Federal enforcement authorities are playing full-court press against some of the biggest names in the world of college basketball, scoring federal criminal charges last week in a massive fraud and corruption scheme that threatens to rock the compliance world at large and could be one of the largest compliance crises to face American collegiate sports.
“This case demonstrates how prosecutors and regulators continue to view the sports world as a high-risk industry for bribery and corruption,” says Jeffrey Lehtman, co-chair of the litigation department at law firm Richards Kibbe & Orbe. “This should be a wake-up call for all organizations affiliated with the sports world.”
In three separate complaints, unsealed Sept. 26 in Manhattan federal court, the U.S. Department of Justice and the Federal Bureau of Investigation announced federal criminal charges against ten individuals who got caught in their own intricate web of two different but related fraud and corruption schemes.
In one fraud scheme, three business managers and financial advisers and three others affiliated with apparel giant Adidas colluded to funnel as much as $100,000 in cash to the families of top high-school recruits in exchange for the players’ commitment to play for the universities that had sponsorship deals with Adidas.
“Our investigation is ongoing, and we are conducting additional interviews. We have a lot more work to do.”
William Sweeney, FBI Assistant Director in Charge, New York Field Office
Among those arrested were James Gatto, director of global sports marketing - basketball for Adidas; Merl Code, an adviser to Adidas; and Jonathan Augustine, who runs an amateur basketball program sponsored by Adidas. In a statement, Adidas said it was “unaware of any misconduct and will fully cooperate with authorities to understand more.”
The facts are self-explanatory: “For these men, bribing coaches was a business investment,” Joon Kim, acting U.S. attorney for the Southern District of New York, said in a press conference announcing the corruption charges. “They knew that the corrupt coaches, in return for bribes, would pressure the players to use their services.”
These managers and advisers also knew that as those players turned pro, Kim said, that would translate into big bucks for them in professional fees and profits. As one of those athlete advisers, Christian Dawkins, said in a meeting recorded by undercover law enforcement, “‘If we take care of everybody, we control everything. You can make millions off one kid.’”
In the second related scheme, four Division I NCAA basketball coaches took cash bribes, ranging from $13,000 to $100,000 each, from these athletic advisers in exchange for steering star athletes and their families to the bribers.
Among some of the big-name coaches criminally charged include Chuck Person, associate head coach at Auburn University; Tony Bland, associate head coach at University of Southern California (USC); Lamont Evans, associate head coach and recruiting coordinator at Oklahoma State University; and Emanuel Richardson, assistant coach at the University of Arizona.
DEFENDANTS & CHARGES
Below is a list of defendants and charges.
Source: Department of Justice
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The three complaints, totaling over 100 pages, put a spotlight on the “dark underbelly” of college basketball, Kim said. Only through an informant (a former financial adviser) and two undercover agents posing as corrupt advisers and financial backers were agents able to enter this secret world and obtain numerous court-authorized wire taps.
Industry reactions. Although not identified in the criminal complaint, University of Louisville head coach, Rick Pitino—who already has a checkered past—was put on unpaid administrative leave, while the university’s athletic director, Tom Jurich, was put on paid leave, in the wake of the scandal. “Doing nothing would be a tacit endorsement of ethical and criminal behaviors,” Louisville’s interim president, Greg Postel, said at a press conference.
Other universities took similar action upon learning of the allegations. “We have suspended Coach Person without pay, effective immediately,” Auburn University said in a statement.
Bland, too, has been placed on “immediate administrative leave,” USC Vice President for Athletic Compliance Mike Blanton said in a statement. “USC places the highest priority on athletic compliance and is taking this situation very seriously.”
Accordingly, it has hired former FBI director Louis Freeh to work with the university in conducting an internal investigation into the matter. USC also has “reached out proactively to both the NCAA and the FBI to pledge our full cooperation and to learn more details,” Blanton added. “Everyone associated with the program will cooperate fully with these investigations and will assist authorities as needed.”
NCAA President Mark Emmert called the nature of the charges “deeply disturbing,” adding that the NCAA has “no tolerance whatsoever for this alleged behavior,” and that it “will support the ongoing criminal federal investigation.”
Broader implications. On the surface, the nature of the NCAA fraud and corruption scheme may appear relevant only to the world of college athletics. A deep dive of the allegations, however, raises critical questions about the relationship between major apparel companies and the colleges and universities they are in cahoots with.
It’s an annual, multibillion business in which major sports apparel companies with deep pockets—Adidas, Nike, and Under Armour, to name a few—sign exclusive apparel deals directly with universities for their athletes to wear their brand clothing while playing for that university. In return, they get star athletes to serve as walking billboards for their apparel and top-ranked university teams advertising their products.
“People think of sports as entertainment, not as big business,” says Michael Hershman, group CEO of the International Centre for Sport Security (ICSS), a non-profit watchdog group. This NCAA scandal effectively acknowledges that there is a ton of money in sports—and historically a long track record of corruption—and yet very little oversight.
THE ADIDAS WAY:
Below is an excerpt from “The way we do things at the Adidas Group.”
We believe our products and services can compete on their own merits. We do not offer, make or authorize others to make any payments or give anything of value in order to influence someone in government or business to give us an improper commercial advantage. This applies irrespective of location or culture. Everyone connected with the Group must comply with applicable anti-bribery and corruption laws.
OUR EXPECTATIONS:
Prevent bribery and corruption and the appearance of wrongdoing by not participating in any form of corrupt behavior
Detect inappropriate conduct by knowing where payments or gifts are destined and for what purpose and by appropriately documenting any services to be rendered
Respond to requests or hints for bribes by rejecting these and reporting such requests to your Compliance Officer.
IT IS NEVER ACCEPTABLE TO:
Use Group funds for any purpose that is not fully understood and correctly documented
Enter into agreements which are not approved by departments or functions according to the Group’s policies
Try to hide behind consultants or third parties who do not share our commitment not to engage in bribery and corruption. This only contravenes our values and does not relieve us of our responsibilities.
An exception may apply for circumstances involving extortion or coercion. This is any situation where you face a demand for payment and where you genuinely feel that your safety is being threatened. Here, a payment may be made, and the Group will support you to justify that payment provided that the payment is properly documented and promptly referred to your Compliance Officer for further investigation.
Source: Adidas Code of Conduct
Quick fixes—like suspending or firing coaches and sanctioning agents who manage sports figures—is not enough, Hershman adds. “We need to have a more concentrated effort to reexamine values and ethics within sports,” he says.
Corporate sponsors also have an integral role to play in fostering integrity in college athletics. “They are the ones who generate the money that is going to the schools that make it such a lucrative business,” says Arthur Middlemiss, a partner at law firm Lewis Baach Kaufmann Middlemiss.
“They are going to have to do a better job of taking responsibility for their actions, recognizing the risk when they step into this marketplace, and policing their actions, and they should expect to suffer the consequences if they don’t do that,” Middlemiss says.
The Department of Justice and FBI have indicated that corrupt behavior in college athletics is so prevalent that they’ve launched a tip line and are encouraging those with information to come forward. “It’s better for you to call us than for us to call you when we’re ready to charge you,” Kim warned.
William Sweeney, FBI assistant director in charge of New York Field office, said the arrests “should serve as warning to others choosing to conduct business this way in the world of college athletics. We have your playbook.”
Sweeney added: “Our investigation is ongoing, and we are conducting additional interviews. We have a lot more work to do.”
Compliance lessons. From a lessons-learned perspective, these charges highlight yet another example of a major fraud and corruption scheme perpetuated by insiders who circumvented internal controls to benefit themselves, with the help of middlemen.
In these cases, a lack of due diligence controls is clear. For example, in steering players to a financial adviser (who unbeknownst to them was working for the FBI), “most coaches did not ask about his qualifications or his track record in handling players’ money,” Kim said.
“A simple Google search by the coaches of the adviser’s name would have revealed that the [Securities and Exchange Commission] had brought securities fraud charges against him just last year, including for misusing professional athletes-clients’ money,” Kim said. They also wilfully ignored that Dawkins had been fired from a sports management company in May 2017 for making tens of thousands in unauthorized purchases with an NBA player’s credit card.
What’s more, they conspired to disguise these payments in the company’s books through fake invoices and false entries. As Adidas adviser Merl Code put it in a call recorded by federal investigators, ‘It’s on the books, but it’s not on the books for what it’s actually for.’”
In another FBI-recorded conversation, Dawkins explained that funneling money to players’ families could “‘not be completely accounted for on paper, because some of it is, whatever you want to call it, illegal.’”
“He was right,” Kim said. “That is what we call it: illegal.”
Often in a widespread fraud and corruption scheme, it is a multinational company that falls victim to a few bad actors, some in senior-level positions. Here, the victims are the colleges and universities, who were being fed false statements by managers and those affiliated with Adidas: On the one hand, star athletes were being promised big money to play at Adidas-sponsored schools, while on the other hand universities were told these students were not being paid at all, Kim said.
Compliance officers at colleges and universities nationwide should view these charges as a wake-up call. “[I]t is time that governing bodies, universities across the United States, and those working in the U.S. college sport system proactively introduce and invest in stronger, mandatory ethics and anti-corruption measures,” Hershman says.
“By strengthening current integrity efforts and policies within U.S. collegiate sport … the NCAA and universities across the United States can help create an environment that better protects athletes, coaches, and other officials from corruption and other integrity risks that currently exist within high-level sports,” Hershman adds.
Such integrity efforts, Hershman says, could include “proactively investing a percentage of commercial and sponsorship revenues into mandatory ethics and anti-corruption training and education for student athletes, as well as employing full-time independent safeguarding and integrity officers.”
If colleges and universities, as well as their corporate affiliates, do not start taking matters of ethics and compliance more seriously than historically has been the case as it concerns fraud and corruption abuse—if they do not take a hard look at their own due diligence, third-party risk management, internal audit controls, and contractual obligations in this space—they may have to worry about more than just financial and reputational harm; a federal criminal investigation may be in their future.
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