What the Latest FBI Charges Mean for the Adidas Schools Named

On Tuesday, the FBI released more details from its lengthy investigation of college hoops' illegal recruiting scandal.

When Adidas executive James Gatto was charged last September for federal crimes related to bribing college basketball recruits, it was clear that only the first shoe in what could become a multi-year prosecution had dropped.

Seven months later, another shoe has hit the ground.

On Tuesday, Gatto, along with Adidas consultant Merl Code and sports management executive Christian Dawkins, faced a new round of charges in the U.S. District Court for the Southern District of New York. In a “superseding indictment” (an indictment that adds additional charges) the three men are accused making or attempting to make “illicit cash payments to the families of high school basketball players” in exchange for those players matriculating to one of four Adidas-sponsored schools: the University of Louisville, the University of Miami, the University of Kansas and North Carolina State University.

Understanding the theory of crime and charges

Everyone agrees that payments to recruits are violations of NCAA amateurism rules. These rules render student-athletes ineligible if they or their family members accept prohibited financial benefits. Student-athletes are deemed ineligible even if they weren’t aware that family members had accepted gifts on their behalf. Universities who enroll rule-breaking student-athletes can also be adversely impacted. These schools usually violate their membership agreements with the NCAA when their players break amateurism rules. They can face an assortment of NCAA punishments, such as vacated wins or forfeiture of scholarships. While courts have rejected certain aspects of amateurism rules, those rules’ ability to prohibit “under-the-table” payments remains in place.

Not everyone agrees that payments to recruits are violations of the law. While NCAA rules may sometimes seem like laws, they are not laws. Instead, they are contractual requirements for admittance and subsequent compliance in the not-for-profit (but billion dollar generating) entity known as the NCAA. Nonetheless, the government views these payments as the ultimate consequence of a criminal enterprise: a plot to convince top recruits to attend a particular college, which in turn leads benefiting recruits to consider endorsing Adidas and hiring Dawkins once they pursue the NBA.

To that end, the Justice Department contends that the defendants, along with certain college basketball coaches, participated in illegal schemes to defraud the four aforementioned universities. This theory asserts that the universities were victimized since they enrolled superstar recruits who, because family members had accepted payments, were ineligible under NCAA rules. These universities thus became vulnerable to NCAA punishment. They also suffered an opportunity cost in that they could have instead awarded athletic scholarships to rule-abiding (if perhaps less athletically talented) recruits.

The Justice Department reasons that it is a stakeholder in these transactions. After all, the federal government subsidizes universities in an assortment of ways. It does so through guarantees of financial aid, grants and various tax breaks and incentives. From that lens, college basketball “corruption”—with “corruption” referring to voluntary exchanges between sneaker executives, coaches and families of recruits so that recruits enroll at specific colleges and in turn help those colleges’ teams generate basketball wins and accompanying revenue—is linked to the government.

Building on this theory, the government argues that Gatto and the other defendants partook in wire fraud. Wire fraud refers to using wire communication (such as phone communications or electronic transfers) that take place between states and are intended to pursue an unlawful objective. Here, the Justice Department insists that the defendants knowingly devised a scheme to use wires to bribe family members of recruits.

Each wire fraud charge carries a potential sentence of 20 years in prison; there are two for each defendant in the superseding indictment. In addition, each defendant faces one count of conspiracy to commit wire fraud, a charge that carries up to 10 years in prison. These charges follow a series of other criminal charges filed against these defendants last fall.

Defendants attempt to debunk this theory of crime

The notion that colleges enrolling superstar recruits are “victims” might strike you as unpersuasive. These recruits are often among the most coveted high school students in the country. So long as their under-the-table payments remain hidden, these recruits will likely significantly improve their schools’ basketball programs and help them compete for the NCAA championship. In turn, those schools will generate more revenue through improved ticket, increased merchandise sales and higher TV ratings. Schools with winning basketball programs also usually gain through favorable media attention, which in turn helps those schools’ admissions and fundraising efforts.

The idea that school officials were unaware of such “conspiracies” to pay their recruits might also come across as improbable. Even the government’s indictment gives reason to question these officials’ supposed obliviousness. For instance, the indictment describes an intercepted phone call in which Code discusses Adidas transferring money to a Louisville recruit’s family. Code says, “this is one of those instances where we needed to step up and help one of our flagship schools, you know, secure a five star caliber kid.” Code’s own words get to the fact that the school—Louisville—clearly benefited by Code arranging for payment to the recruit.

In light of these points, attorneys for the defendants have outlined their arguments against the Justice Department’s case. In a filing last December, these attorneys denigrated the government’s theory as one that attempts, without any precedent, to criminalize NCAA rules.

As the defense attorneys have reasoned, it has never been a crime in the U.S. to pay a recruit to attend a particular college. Further, they stress that the legal definition of wire fraud requires both intent to harm and the presence of a victim. Here, the conspiracy arguably intended to benefit everyone involved. Likewise, there might not have been any victims: the recruit and his family gained money; the college gained a top recruit and enhanced basketball program; the sneaker company gained a sponsorship with an enhanced basketball program; and the agent/advisor gained a lead on signing the recruit once he turns pro.

Potential fallout for the implicated schools

As the government sees it, the four schools mentioned in the superseding indictment are victims of interstate conspiracies to bribe recruits.

The NCAA probably sees it differently.

Take the indictment’s depiction of NC State. According to the Justice Department, in 2015 Gatto and others conspired to funnel $40,000 to the father of a recruit who was “widely regarded as the top high school recruit in the state of North Carolina and who had played for an [Adidas] sponsored AAU team.” These payments were intended to secure the commitment of the player to play at NC State and to convince the recruit to later sign an endorsement deal with Adidas.

Given the indictment’s purported timeline and accompanying player description, it appears the player in question is Dallas Mavericks rookie guard Dennis Smith. Smith was North Carolina's 2015 Gatorade High School Player of the Year at Trinity Christian in Fayetteville. He also played on an Adidas-sponsored AAU team (“Team Loaded”). He then played one season at NC State in 2016-17. If Smith is the player, it doesn’t appear Adidas got all what it bargained for: after declaring for the NBA draft, Smith “spurned” Adidas to sign an endorsement deal with rival Under Armour.

The indictment contends that an unnamed NC State coach played an instrumental role in transmitting a payment from Adidas to this player in question. The coach informed Gatto that this star recruit contemplated de-committing prior to start of the 2016-17 season. Concerned by this development, Gatto then arranged for an Adidas consultant to wire money to the coach, who then paid the recruit’s parent. Gatto then used a series of illegal financial maneuvers to arrange for the consultant to be reimbursed.

The NCAA will likely dwell on the allegation that NC State coach operated as a “middle man” in the transaction. If proven, such activity would justify not only an NCAA punishment of the coach but also one for NC State.

The NCAA will likely also explore the role of financial transactions involving so-called “sham invoices,” a term used repeatedly in the superseding indictment. These invoices normally entail fake bills or fabricated expenses that lead to illegitimate payments. Here, Gatto and Code are accused of financing payments to recruits by submitting sham invoices to Adidas.

For instance, to conceal a payment to a Louisville recruit, Gatto allegedly approved a sham invoice for $30,000 to an AAU team that was managed by Code. The approval allegedly led to wire fraud in that ill-gotten money was wired to the bank in the name of the AAU team. The payment was falsely described as “July Travel Team Expenses” for the AAU team. Similarly, Gatto is accused of concealing a $70,000 payment related to a parent of a Kansas recruit under the guise of a “Tournament/Activation” fee. Last month, Jon Wertheim and I detailed critical aspects of Adidas’ sponsorship deals with colleges, including Louisville, and the possibility for problematic transactions. The NCAA will likely take a close look at financial transactions linking colleges, sneaker companies and AAU teams.

Potential fallout for the implicated players and their family members

In theory, players and/or their family members who took money could also be charged with wire fraud. According to the Justice Department, they knowingly accepted payments that were delivered through an illegal conspiracy. There is also the possibility of tax fraud since these payments were presumably not reported to the Internal Revenue Service.

It is unlikely, however, that any player or family member will be charged. The Justice Department is clearly interested in building a case against college coaches, sneaker executives and the financial brokers who help to facilitate questionable transactions. So long as they cooperate—including by turning over emails, texts and supplying honest witness statements—players and their family members will likely remain only potential witnesses instead of persons of interest, targets or defendants.

Michael McCann is SI's legal analyst. He is also the Associate Dean for Academic Affairs at the University of New Hampshire School of Law and co-author with Ed O'Bannon of the new book Court Justice: The Inside Story of My Battle Against the NCAA.