Brian Zisk's Report from California State Assembly Hearing on Major Label Accounting Practices

July 24, 2002

The Record Industry Accounting Hearings in Sacramento were fairly interesting yesterday (July 23, 2002).

There was pretty clear consensus among the state senators that they weren't interested in regulating specific contractual language but here's what was proposed by Don Engel (entertainment attorney), and what is being considered by the legislature.

1. Legislate that a Fiduciary Duty exists in regards to accounting from the labels to the artists.

2. Require that royalty statements be certified.

3. Create civil and criminal penalties for fraud or falsification of royalty statements.

The prevailing theme of the day was folks telling the senators how horrifying the accounting practices are, and the senators responding questionably, "It can't really be that bad, can it?"

But by the end, they understood, as the RIAA shot itself in the foot through sheer arrogance, and I think it's going to cost them this time.

The RIAA was supposed to have two speaking slots, and the first one featured Steve Marks and Steve Marenberg, who attempted to paint all underpayments as differing interpretations of contracts, amongst members of a big, happy family. Steve Marks read from his prepared speech, where he stated such gems as "The overwhelming majority of artists enjoy excellent relationships with their labels" and "One way in which artists will exercise their leverage is to engage in disputes over contract and accounting term that, in the end will be worked out along with everything else in the economic relationship between artists and labels. That's what's going on here. No more, no less." Steve Marenberg came off even worse, explaining that both the labels and the artists wanted ambiguous clauses in the contract, and if the clauses were made clearer, both sides would insist that ambiguous language be put back in. Senator Martha Escutia (Head of the Senate Judiciary Committee) showed the falseness behind this, by stating that she recalled from law school that in the case of ambiguous clauses, that you'd rule against the party (in this case the record label) who had drafted the contract. The RIAA reps were speechless. Questioning was halted, as the senators knew that there was a full day, and they'd be able to question the RIAA folks after their second appearance later on. The second the two RIAA folks on the stand finished, all of their group (about 8 of them) got up and left the auditorium together.

One observation from before that: The auditorium had two sections of seats in front of the stage, about 18 rows of seats, an aisle about 5 feet wide, and then about 18 rows of seats behind that. The RIAA crew sat in the first row of the second section, and stretched out in the aisle, with their bags, and legs extended. When folks would walk across the aisle, the RIAA folks wouldn't move, keeping their legs fully extended, inconsiderately blocking the aisle like a bunch of obnoxious 4th graders. I saw a number of folks (including senators' aides) stepping gingerly around these obnoxious obstructions; the RIAA folks were making a very bad impression.

The panels were running behind by this point, Don Engel went up and made a number of serious accusations, such as "it's not a matter of contractual interpretation, it's a matter of systemic, intentional, fraud", and laid out specifically what action items he'd like the senators to take. Fred Wilhelms (entertainment attorney) was excellent in explaining how the lack of proper reporting to the AFTRA Health and Retirement Funds caused certain vocalists to be without insurance in situations where they desperately needed it. Fred Wolinsky (an auditor with TONS of business) was next.

After Wolinsky, senators were called to the side of the stage by a local lobbyist for the RIAA who informed them that the Steven's referred to above (and anyone else qualified to talk on behalf of the RIAA) had a plane to catch, and they had to leave right at that very moment so would be unable to appear again, as they had already exited. The senators were incredulous, but in an elegant sort of way. It is clear that the senators had more questions for the RIAA folks, and they'd have gladly pushed back Mr. Wolinsky's session to let the RIAA share their side of the issue, but no, not a word was said, until near the end of Mr. Wolinsky's session. Senators' next few comments were along the lines that since there have been serious accusations levelled which the RIAA will not be responding to as scheduled, that there should be another hearing on this issue in August where they could, and also that since so much of what's been referred to today involved lawsuit settlements which couldn't be discussed in depth due to confidentiality clauses, that they were going to see about subpoenaing some of these into the public record for the next hearing. I didn't have the highest hopes for change going into this session, but I underestimated how badly the RIAA representatives were able to make the recording industry look.

Don Engel's suggestions were good ones, and I think it'll be difficult for the RIAA to prevent them all from eventually passing into law in California, especially given how badly they presented themselves.
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Brian Zisk

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