NKE Nike Inc

By Rebecca Davis O'Brien, Michael Rothfeld and Sara Randazzo 

Attorney Michael Avenatti, who seized the spotlight last year as a lawyer for former adult-film actress Stormy Daniels, was arrested Monday and charged with attempting to extort more than $20 million from Nike Inc.

Federal prosecutors in Manhattan charged Mr. Avenatti with extortion and conspiracy, alleging he told lawyers for Nike that he and an unnamed co-conspirator would release damaging information about the company if Nike didn't pay them to conduct an "internal investigation" and to settle a client's claim, according to a complaint unsealed Monday.

Also on Monday, the U.S. attorney's office in Los Angeles alleged in a separate criminal complaint that Mr. Avenatti embezzled a client's money to pay his own expenses and cover debts -- including for his law firm and coffee business -- and defrauded a bank using phony tax returns. Those charges grew out of an investigation by the Internal Revenue Service into Mr. Avenatti's businesses, prosecutors in California said.

Mr. Avenatti was arrested in Manhattan and collectively faces six charges in the two districts. At an appearance in federal court Monday evening, he was slated to be represented by a public defender.

The co-conspirator in the Nike matter is celebrity attorney Mark Geragos, people familiar with the matter said. Mr. Geragos wasn't charged in the complaint. A lawyer for Mr. Geragos, Benjamin Brafman, declined to comment on his behalf.

The allegations related to Nike came to the attention of Manhattan prosecutors after Mr. Avenatti and Mr. Geragos attempted to reach Nike through its outside counsel at Boies Schiller Flexner LLP earlier this month, according to court records and a person familiar with the investigation.

On March 19, Mr. Avenatti and Mr. Geragos met in New York with two Boies Schiller lawyers and an in-house lawyer for Nike, according to the charging documents. Mr. Avenatti said he had a client -- the coach of an amateur men's basketball team that previously had a sponsorship agreement with Nike -- who had evidence that Nike had authorized secret payments to high-school basketball players.

The coach is Gary Franklin Sr., according to a person familiar with the matter. Mr. Franklin, who led a team known as California Supreme, couldn't be reached for comment Monday.

Prosecutors allege that Mr. Avenatti threatened to make the payments public at an upcoming news conference, unless Nike paid the client a $1.5 million settlement and hired him and Mr. Geragos to conduct an "internal investigation" of the company.

Mr. Geragos, who has represented the likes of Winona Ryder and Michael Jackson, has ties to Nike through one of his most famous clients, former NFL quarterback Colin Kaepernick. Like Mr. Avenatti, who has also been his client, Mr. Geragos has been a fixture on cable news as a legal expert.

On Monday, a CNN spokeswoman said he was no longer a contributor to the network.

Nike and other apparel companies have in recent years drawn scrutiny for their sponsorship of amateur basketball leagues, following a sweeping corruption investigation by federal prosecutors in Manhattan into college basketball. A former executive at rival Adidas AG and two others were found guilty last year of fraud charges stemming from payments they steered to families of high-school players, to induce them to attend Adidas-sponsored universities.

Nike has been cooperating with that probe for over a year, it said Monday. "Nike will not be extorted or hide information that is relevant to a government investigation," Nike said on Monday.

After the March 19 conversation with Messrs. Avenatti and Geragos, Nike and Boies Schiller contacted the U.S. attorney's office in Manhattan, people familiar with the matter said. At prosecutors' direction, Scott Wilson, a Boies Schiller partner, recorded a March 20 conversation with Mr. Geragos and Mr. Avenatti, in which Mr. Avenatti "made it clear" he expected to be paid at least $10 million in exchange for not holding a news conference, according to the complaint.

During the conversation, held on the eve of Nike's quarterly earnings call, Mr. Avenatti said that if his demands weren't met, "I'll go take ten billion dollars off your client's market cap...I'm not f -- ing around."

On Monday afternoon, Mr. Avenatti was scheduled for a meeting at Boies Schiller's midtown offices -- a sting operation at which Mr. Avenatti was to be arrested, two people familiar with the matter said.

He never arrived at the meeting. Shortly after noon, Mr. Avenatti tweeted that he would hold a news conference Tuesday to discuss evidence he claimed to have of "a major high school/college basketball scandal perpetrated" by Nike. Mr. Avenatti's tweet claimed the "criminal conduct reaches the highest levels of Nike."

Within minutes, Mr. Avenatti was in custody.

Nike shares slipped about 1% in Monday afternoon trading after the tweet, but ended the day little changed, up 14 cents to $82.33.

The criminal charges in California originated from an investigation into Mr. Avenatti's alleged failure to pay payroll taxes for his law firm and another business operation, U.S. Attorney for the Central District of California Nick Hanna said Monday.

In California, Mr. Avenatti faces wire-fraud charges stemming from a $1.6 million settlement Mr. Avenatti collected in early 2018 on behalf of a client in an intellectual-property dispute but allegedly used to pay his own personal and business expenses.

Mr. Avenatti also faces bank fraud charges from misrepresentations he allegedly made to obtain three loans totaling $4.1 million from a bank in Mississippi.

Mark Pearson, assistant special agent in charge of IRS criminal investigations in Los Angeles, said that Mr. Avenatti's alleged crimes have helped fund a lavish lifestyle that prosecutors estimated to cost more than $200,000 a month, including $100,000 in monthly rent for a house in Newport Beach, Calif.

The charges Monday come on top of other legal trouble Mr. Avenatti has faced recently. He was arrested in November on suspicion of domestic violence, and hired Mr. Geragos to represent him in the matter. Prosecutors in Los Angeles didn't bring charges.

Mr. Avenatti became a media fixture in early 2018, after The Wall Street Journal broke news that Ms. Daniels, whose real name is Stephanie Clifford, was paid $130,000 on the eve of the 2016 election by a lawyer for Donald Trump to silence her about an alleged sexual encounter with the then-Republican candidate. Mr. Avenatti sued Mr. Trump on Ms. Daniels' behalf in an attempt to invalidate the nondisclosure agreement she had signed.

Ms. Daniels said in a statement Monday that she was "saddened but not shocked" by the allegations, and that she had decided more than a month ago to fire Mr. Avenatti "after discovering that he had dealt with me extremely dishonestly." She said there would be "more announcements to come" but didn't make any specific allegations about her former lawyer's behavior.

Mr. Avenatti also represented a woman who brought allegations of sexual misconduct against Supreme Court Justice Brett Kavanaugh during his confirmation process, and briefly flirted with a presidential run.

In August 2018, he started a political action committee, which raised almost $114,000 last year, mostly from small online donors -- and reimbursed Mr. Avenatti for about $32,000 in travel, restaurant and lodging expenses, according to Federal Election Commission records.

The FEC recently requested more information from the PAC.

--Julie Bykowicz and Khadeeja Safdar contributed to this article.

Write to Rebecca Davis O'Brien at Rebecca.OBrien@wsj.com, Michael Rothfeld at michael.rothfeld@wsj.com and Sara Randazzo at sara.randazzo@wsj.com

(END) Dow Jones Newswires

March 25, 2019 19:26 ET (23:26 GMT)

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