Allegations that a former adidas executive used an N.C. State basketball coach to pay $40,000 to a former Wolfpack player — believed to be Dennis Smith Jr. — could result in a contract conundrum.
The school’s six-year contract with adidas, worth almost $39 million and signed in November 2015, states the sports apparel company can terminate the agreement immediately if the university is hit with NCAA sanctions or attracts publicity that has an “adverse effect” upon the university, the value of the university to adidas or adidas.
But what if those sanctions and adverse publicity were caused, in part, because of the illegal actions of an adidas employee?
The possible recourse by the university is not clear. Under the contract terms, N.C. State can terminate the agreement only if adidas is found insolvent or bankrupt, or breaches any material terms of the agreement.
"If a university failed to protect itself, that can obviously be a problem," said Duke law professor Paul Haagen, speaking in a general sense about such apparel contracts.
Efforts to reach officials at N.C. State for comment on the contract were unsuccessful.
The FBI’s superseding indictment in the college basketball investigation, released Tuesday, said former adidas executive James Gatto conspired to funnel $40,000 to Smith’s father to secure Smith’s commitment to play for N.C. State. The FBI noted N.C. State was under contract with adidas at the time.
The indictment said a student-athlete, believed to be Smith, had committed to play for N.C. State "in or around September 2015," then was said to have had second thoughts. Gatto agreed to give $40,000 to "Coach-4," an N.C. State coach who is not named in the indictment, to pass along to "Parent-1," believed to be Smith’s father, Dennis Smith Sr.
The FBI documents allege the $40,000 was withdrawn from an account that Gatto controlled and was to be delivered to Smith Sr. by the N.C. State coach.
Smith was asked about the FBI case by a reporter for the Fort Worth Star-Telegram during an appearance at the Kids Foot Locker Fitness Challenge on Thursday afternoon at the Boys & Girls Clubs of Dallas.
"State is going to continue to do their thing and ball out,” he said. I haven’t seen the new reports, but when the last ones came out I saw my name in there. And there isn’t anything I can do about it. It just is what it is.”
When asked if the situation has impacted him on or off the court, he said it had not.
“It didn’t affect me at all,” he said. “I know who I am as a person. Allegations are just allegations. There isn’t any proof behind anything. I’m just ready to go home for the summer.”
N.C. State could face an NCAA investigation and possible NCAA sanctions should it be determined Smith or his family accepted the money and he was an ineligible player under NCAA rules during the 2016-17 season, his only season at N.C. State. That could have an “adverse effect” on the university and its value to adidas.
But Gatto’s involvement could further complicate the legal situation, in terms of the contract. The FBI indictment said the university, which receives federal funds, was defrauded by having issued an athletic scholarship to an athlete “under false and fraudulent pretenses.”
The coaches who recruited and coached Smith at N.C. State, including head coach Mark Gottfried and assistant coach Orlando Early, were fired in March 2017 after a poor season. Gottfried has since been hired as head coach at Cal State Northridge. Early is not currently coaching.
At his introductory press conference at Northridge, Gottfried was asked about N.C. State receiving a grand jury subpoena tied to the FBI investigation and whether he would "be OK with whatever comes out."
"Absolutely," Gottfried said. "I don’t foresee any red flags that I’m aware of. It’s a situation that’s much bigger than all of us. It has affected a lot of programs. I’m confident that should be behind us pretty quickly.”
The university later issued a statement saying it had done its due diligence before the hire, again noting there were “no red flags.”
N.C State, in a statement Tuesday, said it contacted Gottfried and his former assistant coaches about the FBI allegations in September, noting, “Former staff questioned stated they had neither any knowledge nor involvement."
N.C. State was one of four schools named Tuesday by the U.S. Attorney’s Office in the Southern District of New York as being defrauded by Gatto.
Adidas signed a 10-year, $160 million deal with Louisville in August 2017. Later entangled in the FBI investigation into fraud and corruption in college basketball, Louisville fired Hall of Fame basketball coach Rick Pitino and athletic director Tom Jurich.
Adidas ended its personal services agreement with Pitino, who reportedly was paid $1.5 million a year, but the school’s apparel contract remains in place.
Adidas, in a statement this week, said the company is “committed to ethical and fair business practices and to full compliance with applicable laws, rules and regulations. We have cooperated fully with the authorities in the course of their investigation and will continue to do so as this case proceeds."