Editorial: A Supreme Court Trifecta

4 June 2008

Even in London, what proposition bookie would’ve given odds on it? The conservative-leaning United States Supreme Court of Chief Justice John G. Roberts Jr. delivering not one, not two, but three decisions, all favorable to online gaming? And all on the same day? If there was ever a time to buy a lottery ticket . . .

United States v. Santos

In United States v. Santos, No. 06-1005, the court’s majority opinion -- written by the formidable Justice Anton Scalia, no less -- addresses the single great concern for the rule of law in post-constitutional America. For decades now, the laws have been written and interpreted so flexibly in the government’s favor that they are coming to mean whatever the prosecutors want, whenever they want. This decision just might be the first sign that the tide is turning.

Once upon a time, (from about four in the afternoon onward, most days), there was a numbers game -- the Hispanic version , known as bolita -- running in the city of East Chicago, Ind. The particular problem was that the operators were actually running around East Chicago to do it. Which is unquestionably breaking state gambling law, which in, turn, lead to federal charges.

As a result, the various owners, operators, and helpers were snapped up by the F.B.I., including one Efrain Santos, operator, and one of his collectors, Benedicto Diaz. What did the feds throw at this pair? As is their habit, everything they could lift. Among it was money laundering, a very serious charge. Prosecutors need not depend on RICO enhancement to get heavy penalties here -- a money-laundering conviction can mean 20 years, right out of the box.

But there is a slight ambiguity in the wording of the law, which led to this appeal. The Money Laundering Control Act, enacted in 1986, speaks of the "proceeds" of illegal activity. "Proceeds" is an inexact word, and it can be taken to mean the gross receipts of an operation, or its profits.

For a defendant, the difference can be enormous.

If, let’s say, you were so incautious as to run a numbers racket, you would have expenses like any other business -- overhead, salaries, and so on -- which you would naturally pay with the gross from the numbers bets.

Now, if "proceeds" is taken to mean this gross, then you, the operator, can be grabbed not only for running an illegal gambling business, but for money laundering as part and parcel of operating the business itself.

But if "proceeds" means the profits only, then the prosecutors would have to prove, separately, that you then turned around and reinvested those profits in something you knew was illegal, or that you sought to disguise the source or control of them. Naturally, the government wants to get the twofer; and initially, they did. Mr. Santos was convicted of illegal gambling operation (five years on two counts) and money laundering (a whopping 17 years) for paying the winners, and helpers like Mr. Diaz. Mr. Diaz, who was just an employee, received nine years for money laundering conspiracy, for receiving his salary. It looked like one more instance of heads they win, tails you lose.

But there is also something called the rule of lenity, and vague laws can bring it into play. When the law is vague, courts are often forced to interpret the will of the Legislature in enacting it. This is the mother of all gray areas, at best, and often enough a solemn farce: as the Unlawful Internet Gambling Enforcement Act of 2006 demonstrates, many lawmakers have no clear idea of what is actually in the bills they enact, and don’t much care.

In any case, the rule of lenity states that in doubtful interpretations, the benefit of the doubt should go to the defendant, especially where, as here, the penalties can be particularly heavy. And this area is doubtful with a capital D. Not only do the feds, but 18 states have money-laundering statutes that don’t distinguish between "proceeds" which are profit, and "proceeds" which are gross income.

"Merger," the courtroom shorthand for this process of one offense automatically entailing another, is the problem. For if, as Justice Scalia asked, one crime necessarily involves the other, why are they separate offenses in the first place? Each count against a defendant must be proven -- no package deals allowed. He then goes on to make the assertion -- astounding for these days of the surveillance state and law-and-order at all costs -- that the government’s administrative convenience is not sufficient grounds to relieve the prosecutors of this separate burden of proof. And that’s how Mr. Santos and Mr. Diaz got let up easy. Or at any rate, easier.

Cuellar v. United States

Regaldo Cuellar was stopped in Texas on his way to Mexico. His car contained $81,000, bagged and hidden in a secret compartment. In fairness to the cops, the cash was so full of marijuana resin that a dope dog went on point; also the bags were covered with goat hair in an apparent attempt to hide the distinctive ganja smell. At trial, and on appeal, the lower courts held that concealing the money was the same thing as attempting to disguise the money source, ownership, or control, in violation of the Money Laundering Control Act. (In other words, concealing the money MUST mean it was being used for an illegal purpose.)

But, said a unanimous Supreme Court led by Justice Clarence Thomas, merely hiding money is no proof that the money is the proceeds (profit or gross, in this case it’s no matter) of illegal activity. Notwithstanding that the circumstances are suspicious as hell, it is not enough to conclude that the aim of hiding and transporting that money was to facilitate some kind of shady enterprise, or that the dough itself came from one, or that the defendant knew any of these things.

That’s exactly what has to be proven -- that the defendant knew this. And in Cuellar v. United States, No.06-1456, the feds didn’t quite do that. So it looks like Mr. Cuellar gets his money back, no doubt needed to pay his lawyers.

CBC Distribution v. Major League Baseball Advanced Media

Often what the Supreme Court doesn’t do is every bit as important as its active decisions. For when the justices refuse to hear an appeal, it often has the effect of affirming the judgment appealed from. Fantasy sports leagues are built on the virtual use of real-world players and their performance statistics. Fantasy leagues now exist for baseball, football, basketball, soccer, NASCAR, and bass fishing. (In the United Kingdom, they consider ballroom dancing a sport -- stay tuned.)

The problem was, pro-sports players associations in the United States, for baseball, particularly, were demanding that fantasy league operators pay royalties -- up to 10 percent -- for the privilege of using actual players’ names and stats.

When Major League Baseball tried to limit the market, CBC Distribution and Marketing, a St. Louis-based company that runs fantasy leagues, sued. Significantly, the suit was launched in the Eastern District of Missouri, the homeland of the right-wing jihad against I-gaming. And -- whaddya know? -- the big leagues lost.

The court granted summary judgment for CBC -- that means a slam dunk before the trial even starts. Use of the players' names did not violate their publicity rights, ruled United States District Court Judge Mary Ann Medler. And in any case, the First Amendment -- and the right to use information already in the public domain, like records and stats, was more important.

The United States Court of Appeals for the Eighth Circuit, in St. Louis, upheld the ruling, and the Supreme Court refused to review the appeals court decision. And that, as they say, was the ball game.


The implications of those three cases for the I-gaming world may be considerable, especially the first two.

Money-laundering charges -- or the threat of them -- are a staple part of the recent campaign of intimidation against Internet gaming operators, and associated service providers. To tighten the standard of proof (or, to be more precise, the standard of allegation) in such cases is indeed, as the United States Department of Justice complained, a move to deprive it of some of its nastier weapons.

But the question is, are those legitimate weapons for the government to wield? The power to decide guilt based on a standard that shifts at will? The power to presume criminal intent without proof? When such rock-ribbed conservatives as Justice Scalia and Justice Thomas say, in effect, that the government has pushed too far, we can be sure that the anything-goes prohibition campaign against I-gaming has finally been located on the wrong side of enough.

But while we can hope, it is still too early to predict whether the money laundering decisions of June 2 will affect the cases of Gary S. Kaplan, founder of BetonSports, and David Carruthers, the company's former chief executive, or, retrospectively, the "settlement" negotiations that Neteller and others were bludgeoned into by the threat of money-laundering prosecution. In our system, minor variations in facts can make a big difference in how the rulings come out, so it’s rarely safe to make blanket predictions. And it’s not like the prosecutors are going to suddenly give up.

Nevertheless, when hard-core conservative justices push back the limits of prosecutorial presumption on money laundering charges, they limit the Justice Department's ability to play, fast and loose, with its administrative power -- a welcome development for an industry that has suffered from the abuse of that power.

It is equally encouraging to see a judgment against corporate encroachment in the name of intellectual property rights. This has become a distinct problem, affecting creativity and future development of Internet and interactive media. A little relief was definitely in order.

The three decisions are not revolutionary, and are not likely to unhinge existing prosecutions and corporate power grabs. But the sky is a little less dark now.

Mr. Owens is a lawyer in Sacramento, Calif., specializing in Internet gambling law. Released in 2005, he coauthored "Internet Gaming Law" with Professor I. Nelson Rose, America's senior authority on gambling.