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Recording Industry Accounting Probe Widened to Include Fraud Allegations

By Chuck Philips
LOS ANGELES TIMES -- The California Senate has widened its probe of music industry accounting practices and is investigating whether major record companies defrauded artists out of royalties through undisclosed licensing deals with record clubs and video channels.

The Senate Rules Committee in Sacramento, Calif., the state capital, issued subpoenas late last week seeking documents from artists’ lawyers and managers to substantiate the allegations, which first came to light at a hearing last month called by Democratic state Sens. Martha Escutia and Kevin Murray to examine accounting practices in the music industry.

During the July 23 hearing, artist representatives accused the world’s five largest music companies of collecting millions of dollars annually from licensing deals with record clubs and video channels never shared with artists. Attorneys also alleged that companies employ fraudulent accounting formulas to bilk artists out of earnings on music sold overseas.

“We want to find out how these deals are structured and whether artists are getting shortchanged,” Murray said in an interview. “We’re also interested in determining whether companies are cheating artists by using unfair tactics in the accounting of foreign royalties.”

Escutia and Murray have scheduled a second hearing on the matter Sept. 24 in Sacramento. The accounting issue is the latest wrinkle in an ongoing debate over artists’ rights in the record industry. Performers and musicians have complained to lawmakers that music companies use unfair contracts that bind them longer than other California workers and use accounting tricks that reduce their wages, health care and pension benefits.

The Recording Industry Association of America, a Washington trade group that represents the nation’s five biggest music companies, declined to comment on the allegations, except to say that artists are paid in accordance with their contracts. Record executives privately say labels do not cheat artists on music sold overseas nor do they profit from covert licensing arrangements at artists’ expense.

Entertainment attorney Don Engel, who has sued labels on behalf of Luther Vandross, Meatloaf, Don Henley, and the Dixie Chicks, told lawmakers last month that companies routinely cheat artists out of royalties.

In an interview, Engel spelled out what he characterized as a series of “schemes” perpetrated on artists by the music industry.

Record companies, he said, purport that music videos are promotional tools to help generate sales of CDs. Artists are contractually required to reimburse companies for at least half of the cost of each promotional video before they receive a royalty check.