Imagine you sell industrial equipment. Your biggest new prospect is running a request for proposals for a nine-figure installation, and it tells you that you are its preferred provider. But there is a condition: the customer wants a “spend back,” some business or value flowing from you back to it. That is not uncommon in your industry, so you agree. Then a senior executive on the other side tells you what form the spend back should take. You will sign an endorsement agreement with a celebrity the customer has picked.

On a call later that month, the executive names the price: $3 million a year for two years. You believe that saying no will cost you the bid. The contemplated recipient is a limited liability company that did not exist when the RFP went out. You sign the agreement in July. The following February, the same executive calls again. He has decided to spend more on the installation, so you should pay the celebrity more. You negotiate a little and add $2 million to year two.

The endorser is a real person, and the contract lists real, if light, obligations. Nobody on the customer’s side is taking a cut of the payment to the celebrity endorser. The deal is never announced, and the endorser does very little, if anything, to perform. What did you agree to, and how worried should you be? The payment may look nothing like classic commercial bribery and still carry accounting, disclosure, books-and-records, internal-controls, and potentially fraud exposure.

The Hypothetical Is Real

The facts above are real. They come from a report that Wachtell, Lipton, Rosen & Katz delivered to the National Basketball Association on September 2, 2026. Daktronics, a Nasdaq-listed scoreboard maker from Brookings, South Dakota, was competing to supply the acre-sized, double-sided “halo” video display for the Intuit Dome, home of the Los Angeles Clippers.

In May 2020, the Clippers told Daktronics that it was the preferred provider but wanted a “spend back.” Clippers president Gillian Zucker suggested that the spend back take the form of an endorsement agreement with the team’s superstar player, Kawhi Leonard. Later that month, a senior Clippers executive set the terms on a call: $3 million a year for two years.

The chronology is telling. In a six-day span in early June 2020, Ms. Zucker sent three emails introducing Boingo Wireless, Daktronics, and Lockton Insurance, all of them then negotiating for Clippers business, to Mr. Leonard’s representatives. Each email said the vendor had asked for the introduction. The investigators found no evidence that any of them had.

On June 9, the day of the second email, articles of organization were filed for KL2 LBS LLC, whose members are Mr. Leonard and his uncle and business manager, Dennis Robertson. That entity became the counterparty to all three endorsement agreements.

Daktronics signed on July 6, 2020. In February 2021, the same Clippers executive told Daktronics that the team had decided to spend more on the scoreboard and that Daktronics should raise Mr. Leonard’s second-year payment to match. Daktronics agreed, and an amendment executed on May 20, 2021 added $2 million.

The three vendor agreements totaled $18 million, all paid by August 2021. The only confirmed activity by Mr. Leonard under any of them was one visit to a military base and some signed memorabilia. None of the endorsements were publicly announced.

The Clippers arranged for these endorsement agreements to evade the NBA’s collective bargaining agreement, which prohibits any agreement outside a player’s uniform contract involving “compensation or consideration of any kind or anything else of value” paid “by, to, or for the benefit of the player.”

The league’s guidance to teams gives, as an example of prohibited conduct, a team representative who “initiates or facilitates an endorsement relationship between a team sponsor and one of the team’s players.” The Clippers knew this. In 2015, the league fined them $250,000 for facilitating an endorsement deal between an incoming sponsor and DeAndre Jordan, then a free agent the team was courting.

The report states that the Clippers “initiated, facilitated, and induced” the Daktronics, Boingo, and Lockton agreements and that Ms. Zucker initiated the separate Aspiration deal, worth $48 million in cash and equity over four years, that kicked off the public discussions of alleged Leonard side-deals. As a result of the report’s conclusions, the NBA suspended Steve Ballmer for a year, fined the team $30 million, took five first-round picks, and banned Mr. Robertson from league business for five years.

Start With the Rule

So what is our hypothetical vendor’s exposure? In colloquial terms, the payment to Mr. Leonard feels like a bribe. But commercial bribery statutes generally target a benefit conferred on an employee or agent to influence that person’s conduct without the knowledge or consent of the relevant employer or principal. See, e.g., N.Y. Penal Law §§180.00, 180.03.

Here, the Clippers orchestrated the agreement. Deceiving the NBA or the NBPA makes the conduct look worse. Neither, though, is Mr. Leonard’s employer or principal.

Other regimes feel analogous too. Customer-directed payments to a third party are textbook red flags under the Foreign Corrupt Practices Act, 15 U.S.C. §§78dd-1, 78dd-2, the federal Anti-Kickback Statute, 42 U.S.C. §1320a-7b(b), and the kickback and gratuities rules of government procurement, 41 U.S.C. §§8701-8702. But none of these reaches a private customer in a private industry that wants an unusual “spend back.”

The common thread is still useful. Each of these prohibitions exists because the counterparty to the contract operates under a third party’s rules, and a payment the counterparty cannot make directly is one it may be trying to make indirectly.

In the Clippers example, the third party is the NBA and the rule is the CBA, which binds teams and players, not scoreboard vendors. So when a customer asks you to write a check to a third party, ask what rule stops the customer from writing it, then ask whether that rule reaches you too.

On the report’s facts, the CBA could not reach Daktronics. And yet, on the morning the report came out, Daktronics’ chief financial officer told analysts on the company’s earnings call that “the Securities and Exchange Commission is seeking information from us concerning the company and Mr. Leonard.” Intuitively, that is not surprising. Even accepting that the Daktronics payment was not a bribe, something feels “wrong” about the arrangement. The hard part is explaining why. The answer comes down to accounting, disclosure, recordkeeping, and potentially fraud.

One Deal, Two Theories

Start with the accounting, where the report gives us the most to work with. It supports one theory of the Daktronics payment: the money was a cost of winning the business. It leaves a second theory open: round tripping.

The rebate theory is what the report describes. Daktronics won a real supply contract and paid $8 million of its margin to the customer’s designee. No money came back from the Clippers. Daktronics had no independent interest in Mr. Leonard as an endorser, and the report says as much. The $8 million was a cost of winning the Intuit Dome.

That matters because Accounting Standards Codification 606 can treat consideration payable to a customer as a reduction of the transaction price unless the payment buys a distinct good or service, and the concept may extend to payments a customer directs to a third party when the payment is tied to the contract.

Whether that is the right treatment here is fact dependent. It turns on what Daktronics received, what Mr. Leonard was expected to do, and whether those obligations were distinct and substantive. If the payment belongs in revenue as a reduction of the Intuit Dome contract price rather than in marketing expense, then revenue and gross margin on the company’s largest project could be overstated by that amount, and the charge could land in the wrong periods.

The round-tripping theory runs through the consulting agreements. Each of the three vendors, the report says, signed a multi-million-dollar “consulting” agreement with the Clippers around the time it signed Mr. Leonard. Two received almost the whole fee up front, $10 million each, before paying him a dollar. The third received its first $2 million installment the day after its first payment to him.

A former executive of one company called its consulting agreement “highly unusual.” The company was not in the consulting business, the services were not worth the money, and it had never before been paid virtually its entire fee in advance. A “credible witness with direct knowledge” told the investigators that one of the consulting agreements “was in fact a ruse, designed and intended to be a vehicle for the team to provide the company with funds to be paid to Mr. Leonard.”

If that is what happened, the vendor was a conduit for the Clippers’ funds. Money left the Clippers as a consulting fee, sat on the vendor’s books, and left again as an endorsement payment. The vendor booked revenue it did not earn and an expense it did not incur. That is a round trip, and round trips are classic SEC violations. For example, in 2005 the agency settled with Time Warner for $300 million over online advertising deals in which AOL supplied counterparties the money they used to buy its ads, so that both sides recorded revenue from transactions with no independent economic substance. See SEC v. Time Warner Inc., Litig. Release No. 19147, AAER No. 2216 (Mar. 21, 2005).

The round-tripping theory is worse for everyone involved. For the league, it moves the Clippers from arranging compensation to paying it, outside the contract and outside the cap, which is what the circumvention rules exist to stop and the reason the investigators flagged the possibility as making the misconduct “even more severe.”

Under the rebate theory, the only flaw may be an accounting error. Under the round tripping theory, the consulting agreement is a document written to describe something that did not happen, and the auditors signed off on revenue for services no one provided. A vendor that signed a sham agreement to pass team money to a player has also joined a scheme to deceive the league and the other twenty-nine teams, with its own contract as the false statement.

Whether or not prosecutors ultimately pursue criminal charges like wire fraud remains to be seen. But after Kousisis v. United States, No. 23-909 (U.S. May 22, 2025), a fraudulent inducement is wire fraud even where the victim suffers no net economic loss, and a clear sham contract is more than many prosecutors have to work with.

The report makes no finding against Daktronics under either theory, and it is unclear whether the Daktronics consulting contract is the one that was described as a “ruse.”

Recordkeeping: Where the SEC Comes In

Either theory may explain the SEC’s interest in Daktronics. Section 13(b)(2)(A) of the Securities Exchange Act of 1934 requires an issuer to keep books and records that “accurately and fairly reflect” its transactions “in reasonable detail.”

Section 13(b)(2)(B) requires internal accounting controls sufficient to ensure that transactions are recorded as needed to prepare financial statements in conformity with generally accepted accounting principles. Neither provision requires the SEC to prove that anyone meant to deceive. In a civil case, an entry that does not match the transaction is enough.

Run the two theories through those provisions. Under the rebate theory, the question is whether an entry labeled “endorsement” accurately reflects a payment made to win a scoreboard contract, and whether any control existed to catch a customer dictating the amount of a marketing expense. Under the round-tripping theory, the question is who approved receiving $10 million for consulting services the company does not sell, and what the control environment was doing while that happened.

Either way, the SEC needs only to show that the books describe something other than what occurred. That is what “something feels wrong” amounts to, and it is why a vendor that broke no statute and no league rule can still find itself answering questions from the Division of Enforcement.

Disclosure: What Daktronics Said, and When

No item on Form 8-K requires a company to say the SEC has asked it questions. Item 103 of Regulation S-K, 17 C.F.R. §229.103, covers material pending legal proceedings and proceedings “known to be contemplated by governmental authorities,” and a request for information, without more, is neither. Item 303, 17 C.

F.R. §229.303, covers known trends and uncertainties, and risk factors cover the rest. The test that actually governs is the one for every public statement: complete and not misleading in light of what the company has already said. A voluntary request about an $8 million contract at a company with revenue in the hundreds of millions is the kind of thing many issuers would keep quiet.

Daktronics did the opposite. On Sept. 2, the morning the report was released, its chief financial officer told analysts the company had received requests from the NBA and the SEC, took them seriously, and was cooperating. The stock rose nearly ten percent in premarket trading and gave it back by the close.

The premarket move was about a sentence the report had handed the company. Of the outside parties with relevant information, the investigators credited only Daktronics and Aspiration’s bankruptcy trustee with “substantial cooperation.” Lockton “refused to cooperate.” Boingo “purported initially to cooperate” and then “ultimately refused to cooperate further.”

Daktronics had that finding in writing from the league’s own investigators before it had to say anything, and it used the line within hours. Whatever its books turn out to show, it will be the vendor that answered the phone, and Lockton and Boingo will be the ones that did not. That is a favorable place to begin a conversation with the SEC, and it was available only because the company chose to cooperate with a private investigator that had no power to compel it, months before any regulator called. Cooperation cannot fix an incorrect accounting entry, but it can change who the staff believes when they ask how the entry got there.

What to Do With the Next ‘Spend Back’

First, ask why the customer cannot pay the third party itself, and get the answer in writing. There is always an answer, and it is the rule the customer is trying to get around. If the rule is a league salary cap, the exposure is reputational and accounting. If it is a procurement rule, a hospital’s referral policy, or a foreign government’s ethics law, the exposure is potentially criminal for you and the customer alike.

Second, do not let the customer set the price. A spend back at a number your own marketing department would have chosen is a rebate with extra steps. A spend back at a number dictated by the customer’s executive on a call, and raised later because the customer decided to spend more with you, is probably not a rebate at all. Document the rationale, the comparables, and who picked the amount.

Third, scrutinize the facts. Identify the payee and its beneficial owners, and ask why the entity was formed when it was. Define deliverables, pay against performance where you can, and announce the deal. An endorsement nobody publicizes is not an endorsement. The report’s list of what made the three vendor agreements “highly unusual” doubles as a list of red flags the vendors ignored.

Fourth, keep accounting in mind when you sign. Decide how the payment should be characterized under ASC 606: consideration payable to a customer, a distinct service, or a rebate. Have finance document the fact-dependent analysis, and keep the approval record. If the customer offers to fund the payment, decline. And if it already has, do not describe the money as something other than what it was.

Fifth, decide disclosure before the facts become public. Assess materiality, decide whether a proceeding is contemplated, and check whether anything the company has already said would become misleading.

The conduct in the report reads like a hypothetical from a compliance training deck. The customer picked the payee, named the price, and raised that price when it decided to spend more on its own project.

The payee was a newly created entity owned by the endorser and his business manager. The deal was never announced, the services were never performed, and Mr. Leonard was paid in full all the same. Daktronics signed anyway, and by the report's account it did so because it believed the alternative was losing the Intuit Dome.

Then it changed course. It cooperated when the investigators called, and it disclosed the SEC’s inquiry when it arguably had no duty to. That may prove to be enough. The SEC’s questions are still open, and the books are what they are. But of the three vendors who took the Clippers’ call in June 2020, Daktronics is the only one that will walk into its first meeting with the staff having already been credited, in writing, with telling the truth.

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This article first appeared in the September 17, 2026, edition of the “New York Law Journal” © 2026 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.