Could Nike Still Be In Trouble After Avenatti's Arrest?

On Monday, shares of Nike (NYSE:NKE) briefly plunged more than 6% after infamous celebrity lawyer Michael Avenatti tweeted that he would soon hold "a press conference to disclose a major high school/college basketball scandal" involving the company.

"This criminal conduct reaches the highest levels of Nike and involves some of the biggest names in college basketball," he claimed.

But the morning didn't exactly play out as Avenatti had hoped. Minutes after the tweet, he was arrested outside the office of one of Nike's lawyers, where he had scheduled a meeting to discuss the situation. Avenatti was later charged with extortion for what prosecutors describe as an attempt to force Nike to pay over $20 million in exchange for not releasing the damaging information he claims to have uncovered.

The big "what if?"

Nike claims that, just before its fiscal third-quarter 2019 report last week -- which incidentally caused the stock to fall around 6% as the market frowned on Nike's light forward guidance -- Avenatti contacted Nike's lawyers with his demands.

"I'll go take 10 billion dollars off your client's market cap," he allegedly threatened.

Perhaps unsurprisingly, Nike stock has recovered its losses since Avenatti's arrest.

But this also raises the question: Even with Avenatti's credibility in shambles, what if he was right about the scandal? If there's even a grain of truth to his claims, and with echoes of last year's case in which several Adidas executives were found guilty of making illegal payments to families of coveted high-school basketball recruits, it could be only a matter of time before any events allegedly involving Nike come to light.

Nike goes on offense

In a statement issued yesterday, however, Nike pointed out that it has been cooperating with the government's basketball investigation for more than a year. Thanks to Nike's astute move to promptly report Avenatti's initial contact to federal prosecutors, the FBI was also able to monitor his threats against the company as they happened.

"By engaging in the conduct alleged in the complaint, Avenatti was not acting as an attorney," elaborated U.S. Attorney Geoffrey Berman. "A suit and tie doesn't mask the fact that at its core, this was an old-fashioned shakedown."

"Nike will not be extorted or hide information that is relevant to a government investigation," the company stated. "Nike firmly believes in ethical and fair play, both in business and sports, and will continue to assist the prosecutors."

Avenatti holds his ground

But Avenatti isn't giving up that easily. After being released on a $300,000 bond on Tuesday, he took to Twitter once again to argue that "corruption at Nike was rampant," that the company is trying to "divert attention from their own crimes," and that it lied in response to subpoenas while withholding documents from the government.

"A lot of people at Nike will have to account for their criminal conduct," Avenatti warned. "The diversion charade they orchestrated against me will be exposed."

If one thing seems clear, it's that federal investigators will get to the bottom of this supposed corruption, if it exists. But considering the FBI was watching Avenatti's interactions with Nike in real time and saw fit to arrest him on extortion charges as a result, it seems unlikely this was a "diversion charade," as he claims.

In any case, Nike investors would do well to keep a close eye on this situation as it unfolds.

This article originally appeared in the Motley Fool.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.