Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-05-03691/USCOURTS-ca8-05-03691-0/pdf.json

Parties Involved:
Susan Bala
Appellee
Racing Services
Appellee
United States of America
Appellant

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 05-3688

No. 05-3691

___________

United States of America, *

*

Plaintiff - Appellee/ *

Cross-Appellant, *

*

v. *

*

Susan Bala, *

*

Defendant - Appellant/ *

Cross-Appellee. *

___________

Appeal from the United States

No. 05-3690 District Court for the

___________ District of North Dakota.

United States of America, *

*

Plaintiff - Appellee, *

*

v. *

*

Racing Services, Inc., *

*

Defendant - Appellant. *

___________

Submitted: September 28, 2006

Filed: March 6, 2007

___________

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Before LOKEN, Chief Judge, SMITH and GRUENDER, Circuit Judges.

___________

LOKEN, Chief Judge.

After a lengthy trial, the jury convicted Racing Services, Inc. (RSI), and its

president and sole shareholder, Susan Bala, of conducting and conspiring to conduct

an illegal gambling business in violation of 18 U.S.C. §§ 1955 and 371; illegal

transmission of wagering information in violation of 18 U.S.C. § 1084(a); and eight

counts of money laundering and conspiracy to commit money laundering in violation

of 18 U.S.C. §§ 1956(a)(1)(A)(i), 1956(a)(1)(B)(i), and 1956(h). For forfeiture

purposes, the jury subsequently found the amounts involved in each defendant’s

illegal gambling and money laundering offenses -- $99,013,200 as to RSI and

$19,719,186.06 as to Bala. The district court sentenced Bala to 27 months in prison,

ordered her to forfeit $19,719,186.06, and held her jointly and severally liable for

RSI’s forfeiture of $99,013,200. Bala appeals, arguing that the evidence was

insufficient and a number of other issues. RSI, now represented by its bankruptcy

trustee, joins in these contentions. Both defendants also challenge the forfeiture

orders. Concluding the evidence was insufficient on all counts, we reverse.

I. Background. 

In 1989, the State of North Dakota legalized parimutuel wagering on horse

races conducted outside the State and simulcast (simultaneously broadcast) to licensed

off-track betting (“OTB”) operators in North Dakota. The North Dakota Racing

Commission (the “Commission”) administers this heavily regulated regime. Only

charities and other “public-spirited organizations” may be licensed to conduct

simulcast parimutuel wagering. See N.D. Cent. Code § 53-06.2-06. 

In 1993, RSI became the sole entity licensed by the Commission to provide

simulcast services to the charities licensed as OTB operators. RSI as simulcast service

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provider contracted with out-of-state race tracks to provide satellite broadcast signals

of live racing events to licensed OTB locations in North Dakota. RSI also established

and maintained the combined parimutuel pools of North Dakota wagers and

performed many record-keeping functions. 

In 2001, Bala, the Commission, and interested North Dakota constituents such

as horse breeders and the racing industry persuaded the North Dakota Legislature to

amend its parimutuel wagering statutes to permit parimutuel “account wagering.”

Before account wagering, parimutuel bettors placed bets with OTB operators before

the simulcast horse race, usually appearing in person and paying the OTB operator’s

teller in cash. The various wagers were combined into a parimutuel pool. After the

race, approximately 80% of the pool was paid to winning bettors. The remaining 20%

was divided between the race track, the OTB operator, North Dakota taxes and fees,

and RSI, the simulcast service provider. With account wagering, bettors may establish

accounts and place simulcast parimutuel wagers electronically, eliminating the need

for cash-handling tellers. Rather than authorize multiple OTB operators to establish

bettor accounts and receive account wagers, the account wagering statute provided

that account wagers “may only be made through the licensed simulcast service

provider,” RSI. N.D. Cent. Code § 53-06.2-10.1. The way RSI conducted account

wagering resulted in this prosecution. 

Following passage of the account wagering statute, RSI established a call center

where RSI employees received bets from callers with wagering accounts. After

receiving a bet, the employee would charge the customer’s account and enter the bet

into a “tote machine,” the same equipment used to transmit bets placed with OTB

operators to the race track and to calculate the combined parimutuel pool for that race.

RSI moved this operation from its Fargo headquarters, where charities licensed as

OTB operators were already conducting simulcast parimutuel wagering, to a building

at 1318 23rd Avenue South in Fargo (referred to by the parties as “1318”). The

indictment charged and the government’s evidence at trial tended to prove that,

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between October 1, 2002, and April 28, 2003, $99,013,200 was wagered through the

1318 call center, yet RSI paid no part of these wagering proceeds to the State in the

form of incremental fees or taxes or to the charity OTB operators. When a disgruntled

employee complained to the Commission that RSI was conducting “rogue” activities

at the 1318 site, the FBI investigated and this prosecution followed.

II. Sufficiency of the Evidence.

Defendants argue that the evidence was insufficient to sustain their convictions

on all counts because it established that RSI’s account wagering operation at 1318 was

a legal parimutuel wagering business that at worst violated the Commission’s

licensing regulations. This contention raises difficult and complex issues, both

factually and legally. 

Counts 1 and 2. These counts charged RSI and Bala with conspiring to

conduct and conducting an “illegal gambling business” within the meaning of 18

U.S.C. § 1955. This statute provides in relevant part: 

(a) Whoever conducts, finances, manages, [etc.] all or part of an

illegal gambling business shall be fined under this title or imprisoned not

more than five years, or both. 

(b) As used in this section --

 (1) “illegal gambling business” means a gambling business

which --

 (i) is a violation of the law of a State or political subdivision

in which it is conducted . . . . 

First enacted as part of Title VIII of the Organized Crime Control Act of 1970, § 1955

extended federal criminal jurisdiction to illicit gambling businesses of “major

proportions,” thereby giving the federal government “a new substantive weapon [to]

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strike at organized crime’s principal source of revenue: illegal gambling.” Iannelli

v. United States, 420 U.S. 770, 788-90 (1975) (quotation omitted). The statute does

not broadly prohibit individual acts of gambling that are prohibited by state law. “It

is participation in the gambling business that is a federal offense, and it is only the

gambling business that must violate state law.” Sanabria v. United States, 437 U.S.

54, 70 (1978). The issue is whether Bala, and the former RSI officers who pleaded

guilty and testified against her, caused North Dakota simulcast service provider RSI

to conduct an “illegal gambling business” within the meaning of § 1955.

1. A violation of § 1955 requires proof that the gambling business “is a

violation” of state law. The government’s lengthy indictment interpreted this element

broadly, alleging that RSI’s account wagering operations knowingly violated

administrative regulations adopted by the Commission. In ruling on pretrial motions

to dismiss, the district court rejected this broad interpretation of § 1955, correctly

ruling that § 1955 only prohibits gambling businesses that are “in violation of state

penal laws,” not state administrative regulations. United States v. Gordon, 464 F.2d

357, 357-58 (9th Cir. 1972), followed by this court in Missouri ex rel. Small v.

Harrah’s-N. Kan. City Corp., No. 99-1551, 2000 U.S. App. LEXIS 2022, at *3 (8th

Cir. Feb. 15, 2000) (unpublished). Thus, weighing the sufficiency of the evidence on

these counts requires a close look at North Dakota criminal laws relating to gambling.

A review of North Dakota’s gaming laws must begin with Article XI, Section

25, of the North Dakota Constitution: 

The legislative assembly shall not authorize any game of chance . . . for

any purpose whatever. However . . . the legislative assembly may

authorize by law bona fide nonprofit veterans’, charitable, educational,

religious, or fraternal organizations, civic and service clubs, or such

other public-spirited organizations as it may recognize, to conduct games

of chance when the entire net proceeds of such games of chance are to

be devoted to educational, charitable, patriotic, fraternal, religious, or

other public-spirited uses.

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(Emphasis added.) Consistent with this provision, the North Dakota criminal laws

include a broad gambling prohibition: “Except as permitted by law . . . [a] person is

guilty of a class C felony if that person engages or participates in the business of

gambling.” N.D. Cent. Code § 12.1-28-02(3). 

The statutes authorizing simulcast parimutuel wagering create a limited

exception to this broad prohibition: “Civic and service clubs; charitable, fraternal,

religious, and veterans’ organizations; and other public-spirited organizations may be

licensed to conduct racing and simulcast parimutuel wagering as authorized by this

chapter.” N.D. Cent. Code § 53-06.2-06. The government argues on appeal, as it did

to the district court, that RSI and Bala violated § 12.1-28-02(3), and therefore were

properly convicted of violating § 1955, because neither was a charitable organization

eligible to be licensed to conduct simulcast parimutuel wagering. 

The district court rejected this theory and so do we. As the court recognized,

the 2001 statute that authorized account wagering expanded the exception for

simulcast parimutuel wagering: 

[P]arimutuel wagering [may] be conducted through account wagering.

. . . An account wager made on an account established in this state may

only be made through the licensed simulcast service provider authorized

by the commission to operate the simulcast parimutuel wagering system

under the certificate system. An account wager may be made in person,

by direct telephone communication, or through other electronic

communication in accordance with rules adopted by the commission. 

N.D. Cent. Code § 53-06.2-10.1 (emphasis added). This statute expressly granted the

licensed simulcast service provider, RSI, exclusive right to conduct account wagering,

without an additional license but subject to rules of the North Dakota Racing

Commission (rules that the Commission for the most part never adopted). Thus,

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account wagering conducted by RSI became a “legal gambling business” in North

Dakota, whether conducted at 1318 or elsewhere. 

2. The parimutuel statutes also prescribe how the simulcast service provider

must distribute the proceeds of an account wagering operation. After paying

qualifying expenses, the provider "shall use the remainder of the amount so withheld

[from the wagering pool] only for eligible uses allowed to charitable gambling

organizations." N.D. Cent. Code § 53-06.2-11(5). The cross reference is to a statute

that restricts the use of wagering proceeds by a charity licensed as an OTB operator,

restrictions consistent with Article XI, Section 25, of the North Dakota Constitution,

as one would expect. See N.D. Cent. Code § 53-06.1-11.1(2). A violation of this

statute is a crime -- specifically, a class A misdemeanor. See § 53-06.1-16(1). Thus,

a simulcast service provider such as RSI that fails to use its “net proceeds” in the

manner prescribed by the North Dakota Constitution violates a penal statute. The

district court’s jury instruction on account wagering explained that, while RSI was

authorized to take account wagers, “North Dakota law still requires that some portion

of the proceeds of these wagers go to a charitable organization.” Consistent with this

analysis, the court denied Bala’s post-verdict motion for acquittal of the § 1955

charges because:

No defendant offered any evidence that any proceeds from the 1318

operation went to a charity during the October 2002 through April 2003

time period. Therefore, Defendant cannot claim that her gambling

activity at 1318 . . . was legal under North Dakota law.

In our view, while the court’s evidentiary observation was correct, its legal

conclusion overlooked the government’s affirmative failure to prove that this arguable

non-compliance with state law converted defendants’ authorized account wagering

into an “illegal gambling business” within the meaning of 18 U.S.C. § 1955. 

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1

We also note the indictment charged Bala and RSI with violating N.D. Cent.

Code § 12.1-28-02(3) and various provisions of the North Dakota Administrative

Code by operating an unlicensed simulcast parimutuel wagering site at 1318. As we

have explained, this was a conceptually flawed theory. The indictment did not accuse

defendants of violating § 53-06.1-11.1(2), nor did it allege that RSI unlawfully failed

to pay its net proceeds to charity. In United States v. Miller, 774 F.2d 883, 885 (8th

Cir. 1985), we reversed a conviction under 18 U.S.C. § 1955 because, by failing to

specify what state gambling law the defendant violated, the indictment did not

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3. We note first that, to prove a criminal violation of N.D. Cent. Code § 53-

06.1-11.1(2), the government must prove that RSI failed to “disburse net proceeds [to

one or more charities] within the period prescribed by rule.” Prior to and during the

period in question, the Commission had no rules in place either defining account

wagering net proceeds or prescribing how or when RSI must disburse its net proceeds

to charity. The North Dakota constitutional term “net proceeds” is inherently vague.

The parimutuel statute that cross references § 53-06.1-11.1(2) does not even use the

term net proceeds. See § 53-06.2-11(5). The Games of Chance statutes define “net

proceeds,” but the definition is vague and may not apply to parimutuel horse racing

revenues. See § 53-06.1-01(13). 

At trial, the Commission’s former executive director testified (for the

government) that the portion of parimutuel wagering proceeds owed to charities was

“a matter of free contract” between the charities and parimutuel licensees. “It can be

as much or as little as they contract for in that there is no law or regulation that the

Racing Commission says you must take this or you must accept this.” In this

uncertain regulatory environment, without Commission rules establishing a deadline

for payment and the manner of calculating the amounts due to charity, the

government’s proof that RSI made no payments during its initial seven months of

account wagering operations failed to prove a violation of § 53-06.1-11.1(2). And if

defendants did not commit a criminal violation of § 53-06.1-11.1(2), their legal

account wagering operations fell within the “Except as permitted by law” exclusion

to a criminal violation of N.D. Cent. Code § 12.1-28-02(3).1

 

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unambiguously set forth all elements of the offense and “contained no assurance that

the grand jury deliberated on the elements of any particular state offense.” Here, it

appears that the grand jury deliberated on a purported gambling offense very different

from the failure-to-pay-charities offense underlying defendants’ § 1955 convictions.

This violated the principles underlying our decision in Miller.

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4. Even if the government had proved a violation § 53-06.1-11.1(2) by

establishing that RSI did not make one or more timely or adequate disbursements of

account wagering net proceeds to charity, we would not affirm these § 1955

convictions. The statute defines an “illegal gambling business” as one which “is a

violation” of state law. 18 U.S.C. § 1955(b)(1)(i). The word “is” strongly suggests

that the government must prove more than a violation of some state law by a gambling

business. The gambling business itself must be illegal. The legislative history

supports this interpretation, stating that § 1955 was intended “to deal only with illegal

gambling activities of major proportions.” H.R. Rep. No. 91-1549 (1970), as

reprinted in 1970 U.S.C.C.A.N. 4027, 4029; see United States v. Thomas, 508 F.2d

1200, 1204 (8th Cir. 1975). 

Our prior § 1955 opinions have said the government need only prove that the

gambling “violates state gambling laws,” United States v. Sutera, 933 F.2d 641, 645

(8th Cir. 1991), or is “in violation of state law,” United States v. Trupiano, 11 F.3d

769, 771 (8th Cir. 1993). But those cases involved forms of gambling that were flatly

illegal under state law. See United States v. Shursen, 649 F.2d 1250 (8th Cir. 1981).

In no prior § 1955 case have we dealt with an alleged violation where the core

gambling activity was specifically authorized by state law but the manner in which

defendant conducted that activity violated some aspect of state law. In this situation,

we must identify those criminal violations of state law that turn a legal gambling

business into an “illegal gambling business” that is itself a violation of state law.

In our view, it is clear that a criminal violation of a state law unrelated to

gambling, such as a safety code or employment law violation, would not cause a legal

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gambling business to violate § 1955. On the other hand, if RSI had intentionally

violated § 53-06.1-11.1(2) by failing to pay its net proceeds to one or more charities

for seven months, that would be a criminal violation of a state law regulating the

manner in which gambling may be lawfully conducted. But that misdemeanor

violation would not have made the gambling business itself illegal. Though it may be

difficult in some cases to determine when a gambling-related violation is sufficient to

make a legal gambling business illegal for purposes of § 1955, the text of the statute

and its legislative history, supported by the rule of lenity to the extent those primary

sources are ambiguous, require that the line be drawn. See generally Chapman v.

United States, 500 U.S. 453, 463-64 (1991). 

5. Assuming the theory was adequately charged in the indictment and

explained in the jury instructions, the government could have avoided this evidentiary

insufficiency by proving that RSI entered the account wagering business never

intending to distribute its net proceeds to charity. A reasonable jury could then find

that this form of account wagering business was itself illegal. But there was no direct

or circumstantial evidence of such an intent or agreement. Two former RSI executives

testified for the government, Vice President Raymundo Diaz and Chief Financial

Officer Gary Storm. Diaz testified that the initial plans were to include a charity in

the account wagering operations, and he assumed RSI made the appropriate

arrangements. Storm testified that he was not aware of the account wagering

operations at 1318 until months after they began. Bala testified that she told RSI

officials charities must be involved in account wagering; that she believed the 1318

site was being used for internet wagering, which did not require charity involvement;

and that she attempted to satisfy RSI’s obligations to its OTB charities when she

learned 1318 had conducted account wagering, but this prosecution thwarted those

efforts. Given the lack of Commission rules prescribing the amounts RSI was

required to pay to charities, the government’s evidence fell far short of proving that

RSI and Bala never intended to conduct the account wagering business in the manner

prescribed by North Dakota’s penal statutes. 

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For all these reasons, we conclude that the evidence was insufficient to convict

Bala and RSI of the offenses charged in Counts 1 and 2.

Count 3. Count 3 charged defendants with violating 18 U.S.C. § 1084(a) when,

being engaged in the business of betting and wagering, they knowingly made

interstate wire transmissions of bets, wagers, “and information assisting in the placing

of bets and wagers.” Section 1084 provides an exception for "the transmission of

information assisting in the placing of bets or wagers . . . from a State . . . where

betting on that sporting event or contest is legal into a State . . . in which such betting

is legal." 18 U.S.C. § 1084(b). The district court instructed the jury that defendants

violated § 1084 if they transmitted “information assisting in the placing of bets and

wagers,” unless betting on the sporting event or contest was legal where the

transmission was both placed and received. 

North Dakota law expressly permitted RSI to conduct parimutuel wagering

through account wagering using “telephone . . . or . . . other electronic

communication.” N.D. Cent. Code § 53-06.2-10.1. The district court nevertheless

denied defendants’ motion for judgment of acquittal on Count 3 on the ground that

“[p]arimutuel wagering is only a legal activity when some proceeds are devoted to a

charitable use.” We conclude that this construction extended § 1084(a) beyond what

the statute’s plain language will permit. Transmitting information assisting in the

placing of parimutuel account wagers was legal in North Dakota when RSI engaged

in that activity. The betting in question was never illegal, only RSI’s alleged use of

the “net proceeds” of the betting long after the race was completed and winning

bettors were paid. Thus, the electronic transmission of such information fell within

the § 1084(b) exception unless the account wagers were placed from States where

such wagering was illegal. As the government presented no evidence that ever

occurred, the convictions on Count 3 must be reversed.

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There is an aspect of this issue unnoticed by the parties that could have serious

implications for the future of interstate account wagering. The prohibition in

§ 1084(a) encompasses bets and wagers as well as information assisting bets and

wagers, whereas the exception in § 1084(b) is limited to information assisting bets and

wagers. Thus, the plain language suggests that Congress intended to prohibit all

interstate wagering by wire, whether or not legal in the States between which the bets

are transmitted. There is explicit support for this interpretation in the legislative

history. See H. Rep. No. 87-967 (1961), as reprinted in 1961 U.S.C.C.A.N. 2631,

2633. One unreported case reflects a federal indictment broadly construing § 1084 in

this fashion, and the district court denying defendant’s motion to dismiss. See United

States v. Ross, No. 98 CR. 1174-1(KMV), 1999 WL 782749, at *3 (S.D.N.Y. Sept.

16, 1999). Two circuits have addressed the scope of the § 1084(b) exception without

deciding this issue. See United States v. Cohen, 260 F.3d 68, 73-74 (2d Cir. 2001);

Sterling Suffolk Racecourse Ltd. P’ship v. Burrillville Racing Ass’n, Inc., 989 F.2d

1266, 1272-73 (1st Cir. 1993). Here, the trial record suggests that North Dakota

passed the 2001 account wagering statute in an attempt to attract interstate electronic

betting. If the reach of § 1084 is as broad as its legislative history suggests, the

attempt if successful will violate federal law. We leave that issue to another day.

Counts 4-12. Counts 5-12 charged that defendants conducted specific financial

transactions using the proceeds of an illegal gambling business for the purpose of

promoting that business and concealing their unlawful activity, all in violation of the

federal money laundering statutes, 18 U.S.C. §§ 1956(a)(1)(A)(i) and (B)(i); see

generally United States v. Hildebrand, 152 F.3d 756, 762 (8th Cir. 1998). Count 4

charged a conspiracy to commit both offenses. A money laundering charge requires

proof of a financial transaction involving the proceeds of “specified unlawful

activity,” which is defined to include violations of § 1955 and § 1084. See 18 U.S.C.

§§ 1956(a)(1), 1956(c)(7)(A), 1961(1). The government persuaded the district court

that the entire $99 million of account wagers were the proceeds of RSI’s illegal

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gambling business. However, as the government proved no violation of § 1955 or of

§ 1084, the convictions on Counts 4-12 must be reversed.

The Forfeitures. The indictment alleged that defendants must forfeit an

amount equal to the gross receipts from RSI’s account wagering activity --

$99,013,200 -- on account of their illegal gambling business and money laundering

offenses. Congress has provided for the criminal forfeiture of property “used” in an

illegal gambling business, 18 U.S.C. § 1955(d), or “involved” in money laundering,

18 U.S.C. § 982(a)(1). As to RSI, the jury found that the entire $99 million was

involved in both offenses. As to Bala, the jury found a reduced amount,

$19,719,186.06. The court’s forfeiture order made Bala jointly and severally liable

for the full $99 million. As we have reversed the illegal gambling business and

money laundering convictions, the forfeiture orders must be reversed as well.

The Government’s Cross-Appeal. The government cross appeals the district

court’s order permitting Bala to use some $68,000, proceeds from the sale of a house

she purchased many years earlier, to pay the fees of her retained trial and appellate

attorneys, rather than holding those funds in trust to satisfy a portion of the adverse

forfeiture orders. This issue is moot because we have reversed the forfeiture orders.

In any event, we agree with the district court’s resolution of the issue. 

III. Conclusion.

The evidence at trial established that the North Dakota Racing Commission

knew charities must receive the “net proceeds” of the account wagering that RSI, and

only RSI, was authorized to conduct. Yet the Commission neither drafted regulations

prescribing how this complex task should be accomplished nor adequately monitored

RSI’s compliance. Issues predictably arose. Rather than pursue possible violations

in state court, the Commission brought the complicated situation to federal authorities,

who then commenced a federal prosecution based upon flawed interpretations of state

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law, of 18 U.S.C. § 1955, and of 18 U.S.C. § 1084. The result was a trial at which the

government failed to prove any of the offenses charged. Accordingly, the judgments

of the district court, including the preliminary and final orders of forfeiture, are

reversed. Bala’s motion to file additional pro se materials on behalf of RSI is denied

as moot. The government’s cross appeal is dismissed.

______________________________

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