As the Kawhi Leonard salary cap evasion situation continues to spiral out of control, I thought this would be an appropriate time to take a step back and address some of the issues that arise from this unique situation.
What are the facts of the Kawhi Situation?
It seems that we don’t know all the facts for sure but here is a basic recap:
Pablo Torre provided a detailed report that showed that, in April 2022, Kawhi got a $28 million endorsement from a company called Aspiration Partners, which was billed as a “green” digital bank. Clippers owner Steve Ballmer invested $50 million in Aspiration around the same time as the endorsement deal.
Aspiration subsequently went bankrupt and is dealing with other unrelated fraud charges. The bankruptcy, however, revealed that Kawhi’s LLC was one of Aspiration’s major creditors. Torre reported that Kawhi’s endorsement deal was a “no show” job and that several Aspiration employees specifically felt or heard that the deal was designed as a front for Ballmer to compensate Leonard above the salary cap, as Kawhi was making roughly the maximum he could be legally paid under the CBA. (As a side note, there has been some speculation that Kawhi’s uncle, Dennis Robertson, was the driving force for this deal. Robertson is not officially an agent but he has been an adviser and he allegedly demanded similar “side compensation” from teams during Leonard’s 2019 free agency).
Ballmer denied the allegations and said that his investment was bona fide and that Aspiration had duped Ballmer, just like it had every other investor.
This seemed to slightly calm the masses until a subsequent report came out finding that Clipper minority owner Dennis Wong invested about $2 million in Aspiration about a week before Aspiration owed Kawhi a $1.75 million payout in 2022 and Ballmer added an additional $10 million in 2023.
Adam Silver has just retained the firm Wachtell Lipton to investigate whether salary cap circumvention occurred. Silver was pretty calm about the situation: “I think as a matter of fundamental fairness, I would be reluctant to act if there was sort of a mere appearance of impropriety. … I think that the goal of a full investigation is to find out if there really was impropriety. Also, in a public-facing sport, the public at times reaches conclusions that later turn out to be completely false. I’d want anybody else in the situation Mr. Ballmer is in now, or Kawhi Leonard for that matter, to be treated the same way I would want to be treated if people were making allegations against me.”
Silver is correct. He should not pre-judge this situation but the facts reported certainly are sufficient probable cause to look further into the situation. Now, with an investigation imminent, there is a lot of talk about how cap circumvention is proven. To that end, a lot has been made of the text of the CBA provision on this issue.
What’s the deal with circumstantial evidence provision in the CBA?
Section 2 of Article XIII of the CBA states that a team or team affiliate shall not agree to any side deals to compensate the player outside of the player’s NBA contract (there is an exception for passive investments that are less than 12.5% and investments are not coordinated).
The CBA goes into how a violation can be proven: “[a] violation… may be proven by direct or circumstantial evidence, including, but not limited to, evidence that a Player Contract or any term or provision thereof cannot rationally be explained in the absence of conduct violative of [the circumvention provision of the CBA].”
It is interesting that the CBA would specifically articulate that standard, since circumstantial evidence is routinely used to prove facts in court (in both civil and criminal cases), often in the context of financial transactions that may be the product of some sort of improper conduct. Digging a little deeper, we see that this “circumstantial evidence” language is not new. The language has been in each of the CBAs since 1999.
The previous CBA, from 1995, has the “No Undisclosed Agreements” section and bars side deals but does not discuss the evidence required to prove this.
What happened between 1995 and 1999 to get the NBA so worked up over this issue?
To understand the change, it makes sense to see the major cap circumvention issues that arose before 1999. Let’s review a little history on the reported cases of significant salary cap disputes before the 1999 amendment to the CBA:
–Albert King, 1985: The Knicks attempted to sign King into the salary slot of unsigned Truck Robinson, who was making $540,000. New York’s initial offer to King had a $400,000 signing bonus and started at $450,000 per year and escalated each season through 1989-90. The NBA read the CBA to permit New York to pay only 50% of Truck’s salary ($270,000) in 1985-86 (while not relevant, New York could have used the full $540,000 if they lost Truck as a free agent but only 50% if he was technically a retiree, which the NBA thought he was. Robinson played only two games in 1984-85 and did not play in the NBA after 1985, so the League had a point).
New York got creative and restructured the offer to contain a $960,000 signing bonus and only $75,000 in salary each of the first two seasons of the contract. This technically complied with the salary cap if the signing bonus did not count as salary. The NBA obviously thought that this arrangement was a sham and invoked the terms of the 1983 CBA (the first that had a salary cap) and its anti-circumvention provision (then Article III C(9) of the CBA).
Early arbitrators had ruled that these front-loaded signing bonuses did not violate the cap based on the NBA’s previously permitting such provisions. In the case of King, the arbitrator ruled consistently with the prior cases, upholding King’s revised contract with the huge signing bonus. The decision was overturned by a court, which found that “[t]he events and circumstances of this case present a stark case of intentional circumvention. If the court were to let it stand, the [arbitrator]’s determination would eviscerate the salary cap limitation for the final years of the [1983 CBA], and undermine the NBA’s purpose in signing the agreement…. The critical underpinnings of the [1983 CBA] were the maximum and minimum team salary limitations and the revenue sharing provision. The agreement could not have come into being without those stipulations. The NBA wanted a maximum team salary limitation. The NBPA sought to protect the players from any permanent adverse effects pursuant to the agreed on salary cap with a minimum team salary provision and a revenue sharing mandate. This quid pro quo formed the heart of the Modification Agreement. The parties took pains to provide for contingencies and play within these provisions without destroying them.”
Note that the judge in question, Robert Carter, previously presided over the messy Oscar Robertson litigation with the NBA from the 1970s. The league was in bad shape at that point and Carter was clearly taking special care to make sure the salary cap solution to those problem was not undermined by accounting tricks.
A quick postscript…The Knicks were saved by this court order. King ended up re-signing with his prior team, the Nets, for a one-year $650,000 deal and his production fell drastically (from 14 ppg on .498 TS% to 9.5 ppg on .472 TS%). King underwent knee surgery and did not get a new contract offer until November 1987, when Philly gave him a two-year deal worth about $400,000 per year. He continued to decline and was traded to the Spurs then waived near the end of the 1988-89 season. He played abroad for two years and retired in 1991-92 after a short cameo with the Bullets.
In all, King made about $1.5 million in the NBA during that span (it’s not clear what he was paid for his two years in Europe). The Knicks wanted to pay him $3.3 million over that span.
-Chris Dudley, 1993: The next cap circumvention battle came in the form of hustling, but offensively-challenged, Nets backup center Chris Dudley. In the summer of 1993, Dudley rejected a seven-year $20.8 million deal from Jersey in favor of a seven-year $10.5 million deal from Portland, with an opt-out after the first season. Portland could only pay Dudley $790,000 the first season (and offer 30% raises thereafter). After the opt-out, the Blazers could pay Dudley more as a returning player under the Larry Bird Exception, which permits a team to re-sign a player for more than the salary cap would allow if the player was coming from another team.
The NBA challenged the agreement with Portland as an improper circumvention of the cap under the 1988 version of the CBA. The court opinion has some fascinating tidbits about Dudley’s free agent process. Dudley had the sizable Nets offer and some interest, but no concrete offers, from Phoenix and Detroit. As between Jersey and Portland, Dudley preferred Portland because: “it was of championship caliber, it had no natural center, it played a style of basketball that he thought would ‘showcase’ his skills and it was located on the West Coast where he lived.” Those facts were a bit shaky. Portland had been a contender but was aging and had just been bounced in the first round of the 1992-93 Playoffs. They were not a serious contender, but they did have room for a starting center, though “showcase” seems like the wrong word to describe Dudley’s lunchpail game.
When Portland realized they could only pay about 50% of what the Nets could pay, GM Geoff Petrie wrote a memo to management suggesting the opt out clause after the first season, at which time they could pay closer to what New Jersey was offering.
The 1988 CBA had a provision the prohibited any “unwritten understanding concerning future renegotiations of the contract” and Dudley’s contract had an implied understanding that he would opt out after 1993-94 and get paid much more. The section of the CBA that seemed to cover the NBA’s concern stated that: “[t]here shall be no undisclosed agreements of any kind, express or implied, oral or written, or promises, undertakings, representations, commitments, inducements, assurances of intent, or understandings of any kind, between such player and any Team concerning any future renegotiation, extension, or amendment of the Player Contract.”
The case went to arbitration, where the arbitrator found that “a gross discrepancy in salary below a player’s `market value’ (as determined in this case by Dudley’s salary of $1,200,000 and the New Jersey offer of $1,560,000) constitutes without more [explanation] a cap circumvention.” This arbitration was appealed to court and the court assigned the case to a special master (basically, another arbitrator) to conduct a new hearing. The NBA offered no direct evidence that Dudley and Portland had a secret understanding to re-sign and, instead, argued that an inference of circumvention could be made solely based on the fact that Dudley took an offer worth half of the Nets’ offer and he had this opt out provision that he would undoubtedly exercise.
The special master found that Dudley had offered legitimate reasons for taking less to play in Portland and would not infer a secret agreement existed without more direct evidence. The court agreed with the special master and addressed the proof of a secret agreement allegation as follows: “[i]t was obvious that Dudley and Portland understood that with a one-year out it was highly probable that at the end of the year Dudley would exercise his option and Dudley and Portland would take advantage of the situation to negotiate a new contract uninhibited by the salary cap. However, that was not an undisclosed agreement of any kind. It was a situation which all the world could see. The NBA saw it and instituted these proceedings. That is not the kind of understanding which falls within the prohibitions of Section 4 [of the 1988 CBA].” The court also recognized that the one-year opt out practice might undermine the salary cap, but that not enough evidence existed at that time to conclude that the overall salary cap structure was in danger. The court consequently upheld Dudley’s contract as valid under the CBA.
Dudley ended up breaking his ankle in 1993-94 and played only 6 games for Portland (he did return for the playoffs and played 20 mpg and had 2.3 ppg on .400 FG%, with 3.8 rpg). Despite his terrible year, in the summer of 1994, Dudley opted out and the Blazers gave him a six-year $24 million contract. David Stern was pissed and argued that the new facts created an even stronger inference of a pre-arranged deal because Dudley’s season should not have increased his market value. Deputy commissioner Russ Granik said that: “[w]e think [long term contracts with opt outs after the first-year] all involve circumvention and also are technically violations of the collective bargaining agreement, but this one was just so transparent that we didn’t see any point doing anything other than disapproving it immediately.”
A second litigation ensued (the NBA also attempted to void other similar contracts of Horace Grant, Craig Ehlo, AC Green, and Toni Kukoc at the same time). Dudley won the second litigation and the court found that the issues had already been decided in the first litigation and could not be relitigated. This was a little strange because the evidence of collusion that was missing in the first case was a bit more compelling because he got a raise when he did nothing to improve his market value other than ending the season ambulatory. (Dudley also argued that Sacramento had made a similar offer to Portland that showed that the Blazers were paying market value).
Dudley ended up playing in the NBA through 2003. His stats post-1993-94 were not great:
486 games, 18.4 mpg, 3.3 ppg, .438 TS%, 6.1 rpg, 1.0 bpg, 10.1 PER, .092 WS48, -2.6 BPM, -1.3 VORP
Dudley was basically a non-offensive back up center for that span. He made $38 million in career earnings.
-Danny Manning, 1995: Manning was a hot free agent that summer and shunned large multi-year contracts (his prior team, Atlanta, was offering $35 million for five years) to sign with the Suns for one-year and $1 million. Phoenix lacked cap room but were a contender, so Manning took the one-year deal, assuming he would compete for a title and that the Suns would pay him what he was worth in the off-season of 1995. Manning ended blowing out his knee midway through the 1994-95 season.
The Suns still gave him a six-year $40 million contract that summer. Suns owner Jerry Colangelo argued that paying Manning was beneficial because it would show future free agents that the Suns were a loyal organization. The NBA did not challenge this contract as pre-arranged, even though it sure seemed that way.
Manning actually stayed relatively healthy for that deal. Though he missed much of 1995-96 with the prior knee injury (he played 33 games), he missed only about five games per year through the end of the contract in 2000-01. He was okay but not overwhelming statistically in that time (22.0 mpg, 9.9ppg, .537 TS%, 4.3 rpg, 1.7 apg, 16.0 PER, .104 WS48, 0.0. BPM, 4.3 VORP).
-Juwan Howard, 1996: In the first crazy summer of modern(ish) NBA free agency, the Heat attempted to sign Howard from the Bullets for a seven-year $100 million deal. The NBA voided the deal, finding that Miami had already agreed to pay Alonzo Mourning $112 million and this agreement, though not officially signed yet, was imputed to the Heat’s salary cap upon reaching an oral agreement.
This seemed like an aggressive use of the circumvention provision of the CBA. Frankly, the NBA was already annoyed that Pat Riley had broken his contract with the Knicks and suffered little consequence and this seemed like payback. Howard contested the NBA’s actions and filed for arbitration. While this was pending, Howard signed back with the Bullets, but reserving the right to go to Miami if he won the arbitration.
Before the case got too spicy, the parties settled. According to a report at the time, the agreement was as follows: the NBA approved the Heat’s other free agent contracts signed that summer (Mourning, Tim Hardaway, and PJ Brown) and the Bullets kept Howard and paid him the exact amount the Heat offered him. The NBA also dropped challenges to the legality of certain performance bonuses in Hardaway’s contract.
Howard had a long career after this incident but this contract was considered a huge overpay, as he settled into a role as a replacement level forward (career advanced stats were 14.6 PER, .078 WS48, -1.6 BPM, 3.8 total VORP).
-Latrell Sprewell, 1998: Spree didn’t have a salary cap issue but his case was relevant to the changes to the CBA in 1999. Golden State attempted to void his contract for violating the “moral turpitude” clause of the CBA when he choked his coach. The arbitrator found that the CBA didn’t specifically address Spree’s specific conduct and thus, while Sprewell could be punished, his contract couldn’t be terminated.
These disputes paint a picture of why the 1999 CBA specifically articulated that the NBA could prove circumvention via circumstantial evidence. Circumstantially, the Dudley case seemed like an obvious case of a pre-arranged deal. When faced with the evidence presented, the arbitrators and the courts had very different standards of review as to what constituted proof of a secret deal. Couple that discrepancy with the Sprewell arbitration and the NBA was making sure there was no ambiguity that an arbitrator or court had better apply a more relaxed standard of proof for the NBA in any circumvention dispute.
What does this mean for the Kawhi case?
Well, it means that the NBA has wide latitude to prove cap circumvention, and the CBA is mandating that an arbitrator or court apply a looser standard than they might naturally apply without specific guidance. Of course, arbitrators and courts can still go rogue but CBA provision makes it more difficult to do so.
It is too early to definitively predict what will occur in the Kawhi case because the fact record has not yet been developed. In theory, Leonard and Ballmer may have a reasonable explanation for this situation but it’s clear that the circumstances place the burden on them to do so. At this point, the evidence of circumvention greatly exceeds the Dudley dispute, where the argument rested on common sense motivations of the parties. With Kawhi, we shall see what happens but a full exoneration seems highly unlikely.