3 Kinds of Stiffing: What A&M’s Jerry Moss taught me about Music Audits [Chris Castle]

Royalty audits are as old as the music business itself, and its fair to say that most music company audits find something. But legendary record executive Jerry Moss taught attorney Chris Castle that bad accounting comes in several forms.

by CHRIS CASTLE of Music Tech Policy

You’re probably going to be hearing about the evil of audits now that the Mechanical Licensing Collective is getting what will likely be the first of many audits. That’s right–there’s something wrong with you if you even ask to check on whether you got a straight count. This is, of course, spin. Or as we say in Texas, that’s bullshit for starters. Let me tell you something I learned from Jerry Moss and from the culture he brought to A&M. And something that distinguished A&M not just from other record companies but from many, many other companies and organizations.

Herb Alpert described Jerry as the kindest man he ever knew. And “kindness” is what I’m driving at. For some people it’s called different things, like being well-mannered. Being well-mannered doesn’t mean you know how to eat a pear. (Which fork? Skin on or off? So many decisions.). Being well-mannered means you know how to treat someone with kindness and empathy so they feel valued and heard. It doesn’t matter if you have a degree from this one or that one or none at all. Being well mannered is taught in an entirely different place. God knows.

“The Braying Lawyer”

This comes up often in my profession when encountering the Braying Lawyer in their natural habitat. When you encounter someone who is just a hot mess of threats and insults at a high decibel level, kind of a maelstrom of Pig-Pen and Vercingetorix, the ontological lack of empathy results in very large withdrawals from what Tom Wolf called the favor bank.

And nowhere is the presence or absence of kindness more obvious than when other people, especially artists, entrust you with their money and it comes time to pay them. At those moments, some people decide to stiff their artists rather than give them a straight count.

Three Kinds of Stiffing

First, there are three kinds of stiffing on royalties – intentional stiffing, negligent stiffing, and honest stiffing. That should ring true because that’s kind of like the common law we inherited from England, you know, the charter of the land and all.

If you want to have a long term relationship with both your artists and the artists you have yet to meet, do not intentionally stiff anybody about anything but particularly not their royalties. Word gets around. When you are trying to sign a future artist in a competitive situation, that artist will get together with their lawyer and make a list of the labels they want to sign with. If that lawyer has had trouble with your label, especially on royalty accountings, you may be low on that list or not on it at all. (The same is true if all the lawyers are dicks or the companies are like Spotify, but different discussion.). Your reputation precedes you into that room, and if you’re not on that list, there’s really no way to get back on it. And once talent is gone, it’s gone forever.

Like so many things, when your parents learned you that honesty is the best policy, they weren’t kidding. Another thing that happens in those competitive situations is when you are competing with a notorious thief, it’s good to be able to say we’re not going to match the thief’s $100k in tour support that you’ll be promised but never receive. That’s because we think there’s an intrinsic value to being signed to A&M Records. I believed that because in that particular material deal point, I knew of at least three artists on the current roster that we had spent well over $1 million in tour support and never put it in the contract. 

But it’s not important what I believe, it’s important what the lawyer on the other side believes and it better be true. And that’s why we tended to not do bidding wars; there was only one A&M and you either wanted to be there or you didn’t. One reason on the business side of the relationship is that you would get a straight count because there was no intentional stiffing. In fact, that was a good way to get fired if you tried hard enough. The lawyer who thought we were just another one to play off against another one (and often at a high decibel level) didn’t get it and was unlikely to be successful with us.

Intentional Stiffing

On the other hand, I know you’ll be shocked to learn that sometimes the auditors make stuff up. I had one big inbound audit where about half of the 7 figure claim was based on the auditor’s interpretation of the worldwide uplift on CDs for a significant international catalog artist. The auditor relied on a ruling by the British Copyright Royalty Tribunal claiming in a cited footnote that the worldwide uplift should be about 180% of dealer, and we used a lower averaged number derived internally. Needless to say that was a big difference. (If you know CD pricing, that 180% simply could not possibly be true.) After a major, major hunt I actually found that Tribunal ruling cited by the auditors and discovered that the cited footnote said nothing of the kind. In fact, the issue never came up in the entire ruling. At all. 

Total fabrication. (And God knows how many other audit reports by the same auditor had a cut and paste of that identical language that nobody ever checked.). 

So we zeroed that out, but ended up making a token payment to cover the cost of the auditor. Which I fought tooth and nail, but guess who thought it was the fair thing to do?

Negligent Stiffing

Negligent stiffing is something that happens because somebody wasn’t paying attention. This comes up with auditors who are trying to find fault and don’t bring up a mistake until it gets into the audit report and their client sees an inflated figure. This is why we established a practice of asking–and later requiring–auditors to sit with our audit supervisor to discuss field work before they left the lot to write their report. I don’t know as we were the first ones to do this, but I think we were the first to put it in the contract and it’s now in the Music Modernization Act. This gut-check sit-down allowed us to correct any mistakes we had made or oversights by the auditor, which happens because nobody’s perfect. We were also able to fix mistakes and credit the artist’s account right away, i.e., before that audit report is even drafted. 

Of course there’s a practical side to this, too. If we got rid of issues that are not “real” because they were just oversights, the audit report wasn’t inflated and we didn’t have to negotiate against ourselves on the ultimate audit settlement. But still, it was a way to troubleshoot our systems and the audited statements.

Honest Stiffing

Honest stiffing is not the result of a planned underpayment or self-constructed dispute, but rather is just a mistake that happens when you are counting millions of widgets moving around the world. Sometimes it’s the interaction between dates units are reported at the label level and the date that royalties derived from those units are reported on the artist’s royalty statement.

Once when I was working in Europe, I had a message from a lawyer who represented one of our artists who had enjoyed a hockey stick sales success. The lawyer was a friend of mine so I wondered what he could be calling about urgently knowing I was out of the country. It turned out his recently successful client had gotten the first royalty statement after selling several million units over two royalty periods. He told me the royalty check was $40,000–“I can’t show it to them” he said. ”They’ll go ballistic.”

Now this artist had a large unrecouped balance–remember that off-contract tour support? Because of accounting we received the billing for about 1 million units after the close of the royalty accounting period. So there was just enough money in Period 1 to recoup the account, but the real money was in Period 2–remembering checks go out 90 days after the close of Period 1, so you’re thinking “I’m rich” in Period 2 when actually you’re not rich yet. (Also enough money to feel great, but too early to renegotiate.). That meant next period the artist would get a really big check but this period most of the royalties went to recoupment except for $40,000. 

We had just brought in a major label finance person who now had control of this kind of thing. I called in and asked how much we had in the pipeline which was nearly $1 million in royalties. He knew the numbers off the top of his head, which I found odd. I asked, So you knew this was happening? Yes, he said, it’s my job to know. We make money off the float.

This is the kind of thing that makes me throw up in my mouth. I said, I need you to cut a check for $500k. To which he replied, you can’t make me. I said, that’s true, but I know who can and they won’t want to give $500k, they’ll want to give $1 million. So I made that phone call and sure enough the first thing he said was can we give more?

I told the finance person if you hurry you can cut that check for $500k before the powers that be decide not to listen to me and that it should be $1 million. Oh and messenger will be fine.

I called the lawyer back and told him to expect a check by messenger for $500k. He was happy – not because he was entitled to the bigger check, but because he appreciated being listened to and being heard. And because it was the right thing to do. You don’t get a participation trophy for doing the right thing. It’s just one of the million things that go to making reputation. Or as Tom Wolfe might say, a deposit in the favor bank by doing a kindness to someone who needed it.

Would I have preferred that the finance person had handled it themselves before it ever got to me? Absolutely. Did I set an example in that experienced person’s training to be a better leader? I hope so. Would it have happened at a different label? Maybe, but I doubt it. They’d probably still be arguing about the deal memo to cut the check by the time the next accounting period rolled around.

When a great man passes, your first feeling is sadness.  But you can also say, what a gift that I knew such a man and instead think of him as a hero going home.  I think I’ll do that. And remember his kindness.