NBA's Right to Honesty Nets Referee

Mark Fass

New York Law Journal

Just as the federal government relied on tax fraud to prosecute Al Capone, the long history of sports corruption is peopled by defendants prosecuted for tangential misdeeds -- Cincinnati Reds manager Pete Rose, for example, who bet on his own team but was convicted of filing false income tax returns.

Add to that list Tim Donaghy, the ex-National Basketball Association referee who was sentenced Tuesday by a federal judge in Brooklyn to 15 months in prison for providing gamblers with tips on basketball games based on his insider access to the athletes.

Donaghy's crimes? In addition to conspiring to transmit gambling information, he deprived his employer, the NBA, of the "intangible right" to his "honest services."

A corporation's right to honest services is guaranteed by, of all things, an amendment to the Anti-Drug Abuse Act of 1988.

Former First Lady Nancy Reagan could hardly have known that her pet project would one day be used to prosecute wayward corporate employees, such as Donaghy, whose offenses have nothing to do with illegal narcotics.

But with a 28-word last-minute addition, codified as 18 U.S.C. 1346, the anti-drug act reinstated a robust weapon for fighting not just fraud, but even mere dishonesty.

Thus rearmed, the wire-and-mail fraud laws -- referred to as the "prosecutor's darling" by future federal Judge Jed S. Rakoff in a 1980 law review article -- invite prosecutorial abuse, critics contend.

Is honesty, they ask, an enforceable right? Should the federal government be charged with forcing private employees to comply with their company's rules?

"The fraud [theory is] that the employee has cheated his employer of the duty of honesty and the duty of loyalty," said sports law expert Michael McCann of the Mississippi College School of Law.

"I don't see why we have to call that 'fraud,'" he said. "The effect is that we criminalize the law of employment relations. Instead of just having an employment problem, you have a criminal problem."

In an interview shortly after Donaghy's sentencing, his attorney, John Lauro, called §1346 "a prosecutor's best dream." Under the law, Lauro said, "virtually any violation of a corporate rule," such as using the Internet for personal e-mail, "could be charged as a deprivation of the right to honest services."

"The scope of the law," Lauro said, "is unlimited."

The story of 18 U.S.C. 1346 encompasses the century-long evolution of "mail fraud" and the rapid congressional reaction to a controversial U.S. Supreme Court decision, as well as the debate over whether the federal government should be enlisted to enforce corporate rule books.

In his plea agreement, Donaghy admitted he received cash for giving winning gambling tips on basketball games based on information he gained through his unique access as a referee, such as undisclosed injuries to key players. Donaghy's conduct, he admitted, violated the NBA's rules.

He pleaded guilty to conspiracy to commit wire fraud "as part of a scheme to deprive the NBA of his honest services," as well as conspiracy to transmit wagering information. Tuesday, Eastern District of New York Judge Carol B. Amon sentenced him to two concurrent 15-month terms.

The fraud charge rested on 18 U.S.C. 1346, an addition to the 1988 anti-drug law that revived from the dead a favorite prosecutorial instrument -- the prohibition on depriving others to the right to honest work.

The new law effectively overturned the 1987 U.S. Supreme Court decision McNally v. U.S., 483 U.S. 350, in which the 7-2 majority narrowed the nearly century-old definition of the "schemes" that constitute fraud. In throwing out the convictions and 10-year prison sentences handed down to two Kentucky officials for funneling insurance commissions to a company one of them controlled, the Court ruled that, contrary to common practice, the 115-year-old federal mail fraud statute could not be used to prosecute people for defrauding others of "intangible rights," such as the right to have officials "perform their duties honestly."

As The New York Times reported, "The Supreme Court [has] blunted the most potent weapon used by Federal prosecutors against state and local political corruption by rejecting a broad definition of 'mail fraud' under which dozens of people have been convicted."

CONGRESS REACTS

The Reagan administration criticized the Court for removing a powerful tool from its prosecutorial quiver.

"We are considering whether to ask Congress for corrective action," Associate U.S. Attorney General Stephen S. Trott said at the time.

One year later, the White House did in fact seek a corrective, a sleek amendment reinstating the pre-McNally law tucked into the Anti-Drug Abuse Act. In its entirety §1346 reads, "For the purpose of this chapter, the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services."

Over the next 20 years, the add-on has become the subject of much debate. What does it mean to deprive another of "honest services"? And should the government be in the business of enforcing honesty between a private person and his employer?

Willamette University College of Law professor Jeffrey Standen has criticized the government's use of the law in the Donaghy case on his blog, The Sports Law Professor.

"The government's theory [is] that Donaghy tricked the NBA out of the loyal and honest services he owed. In other words, the government's fraud allegation basically says that anytime an employee acts disloyally or dishonestly toward his employer, or breaks some company rule, that employee is not just in trouble with his employer, but he's also committed a federal crime," Standen wrote. "Nice way to criminalize the fiduciary obligations of employees. This theory of law has been around for a while but still makes no sense."

Alan Vinegrad, a former U.S. Attorney for the Eastern District of New York who now works in the white-collar defense department of Covington & Burling, said Tuesday that the mail-and-wire fraud statutes remain a "prosecutor's darling" that can "be applied in so many situations."

However, he added, "There has to be some self-dealing or bribery or kickback aspect" for the Department of Justice to invoke §1346. Prosecutors are well aware, he said, of appellate court reversals for overreaching.

In Donaghy's case, Lauro said, §1346 proved pivotal.

"He would have been facing a simple gambling charge that would have been about half the sentence he's looking at," Lauro said. "It would have drastically reduced his exposure."