Entertainment & Sports
Jul. 25, 2002
Record Firms' 'Thievery' Alleged
SACRAMENTO - Record clubs make secret payments to record companies that even many label executives don't know about to avoid paying royalties to the artists, a lawyer testified Tuesday before a state legislative hearing investigating accounting practices.
The clubs enter into licensing agreements with record companies so actual sales of records are not reported to the artists, the lawyer said.
"These are not accounting errors, these are outright cases of thievery," said Don Engel, a partner in the Los Angeles litigation firm, Engel & Engel.
"It's a secret side-deal and it's been hidden," Engel told a joint hearing of the Senate Judiciary Committee and Select Committee on the Entertainment Industry. "The heads of the labels don't know it. In some companies, I think only two people know about it."
The practice has been so ingrained, that chief executive officers just accept it, he said.
"These are criminal enterprises," Engel said. "[Executives] get immune to criminal acts. They inherit it, and they don't know what to do about it."
L Londell McMillan, a New York lawyer and general counsel to the nonprofit Artist Empowerment Coalition, said record companies also refuse to release the number of records manufactured because they don't want to account accurately for royalties.
His assertion was confirmed by Fred Wolinsky, an accountant who had conducted hundreds of audits of record companies.
However, an outside counsel for the Recording Industry Association of America said the record companies don't release the manufacturing documents because that would only lead to more controversy, as artists would question the number of recordings given away free.
"You're adding to the level of potential acrimony if you look at the pressing lists rather than how many records were sold [to retail outlets]," said Steve Marenberg, of the Los Angeles law firm of Irell and Manella.
It was the second hearing on the recording industry this legislative session to be headed by Senate Judiciary Committee Chairwoman Martha Escutia, D-Whittier. Escutia earlier hosted an informational hearing on SB1246 by Sen. Kevin Murray, D-Los Angeles, which would limit contracts between record companies and recording artists to seven years. Currently there is no time limit on how long a recording artist must stay with a company.
Murray's bill has stalled, although lawmakers have said they prefer to give the artists and record companies a chance to resolve their differences on their own.
Marenberg testified, as he did in the first legislative hearing, that record companies make money on only one out of every nine artists they contract with, and that the costs of marketing those singers are spread among all artists.
Steve Marks, senior vice president of business and legal affairs for the RIAA, cited a company-sponsored study that showed artists get paid twice what the labels earn.
Sam Moore, of the Sam and Dave rhythm and blues duo best known for their classic hit, "Soul Man," and artists' lawyers testified that the state winds up paying for health and welfare benefits for artists because the record companies underreport their earnings. Benefits are tied to artists' earnings.
Engel, who has settled cases for recording artists who filed RICO charges against record companies, urged legislators to hold more hearings and subpoena record company executives. He also urged lawmakers to define the record company's accounting duties as a fiduciary duty and to require the companies' chief executives to certify the accuracy of royalty statements to artists under risk of civil and criminal penalties.
Linda Rapattoni
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