The NBA charged the Timberwolves, player Joe Smith and his former agent with violating the salary cap by entering into a secret agreement, the league said.
The matter has been sent to an arbitrator, the NBA said.
If the arbitrator rules that if there was secret agreement between the team and player, the Timberwolves could face a multimillion-dollar fine, the forfeiture of draft picks, the voiding of player contracts and the suspension of team personnel, the league said.
"This is the most serious salary-cap offense that can be committed by teams, players, or agents, and subjects the guilty parties to substantial penalties under the (collective bargaining agreement), in addition to other potential liabilities," Joel Litvin, NBA executive vice president, legal and business affairs, said in a statement.
The NBA said it has a written copy of the agreement. The league didn't disclose other details.
Timberwolves owner Glen Taylor, who met with commissioner David Stern on Friday, said he made a secret agreement to pay Smith, a free agent, according to a report in the Minneapolis Star-Tribune.
Taylor could not be reached for comment. Smith's former agent, Eric Fleisher, declined comment.
The National Basketball Players Association, which governs agents, could not be reached for comment.
According to the paper, Taylor agreed in writing, in a 1999 document prepared by Fleisher, to offer Smith a multiyear contract that would begin with the 2001-02 season, when rules would enable the team to exceed the salary cap to pay him.
Smith, 25, joined the Timberwolves in 1999 and has played under three one-year contracts for less than his market value. Privately, Smith had agreed to a lucrative long-term accord, the league said.
"This agreement, which is set forth in writing, calls for future payments to Smith of tens of millions of dollars, and was deliberately hidden from the league by the parties involved," Litvin said.
Taylor said neither coach and general manager Flip Saunders nor vice president Kevin McHale knew about the secret agreement, the paper reported.
In Dallas, Mavericks owner Mark Cuban said he will "definitely go after" Smith if he becomes a free agent.
The Mavericks still have their $2.25-million middle-class exception available, and will be waiting with much interest on the outcome of the Timberwolves' arbitration hearing.
"We have to see what happens," Cuban said. "But if Joe becomes a free agent, we would have quite a bit of interest in him.
"If he is a free agent we will definitely go after him with our mid-level exception. But we will have to wait and see."
NUGGETS: Point guard Andre Woolridge signed, after playing for the team's entry in the Rocky Mountain Revue summer league. Woolridge averaged 10.6 points and 5.2 assists in six games.