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Adidas Could Walk Away Totally Unscathed From NCAA Corruption Case

Cathaleen Chen

Adidas AG , the German sports equipment retailer whose chief marketing executive is enmeshed in one of the largest fraud probes in the history of college sports, stands a good chance of walking away unscathed, industry and legal experts told TheStreet.

Ten coaches, recruiters and financial advisers face federal charges of fraud and money laundering in a corruption case that erupted Tuesday, Sept. 26. Also charged by the FBI is James "Jim" Gatto, Adidas's global head of marketing for basketball. Now, Nike Inc. is being dragged into the case as well. As of Thursday morning, Sept. 28, Nike's grassroots basketball division was served with a subpoena in relation to the case, according to a tweet from ABC correspondent Aaron Katersky.

Gatto is allegedly involved in "making and concealing" payments totaling up to $250,000 to two high school basketball players who were being recruited, one by the University of Louisville and the other by the University of Miami. Neither Adidas nor the two universities were explicitly cited in the complaint, but the identities of the individuals could be inferred through their social media accounts. Also cited but unnamed in the complaint was Louisville head basketball coach Rick Pitino, who was fired by the university on Wednesday Sept 27.

An NCAA criminal investigation of this caliber is unprecedented, said Mark Hyman, a professor at the George Washington University School of Business and author of The Most Expensive Game in Town, a book on youth sports recruitment.

"Locked in a room somewhere, 15 crisis managers are trying to figure it out right now," he told TheStreet. "But in the long term, Adidas will be okay."

That's not to say Gatto is in the clear, or that Adidas, which currently outpaces Nike and Under Armour, Inc in sales growth, won't start bleeding in the near future. Adidas stock dipped 3% on the German stock market when news broke on Tuesday, but shares rose 0.4% as of Thursday afternoon. It's impossible to know how much value Adidas could lose from the case, directly or indirectly, and advisers recommend different strategies for investors. Vince Martin of InvestorPlace, for instance, is telling investors to stay put, while Holmes Osborne of Seeking Alpha says it's time to short Adidas stock.

"[Gatto] was operating on behalf of Adidas, so it's possible that [Adidas] would be financially liable in this case," said Sarah Dale, a attorney and sports marketing consultant in Chicago. "A ruling could put parameters on Adidas' ability to do business with [the] NCAA."

In other words, Adidas could be potentially suspended from doing business with the NCAA as a result of the case, Dale said, but it's unlikely. As Hyman points out, the NCAA has no authority over the companies that sponsor its members.

Adidas alongside Nike and Under Armour are the three largest sporting apparel companies that sponsor college sports teams, accounting for more than $1 billion spent every year, according to a 2015 report from IEG Research. Adidas' 10-year contract with the University of Louisville—signed just last month—alone is worth $160 million to the university. According to Hero Sports, Adidas sponsors more than 100 college basketball teams—compared with Nike, which has about 90 and Under Armour, with 44.

"The costs and consequences to Adidas' reputation are unquantifiable," according to Dale. For Gatto, prison time is a possibility given the severity of charges, though, again, Dale finds that outcome unlikely.

Adidas has since put Gatto on administrative leave and initiated an internal investigation, the company said in a statement by email on Thursday, but declined to comment further on the allegations.

In previous cases, NCAA has slapped penalties and suspensions on member universities when infractions are proved. Southern Methodist University, for instance, saw its football program badly damaged in the late 1970s after the NCAA found the school guilty of paying top-performing high school recruits under the table.

Such bad behavior is not new to the industry. "The NCAA is a big sham in general," New York Giants offensive guard Justin Pugh told TheStreet on Tuesday, in response to a question about the Adidas case. Mark Titus, a writer for sports and culture website The Ringer, called the institutional problem college basketball's "worst-kept secret."

Still, a sports apparel company has never been penalized for sponsorship of a college team, and while this could change depending on the outcome of the case, the most likely consequence will be a de facto shift in how Adidas does business with NCAA schools, said Michael Bapis, managing director of HighTower Sports, a wealth management firm for professional athletes.

Nike and Under Armour will feel the ripple as well, already evident by Nike's subpoena. In the FBI complaint against Gatto, wiretapped conversations revealed that a "rival athletic apparel company" was courting the same student athlete with cash as Adidas.

"If Adidas does lose favor with college programs, then it's an immediate opportunity for Nike and Under Armour," Hyman said. For now, the experts agree that the investigation is far from over.

"This probe is probably reaching every corporation, every college, in some way or another," Bapis said. "There are holes in the process, and now it's all coming down."

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Editors' pick: Originally published Sept. 29.

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