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Can NC State and other NCAA schools really be victims in the FBI's adidas fraud cases?

N.C. State coach Mark Gottfried talks with Dennis Smith Jr. during the Wolfpack's 104-78 victory over Virginia Tech at PNC Arena in Raleigh, N.C., Wednesday, January 4, 2017.
N.C. State coach Mark Gottfried talks with Dennis Smith Jr. during the Wolfpack's 104-78 victory over Virginia Tech at PNC Arena in Raleigh, N.C., Wednesday, January 4, 2017. N &O file photo

Universities have long been accused of exploiting student athletes for their big-time sports programs.

Now, in a twist that could test the breadth of a novel legal theory, federal prosecutors contend N.C. State University and several other campuses are victims in a shady sneaker-money game being played in college basketball's shadow economy.

What makes the cases unusual, legal analysts say, is that the FBI and federal prosecutors contend people working with adidas put the universities in vulnerable positions with the National College Athletics Association, which requires student athletes to be amateurs.

Prosecutors claim that giving the star recruits or their families money taints the players. By doing so, the high school players are put in a position of having to lie to the schools about their eligibility to play NCAA basketball, which could bring penalties and sanctions to universities that thought they were getting a clean player. If later ruled ineligible as a result of the payments, the university would lose the services of their recruit and millions of dollars in revenue that a winning season can bring.

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Prosecutors allege in documents unsealed in New York federal court on Tuesday that adidas executive Jim Gatto arranged secret payments to the families of top high school recruits for assurances the players would commit to specific schools.

Gatto, a longtime global marketing executive for adidas, and two others -- Merl Code, another former adidas executive, and Christopher Dawkins, a former agent -- have been charged with wire fraud and conspiracy to commit wire fraud.

In the pay-to-play scandal that broke in September after a lengthy federal probe, prosecutors allege that the three mentioned in the indictments this week and others fraudulently arranged or facilitated payments to NCAA athletes to attend certain schools or to obtain the services of certain agents or sportswear companies upon entering the NBA.

But the crime of fraud, legal analysts say, requires there to be a victim.

They question whether universities with revenue-generating basketball programs can truly be victims when they gained a coveted recruit who can bolster the school’s image, increase the team’s chances for success and lead to fund-raising opportunities with super-fans?

Randall Eliason, a former federal prosecutor who teaches at George Washington University law school and reflects on white collar crime and federal criminal law on his Sidebars blog, said this week he thought prosecutors might have a tough time persuading a jury the accused conspired to defraud the universities of property by causing them to pay scholarship money to athletes who would be ineligible under NCAA rules.

Prosecutors also contend the scheme deprived universities of the right to control their assets — a limited number of scholarships for big revenue programs.

“In this case the defendants were working with representatives of the victims towards a shared goal," Eliason said on his blog. "They were not trying to obtain anything from the universities. In fact, the defendants would benefit from the scheme only if the universities also benefited.”

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Eliason further noted that the universities would have received the service of the athletes they enrolled.

“Usually if you get what you expected to get at the price you expected to pay, you have not been defrauded, Eliason said.

Fraud, Eliason added, typically requires some deceit or deception by the defendant, but the indictment does not make such allegations against Gatto, Code or Dawkins.

The superseding indictments unsealed Tuesday accusing Gatto of wire fraud don’t identify any N.C. State players or coaches by name. But the timeline included in the indictment seems to match the career of former Wolfpack point guard Dennis Smith Jr.

Smith signed with NCSU in December 2015, played a one-and-done year, was drafted ninth overall by the Dallas Mavericks and ultimately signed an endorsement deal with Under Armour.

Prosecutors contend Gatto arranged for the funneling of $40,000 to Smith’s father, Dennis Smith Sr., an AAU coach, in the fall of 2015.

The indictment alleges that a coach at N.C. State informed an adidas consultant in October 2015 that Smith was having second thoughts about playing for the Wolfpack, even though he had committed publicly to go to the school.

To ensure Smith would follow through and sign with State, the indictments allege, Gatto and the consultant funneled $40,000 to the NCSU coach who was expected to get the money to Smith Sr.

Though the indictment doesn’t say whether Smith’s father ever received the money, prosecutors contend the coach told the co-conspirator the money had been paid.

“The payment described above was designed to be concealed, including from the NCAA and officials at North Carolina State University, in order for the scheme to succeed and for the student-athlete to receive an athletic scholarship from North Carolina State University,” the indictment states.

“In particular, and as a part of the scheme, scheme participants, including, among others James Gatto …and one or more coaches at North Carolina State University, made, intended to make, or caused or intended to cause others to make false certifications to North Carolina State University and the NCCA about the existence of the payments and the known violations of the NCAA,” the indictment states.

Smith Jr., who was approached by a Fort Worth Star-Telegram reporter on Thursday, said he had not seen the new allegations.

"State is going to continue to do their thing and ball out. ...It didn’t affect me at all,” Smith said. “I know who I am as a person. Allegations are just allegations. There isn’t any proof behind anything.”

No players have been charged.

Though Louisville Coach Rick Pitino and the school's athletic director were fired after the scandal broke, the FBI has taken the lead on the probe and the NCAA has not publicly opened any investigations of its own.

N.C. State issued a statement on Tuesday saying compliance officers had contacted former coaches in the basketball program, including Mark Gottfried, who was fired in February 2017 and hired last month at Cal State-Northridge.

”Former staff questioned stated they had neither any knowledge nor involvement," Fred Demarest, spokesman for the athletics department said. “N.C. State will continue to fully cooperate with the U.S. Attorney’s Office and keep the NCAA updated throughout this investigation."

Andy Schwarz, a San Francisco-based antitrust economist who has been a longtime critic of college sports and consulted for athletes who’ve sued the NCAA, said he found it difficult to believe the universities did not know the shadow economy alleged existed.

“The idea that these schools are virgin victims strains credulity,” Schwarz said.

Bob Orr, a former North Carolina Supreme Court justice who has represented former athletes who brought lawsuits against UNC said he thought the cases exposed a major flaw with the structure of the NCAA.

“I do think that the NCAA, because of the oppressiveness of its rules and its inability to enforce some of the ridiculous rules, that they have turned to the criminal justice system,” Orr said.”The entire problem is the brokenness of the NCAA.”

Orr often speaks about calls for reform of the NCAA and reminds people that it’s not a monolithic organization, that it’s made up of member institutions — the universities now being characterized as the victims.

“It’s indication of a broken model,” Orr said.