Matt Levine on Clase and Ortiz – what is the Federal crime here?

Matt Levine is great – if you are interested in finance and adjacent topics you should subscribe to his mostly-daily email Bloomberg newsletter, Money Stuff. (Google "subscribe Money Stuff").

As I expected, today he delved into the complicated legal question of whether Clase and Ortiz have committed a Federal crime. Interesting stuff. Pasted below.

|| || |Inside pitching|

Okay so why is this illegal:

[3-para quote from prosecutors' press release, which Reddit somehow deleted from my post.]

Here is the indictment, which alleges that Ortiz and Clase would agree with gamblers to throw certain certain pitches outside the strike zone so that the gamblers could profit on prop bets. There are pictures of them throwing those particular pitches in the dirt; they’re pretty egregious. And the gamblers allegedly gave Ortiz and Clase a cut of their winnings. (These cuts were generally on the order of a few thousand dollars per pitch. Clase, meanwhile, was making millions of dollars a year from his baseball salary.) “Through this scheme, the defendants defrauded betting platforms, deprived Major League Baseball and the Cleveland Guardians of their honest services, illegally enriched themselves and their co-conspirators, misled the public, and betrayed America's pastime.”

I think there are two main theories of what makes this illegal. The first theory is that they “defrauded betting platforms.” Online sportsbooks offer prop bets on things like whether “a specific pitch would be either a ball or a batter hit by pitch, as opposed to a strike” or “the speed of a given pitch, such as whether the pitch would be above 94.95 miles per hour.” [5] When the sportsbooks offer these bets, they expect that the bettors do not have inside information, and the sportsbooks’ terms of service specifically prohibited users from betting if they “had access to any pre-release, confidential information or other information that was not available to all other wagerers, including any information provided by a professional athlete.” The people who allegedly bet on Ortiz’s and Clase’s pitches thus violated the sportsbooks’ terms of service.

This, in the Justice Department’s theory, is fraud. We talked about this theory a couple of weeks ago, when some bettors were charged with betting using inside information about basketball players. It is, I wrote, a somewhat weird theory, essentially giving the sportsbooks’ terms of service — which nobody reads! — the force of criminal law. Still there is something intuitively correct about it; it does feel like insider betting is a scam on the person you’re betting against. 

The theory is slightly weirder here, though, as Ortiz and Clase are not charged with betting. They had no reason to read the sportsbooks’ terms of service, since they were not customers of the sportsbooks. So they are not actually charged with fraud on the sportsbooks; they are charged with conspiracy. Their gambler buddies allegedly defrauded the sportsbooks by violating their terms of service; Ortiz and Clase are charged with conspiring to violate the terms of service. Kind of a strange crime.

The other theory is that they “deprived Major League Baseball and the Cleveland Guardians of their honest services.” “Honest services wire fraud” is the somewhat odd legal term of art for “taking bribes”: The theory is that if you take a bribe to do something against the interests of your employer, you are committing fraud on the employer by depriving them of your “honest services.” The classic US Supreme Court case involved Jeff Skilling [of Enron], and held that honest services fraud involves “fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived.”

Fine, fair enough: Here, Ortiz and Clase are charged with not doing their best for the Guardians and the game of baseball (by throwing some balls in the dirt), because they got paid by their gambler friends. Sounds like honest services fraud. But the recent history of honest services fraud is quite odd. In 2023, the Supreme Court overturned what seems to me to have been a pretty straightforward bribery conviction by saying, no, you have to do a particular sort of bribery. The wire fraud statute criminalizes “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises,” and the Supreme Court held that “the federal fraud statutes criminalize only schemes to deprive people of traditional property interests.” In other words, taking a bribe is only fraud if you deprive your employer of “traditional property interests,” not if you take something vaguer like (in that case) “intangible interests such as the right to control the use of one’s assets.”

I don’t know what that means, and it is my strong suspicion that nobody knows what it means. [6] We talked once about a Texas federal judge who declared that stock pump-and-dump frauds were not illegal, because if you think about it hard enough, a pump-and-dump doesn’t deprive its victims of “traditional property interests,” but “only of accurate information necessary to make discretionary economic decisions.” Again I have no idea what that means, and that ruling was later overturned, but the theory is still live.

And this summer, a federal appeals court overturned a conviction for insider trading nonfungible tokens: A guy worked for OpenSea, the big NFT trading platform, and got advance notice of which NFTs would be listed on its homepage. He bought those NFTs, which went up when they were on the homepage, and made a profit. The appeals court said that that’s not wire fraud because listing on the homepage is not a “traditional property interest.” Again this struck me as crazy — obviously OpenSea’s confidential information had economic value — but that’s the law, man. 

So here, I guess the question is: Did the Cleveland Guardians or Major League Baseball have a “traditional property interest” in Ortiz and Clase throwing strikes? I think when you put it like that, the answer is either “no” or “what on earth are you talking about,” even though in some intuitive sense it is obviously bad and criminal and economically destructive for pitchers to take bribes to throw balls. My point here is not really to defend them. It’s to point out that (1) legally, they have a decent defense and (2) that’s really weird.

Though I do want to make one other point, which is that, sure, it’s bad to undermine the integrity of baseball by taking money from gamblers. But! You know! Major League Baseball certainly takes buckets of money from sportsbooks to promote gambling. Does that undermine the integrity of baseball? Well. I suspect Clase and Ortiz would not be intentionally throwing pitches in the dirt if baseball wasn’t working with sportsbooks to promote gambling.