SpongeTech Story Becomes A Cautionary Tale

In the midst of the economic crisis, sports teams were in need of sponsorship dollars. So they jumped at a company that was willing to bail almost all of them out. The deals came at a recessionary discount, in some cases with a generous payment plan and, perhaps most importantly, with very few questions asked about the company.

Spongetech banner at Citi Field
Rich Pilling | Major League Baseball | Getty Images
Spongetech banner at Citi Field

The story isn’t completely over yet, but in the annals of sports marketing, it’s pretty apparent that the SpongeTech story will go down as one of the industry’s most cautionary tales.

“Every team got caught up with them,” said Ben Sturner, CEO of Leverage Agency, a New York-based sports marketing firm.“It will turn out to be a wake up call for the industry that if it’s too good to be true, maybe it just is. You saw their product on TV, but I don’t ever remember seeing anyone who actually owned one.”

SpongeTech, the self-dubbed “Smarter Sponge,” gained its fame through its infomercial plugs, but in the end, there were too many things that didn’t add up. It led to the SEC filing civil fraud charges against the company and its top two executives, Michael Metter and Steven Moskowitz. The FBI arrested them in May and they were charged with conspiracy to commit securities fraud and obstruction of justice. Metter's lawyer told reporters that he denies the charges made against him. The public relations e-mail listed on SpongeTech’s Web site bounced back and two lawyers representing the company's executives did not return calls seeking comment.

On Friday, as part SpongeTech’s bankruptcy filing, more than 100 creditors must declare themselves to the court along with the money that they are owed. A who’s who of sports teams are expected to line up for money they might never receive.

Lawsuits alone have shown us that Madison Square Garden (Knicks, Rangers) is owed $430,880 and the New York Mets received bounced checks totaling $300,000.

"We are acting to enforce our contractual rights through the courts,” a Mets spokesperson told CNBC.

The New York Islanders are waiting for $405,000 and the New York Giants are hoping to recoup the $360,000 they were promised, which includes SpongeTech not paying for its suite food at games. Throw in the Chicago Bears’ lawsuit asking for $260,000 the team is owed and SpongeTech owes $1.4 million from just six teams.

"There haven’t been too many times in our industry where a company without much name recognition got involved with so much so quickly, only to see it blow up just as fast as they came onto the scene." -Team Marketer, Anonymous

It’s not known just how many teams did or didn’t get paid.

More than 20 Major League Baseball teams displayed SpongeTech signage, but some did get paid in full for its deals. Sources tell CNBC that the Yankees, who invited Metter on to the field in July ’08 when the company sponsored a key chain giveaway, insisted that the company pay for its advertising in advance. Both the company and the Yankees canceled the second year of their deal together in 2010 given the company’s trouble.

A Major League Baseball source said the Chicago Cubs were also paid in full for SpongeTech’s sponsorship in 2009. Officials with ANC, which placed SpongeTech’s sponsorship on Major League Baseball signage throughout the country, wouldn’t say if the teams it worked with were paid in full or if the company itself will line up as a creditor later this week. CAA, which brokered many of the deals on behalf of SpongeTech, did not return calls seeking comment.

At least eight NFL teams did deals — including the Tampa Bay Buccaneers, which had SpongeTech in its more exclusive “Pewter Partners” sponsorship program. The Cincinnati Bengals sold SpongeTech on a two-year deal to sponsor its practice jerseys. An NFL source told CNBC that the Bengals are owed “in the six figures” for each of the two years, even though the team obviously isn’t putting SpongeTech on its jerseys or anywhere near its field this season.

SpongeTech received more than $350,000 in equivalent advertising time for the amount of time its logo was displayed on the Bengals practice jerseys during the filming of HBO’s “Hard Knocks”last year, according to Joyce Julius & Associates, a sponsorship evaluation firm.

Three NBA and three NHL teams also did deals with SpongeTech, as did the USTA, which struck a last minute signage deal that got the company’s logo on the rotating signage around Arthur Ashe Stadium at the US Open last fall. A tennis industry source told CNBC that the USTA was paid in full by the company.

Perhaps sports teams would have not taken the easy money if they asked a simple question, “Just how much is your marketing budget anyway and how does that compare to sales?” A company official told SportsBusinessJournal that it would spend $20 million on marketing in 2009 on a total reported gross of $50 million in sales, most of which prosecutors say were faked. Even if the sales were real, that’s spending 40 percent of your intake on marketing, well above the industry standard of 15 percent.

“There haven’t been too many times in our industry where a company without much name recognition got involved with so much so quickly, only to see it blow up just as fast as they came onto the scene,” said one team marketer, who requested anonymity because his team is one of the creditors.

So how much is owed to sports teams?

We should know more on that number when the teams file as creditors on Friday. Much of that will depend on whether or not team officials feel they are owed for future years of the contract. Company COO Stephen Moskowitz told ESPN.com last September that the company locked in three-year deals at the down market rates.

Many teams tried to negotiate a settlement with SpongeTech, but CNBC has learned through one team's top marketing officer who had a deal with SpongeTech, that he was told that there was a cash flow problem. It was never mentioned that the company might have had no money to pay its outrageous sponsorship bills.

Questions? Comments? SportsBiz@cnbc.com