The case has sent shockwaves throughout the National Basketball Association, leaving fans wondering if Donaghy altered the outcome of games because of his financial interest.
Donaghy, 40, faces a maximum prison sentence of 25 years but stands to be sentenced to less time as part of a plea deal with federal prosecutors. He was released on $250,000 bail and agreed to forfeit $30,000.
"I was in a unique position to predict the outcome of NBA games," Donaghy affirmed. "Some of my picks included games I had been assigned to referee."
Two accused co-conspirators, James Battista, 42, and Thomas Martino, 41, were released on $250,000 bail. Battista's lawyer said he would plead not guilty and expected Donaghy to cooperate with prosecutors in the case against his client.
Donaghy admitted to participating in a scheme in which, against NBA rules, he would pass along inside information, such as the physical condition of certain players and which referees would officiate upcoming games.
Prosecutors allege he received up to $5,000 for each prediction that turned out to be correct and that he accepted money at least three times: in Phoenix in January 2007, in Toronto in March 2007 and in Washington in April 2007.
Donaghy pleaded guilty to wire fraud conspiracy to defraud the NBA and to transmitting gambling information across state lines.
"He has had a severe gambling problem for a while," defence lawyer John Lauro explained. "He has expressed a great deal of regret and concern about the pain he has caused."
Prosecutors allege Donaghy started betting on NBA games in 2003, using a friend to place the bets with a bookmaker so he could escape detection.
In December 2006, Donaghy met Battista and Martino in Philadelphia, prosecutors said in an affidavit based on an FBI investigation.
Battista, a professional gambler, confronted Donaghy with the fact he was betting on NBA games and proposed that Donaghy provide picks for upcoming games in exchange for $2,000 for each correct pick, the affidavit said. Later the amount was increased to $5,000.
Donaghy and Martino devised a code for communicating Donaghy's picks over the phone - a system that continued until April 2007, the affidavit said.
Donaghy, who earned $260,000 from the league last season, resigned on July 9 after 13 seasons as an NBA referee. Eleven days later the FBI approached the NBA about him.
NBA Commissioner David Stern in July called Donaghy a "rogue, isolated criminal" and said it appeared no other league employees were involved.
"We will continue with our ongoing and thorough review of the league's officiating program to ensure that the best possible policies and procedures are in place to protect the integrity of our game," Stern said.