It’s been 303 days since Joon Kim, then the acting United States Attorney for the Southern District of New York, and William Sweeney Jr., assistant director-in-charge of the New York office of the FBI, announced 10 high-profile arrests of college basketball coaches, sneaker executives and other prominent figures. Adidas executive Jim Gatto, former Auburn associate head coach Chuck Person and eight other men with deep ties to college hoops were charged with wire fraud, money laundering and other felonies in connection with an alleged conspiracy to “bribe” (less pejoratively, “persuade”) elite college basketball recruits. Players were paid tens of thousands of dollars to matriculate to certain universities sponsored by Adidas and, once those players turned pro, sign endorsement deals with Adidas.
Since last September, the Department of Justice has added charges through a superseding indictment. Meanwhile, the U.S. Attorney’s office in the Southern District of New York has issued grand jury subpoenas to several college programs. As explained below, the expansion of the case and accompanying investigation has directed more attention onto Adidas.
Maryland and Kansas subpoenas and their relationship to Adidas
Earlier this month, SI detailed the legal impact of subpoenas sent to the University of Maryland. Those subpoenas requested emails, texts and other records regarding, among other things, the Terrapins’ recruitment of five-star power forward Silvio De Sousa, of IMG Academy in Bradenton, Fla. College basketball experts who closely follow recruiting were convinced that De Sousa, who had moved from Angola to the U.S. before the start of high school, would attend Maryland. Indications were that De Sousa had all but formally committed.
In August 2017, De Sousa surprisingly announced that he would attend the University of Kansas. The unexpected move sent shockwaves through not only college basketball but also the sneaker industry: Maryland is sponsored by Under Armour, while Kansas is sponsored by Adidas. If Skechers, which recently sued Adidas for “funneling hundreds of thousands of dollars in secret payments to players,” is factually correct in its claims against Adidas, then Adidas would have again “gamed the system” to its favor and to the detriment of a rival.
De Sousa reclassified to the class of 2017 and joined the Jayhawks in January. He played in 20 games as a backup forward, averaging 4.0 points and 3.7 rebounds per game. De Sousa is expected to play a more impactful role for a loaded Kansas team in 2018–19.
Fast forward to this week. Kansas has confirmed that it too was hit with subpoenas in the college hoops investigation. On Jan. 8, 2018, Geoffrey Berman—the U.S. Attorney for the Southern District of New York—informed Kansas that it had two weeks to comply with a grand jury subpoena demanding communications between any member of the Kansas athletics department and a specific recruit and his family. The name of this recruit has been redacted from publicly available documents.
On March 14, 2018, Berman relayed to Kansas a similar subpoena regarding a recruit whose name has also been redacted. Since the name of the targeted recruit in each of the January and March subpoenas is unknown, it is uncertain if the target in each refers to the same person or to a different person. However, since the two subpoenas pertain to the same time period and since they demand the same kind of documents, they are likely not duplicative in their target. Instead, two different recruits are presumably implicated. Along those lines, if the government hadn’t received the requested documents about the recruit at issue in the January subpoena, prosecutors would have likely gone to court to demand that Kansas turn them over. A party that fails to comply with a subpoena can be criminally charged with contempt of court.
A Kansas spokesperson has told media that the school is fully cooperating with the investigation. The fact that Kansas has been subpoenaed does not mean the school engaged in any wrongdoing. A subpoena is simply an order for a witness to offer sworn testimony or turn over potentially relevant documentation. Any school that pursued players whose recruitments have been examined by prosecutors has likely been subpoenaed as part of the larger investigation.
It stands to reason that De Sousa may be related to the Kansas subpoenas. De Sousa matches the description of an unnamed recruit described in the superseding indictment. To that end, Gatto is accused of arranging to pay De Sousa’s guardian, Fenny Falmagne, $20,000 to help De Sousa exit a non-binding commitment to attend Maryland and instead join Kansas. Falmagne denies any such payment was made.
Another former five-star recruit connected to the Jayhawks and possibly Gatto is forward Billy Preston, who ESPN reports had received payments from Adidas during his recruitment process. The superseding indictment accuses Gatto of paying $90,000 to the mother of one Jayhawks recruit in exchange for her son’s commitment to both attend Kansas and sign with Adidas once he turned pro. This recruit is explicitly described as someone different from the recruit believed to be De Sousa. Preston left Kansas in January to sign with Igokea Laktaši of the Adriatic League and Bosnian League, then signed a two-way contract with the Cleveland Cavaliers in July.
Importance of Adidas-Kansas communications being subpoenaed
One noteworthy feature of the January subpoena to Kansas is the mandate that the university turn over all communications between any member of the Kansas athletics department and any representative of Adidas. The subpoena goes further to compel Kansas to reveal communications with four specific persons who have or had ties to Adidas: Gatto (head of Adidas global sports marketing for basketball), Christopher Rivers (director of sports marketing for Adidas), T.J. Gassnola (an AAU basketball director who earlier this year agreed to plead guilty to a wire fraud conspiracy charge stemming from his work with Adidas to persuade recruits; Gassnola also agreed to cooperate with federal prosecutors, meaning he’ll turn over any emails, texts and other documents and be willing to testify against other implicated persons) and Merl Code (a basketball organizer who faces similar charges to Gatto for allegedly directing recruits to Adidas-sponsored schools). In addition, the January subpoena requests documentation relating to any contracts, agreements or unsigned oral agreements reached between Kansas and Adidas officials.
The college basketball corruption case is no doubt worrisome to Adidas executives. The more persons with ties to Adidas who are implicated, the harder it becomes for company executives to portray those persons as acting on their own and not with the blessing or acquiescence of company higher-ups. Along those lines, the fact that prosecutors want emails sent from Kansas officials to Gatto and other Adidas representatives could prove problematic for Adidas if names or email addresses associated with other company officials are mentioned in the exchanges.
Further, at any time, the justice department could bring or at least threaten to bring charges against additional parties. Prosecutors usually seek to prosecute the highest-ranking officials in an organization on the theory that they had ultimate authority over allegedly corruptive acts. Gassnola has already agreed to cooperate, meaning he will be asked to divulge everything he knows. If Gatto and Code eventually negotiate plea deals as well, they too will be asked to “name names.”
The justice department’s interest in contracts and unsigned agreements between Kansas and Adidas is also telling. As Jon Wertheim and I explained in March, Adidas’s contract with Louisville contemplated seven-figure “activation investment” payments to Louisville. These “activations” are ostensibly for marketing and internship purposes, but the details and mechanics of them remain uncertain and open to intrigue. According to an April 2018 report by the Kansas City Star, Adidas and Kansas plan to sign a 12-year, $191 million extension. The details of such an extension, and any documents related to its negotiation, will be of interest to the justice department.
Adidas also has business reasons to worry about the investigation. Most obviously, Adidas is a publicly-traded company, meaning that its reputation and any accompanying controversies can influence its value. That said, Adidas’s stock price does not appear to have been discernibly influenced by the investigation: The company’s stock traded at $113.80 per share on Sept. 25, 2017, the day before the government’s case became known, and it closed on July 25 at nearly the same figure, $112.01 per share.
On the other hand, rival sneaker companies including New Balance and Puma have seemingly sensed an opportunity to compete with Adidas for NBA players. New Balance wants to sign Boston Celtics forward Gordon Hayward to an endorsement deal and make him the face of a new line of basketball sneakers, while Puma has brought in Jay-Z as its creative director and signed several top picks from the 2018 NBA draft (Deandre Ayton, Marvin Bagley III, Michael Porter Jr. and Zhaire Smith). Meanwhile, as mentioned above, Skechers has filed a federal lawsuit against Adidas on the theory that Adidas unlawfully prevented Skechers from competing for NBA players. The timing of these moves by Adidas’s competitors is not accidental.
Whether any of these alleged actions constitute crimes is not yet proven
The Department of Justice appears to have a compelling case that various persons connected to college basketball violated NCAA rules. Such a case, however, doesn’t automatically prove that any crimes were committed.
While NCAA rules are impactful in many ways, they are nonetheless internal policies promulgated by a private, non-profit organization and should not be confused with actual laws.
To that end, the government’s basic theory—that colleges landing elite recruits are somehow victims of fraud—might not convince a jury. Jurors will wonder why a university that brought in a five-star recruit with help from a “bribe”, then used that player to win games and sell tickets and merchandise, is a victim in any sensible meaning of the word. Still, the government insists that this theory makes sense. It is also a theory that implicated universities and their officials appear to rely on. For instance, in the wake of the superseding indictment, Kansas coach Bill Self told the Kansas City Star that “I did not see anywhere nor do I believe that we were thought of to be anything but a victim in the situation.”
In addition, jurors would probably take note that paying high school players to attend particular colleges is a common and accepted practice in United States. Various scholarships, tuition discounts and other forms of financial aid are designed to induce students to attend particular colleges. To be sure, those inducements are not thought of as bribes since they are offered in transparent, above-board ways. Yet that point just invites the larger policy question of why recruits can’t be paid to attend colleges in similar ways (we’ll save that discussion for another day).
Most likely, these legal and policy arguments will never see a trial. Approximately 90% of criminal defendants in the federal system strike plea deals with prosecutors. This is mainly because federal prosecutors usually win their trials. With that dynamic in mind, defense attorneys typically counsel their clients to seriously consider accepting a deal in which they would plead guilty to lesser offenses and agree to cooperate with future investigations.
Such “cooperation” should be a source of concern for persons who haven’t been charged—whether those persons are head coaches in college basketball or sneaker executives. If those who are currently charged reach plea deals, they will need to turn over everything they have and also be willing to testify against others. What will they say? At whom will they point fingers? We’ll find out.
Michael McCann is SI’s legal analyst. He is also Associate Dean of the University of New Hampshire School of Law and editor and co-author of The Oxford Handbook of American Sports Law and Court Justice: The Inside Story of My Battle Against the NCAA.