Corruption Probe Into College Basketball Threatens to Set Back Adidas's U.S. Overhaul

By Sara Germano Features Dow Jones Newswires

In a push to boost its brand recognition among Americans, Adidas AG invested tens of millions of dollars in college athletics in recent years. On Tuesday, that effort suffered a potentially devastating blow, when one of the sportswear company's executives and an affiliate of the company were arrested as part of a federal probe into corruption in college basketball.

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While the scheme described in the criminal complaints was sprawling, Adidas was at the center of many of the most serious allegations, which included arranging for six-figure payments to high-school basketball players and their families in exchange for their commitment to play at Adidas-sponsored universities.

James "Jim" Gatto, the global basketball-sports marketing director at Adidas, was among the 10 people arrested.

In the complaint, prosecutors said Mr. Gatto used company funds for bribes and evaded detection by labeling the payments as going to an organization where one of his alleged conspirators was connected. That individual, Merl Code, was an Adidas affiliate, the complaint said. Adidas describes affiliates on its website as independent contractors.

"It's on the books, [but] it's not on the books for what it's actually for," Mr. Gatto said in recordings captured by the government, referring to one of the alleged payments.

A lawyer for Mr. Gatto didn't immediately respond to a request for comment.

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A lawyer for Mr. Code said he was released on bond and is due to report to federal court in New York on Oct. 10.

Adidas wasn't mentioned by name in the complaint but the company confirmed its involvement in the probe.

"Today, we became aware that federal investigators arrested an Adidas employee," an Adidas spokeswoman said in a statement. "We are learning more about the situation. We're unaware of any misconduct and will fully cooperate with authorities to understand more."

In a news conference on Tuesday, acting U.S. Attorney Joon H. Kim said that "there are no other allegations of more senior people at that company" involved in the probe.

The allegations could undermine the German company's recent sales rebound in the U.S. Adidas shares closed down 2.5% at EUR187.68 on Tuesday.

Over the past three years, Adidas has undergone a massive internal reorganization, as well as a marketing overhaul, to boost its sales in the U.S., moving executives from its global headquarters in Herzogenaurach, Germany, to its American office in Portland, Ore.

During that time, the company has signed outfitting deals with several big sports schools, most notably the University of Miami, which had been a Nike school for decades. In August, Adidas renewed its sponsorship deal with the University of Louisville, a longtime cornerstone of the company's network of sponsored colleges and a top-flight basketball school.

In the criminal complaint, prosecutors alleged that Mr. Gatto steered $100,000 to a player's family so that he would attend Louisville.

In a 2015 interview, Adidas North America President Mark King said the company's reset was about rebranding the company to appeal to more Americans. "I know we're a soccer brand globally," he said, "but in the U.S. we have to be about U.S. sport."

The bet has paid off, and Adidas is currently the shining star in a sportswear industry hamstrung by increased competition, the decline of traditional sporting-goods retailers, and a shift to online shopping. Sales in North America rose 26% in the most recent quarter, and Chief Executive Kasper Rorsted, who joined the company last fall, promised Adidas would increase profits faster than rivals.

Peter Moore, a former chief executive of Adidas America in the 1990s who now does consulting work for the brand, said it is too soon to estimate how much impact the probe will have on the company.

"It's fair to say it will have some, especially on the performance side, " of the business, he said, referring to products geared toward use in sports, as opposed to fashion-oriented gear.

Write to Sara Germano at sara.germano@wsj.com

(END) Dow Jones Newswires

September 26, 2017 19:28 ET (23:28 GMT)