to an employee who takes bribes or kickbacks in breach of a duty owed the employer. Prosecutors argument in this regard is, in a nutshell, that coaches are expected to follow the rules and, instead of doing that, defendants benefitted themselves at the expense of their university employers because they were violating NCAA rules. Finally, the defendants were charged with violating what is known as the Travel Act, found in 18 U.S.C. § 1952, which makes it a crime to cross state lines to promote or carry on an illegal act, such as bribery.

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

Person is set for trial in February 2019, while Richardson, Bland, and Evans are scheduled for trial in April 2019. These upcoming trials will likely be very informative, as they will give insight as to how the U.S. Attorneys’ Offices around the country plan to continue to use NCAA rules as a vehicle for asserting violations of the United States Penal Code.

Given this new world order, all those who do business with or otherwise touch upon NCAA sanctioned activity, should be cautious. No longer is it only schools and student-athletes who must take heed of the NCAA’s rules. Third parties could find the FBI knocking on their door if they jeopardize the sanctity of the amateur status of student-athletes.

Robert P. Latham, Partner at Jackson Walker LLP, Globalaw, Nathaniel St. Clair, Partner at Jackson Walker LLP, Globalaw and Brian H. Oates, Associate at Jackson Walker LLP, Globalaw.

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