Fred Wilhelms, a Nashville entertainment lawyer -- whom music writer Dave Marsh once called "the (music) industry's ethicist-in-chief if the industry had ethics" -- has written a letter to SoundExchange executive director John Simson, asking how much SoundExchange has spent on lobbying and public relations efforts that don't appear to be covered by the section Copyright Act that specifies how the organization can spend its money collected in the name of its members, some of whom Wilhelms represents.
Here's Fred Wilhelms' letter to SoundExchange's John Simson, as posted on P2Pnet:
I have read with interest and concern the recent article [link] by Eliot Van Buskirk on the Wired.com blog suggesting that SoundExchange has exceeded its regulatory authority by engaging in the musicFIRST campaign.
I happen to believe, based on my own reading of the law, the lobbying efforts do exceed the legislative and regulatory authority given to SoundExchange. I also believe that the lobbying activity on a matter outside the scope of SoundExchange’s original charter constitutes a violation of the 501 (c) (6) tax-exemption held by SoundExchange. Again, that is just my opinion based on reading of the relevant statutes and regulations. You, I imagine, have received contradictory legal advice.
I am sure that a complete investigation by the appropriateauthorities will, once and for all, resolve the questions of legalconduct. Nonetheless, I strongly urge SoundExchange immediately appointa truly independent entity to review SoundExchange’s operations andissue a public report as to its compliance with all legal requirementsand limitations. The credibility of the organization has beenquestioned, and only independent evaluation can restore it.
SoundExchange already has important obligations to recording artistsand record labels. The integrity with which it carries out thoseobligations is now in serious doubt. The questions and the doubt mustbe put to rest, one way or another.As much as the questions of legality are a major issue, as anattorney for of a number of artists registered with the organization, I
find even more troubling the comments made by SoundExchangerepresentatives in the Van Buskirk article. They do not make meconfident that SoundExchange is taking its current responsibilitiesseriously because it seems to have bigger plans for itself.The first such comment is attributed to SoundExchange“spokesperson” Richard Ades. When asked how much SoundExchange moneywas spent on musicFIRST, he supposedly replied that the information was“proprietary.”
This response is simply unsatisfactory. That an organizationostensibly existing only because of obligations to my clients and otherartists and labels believes it has a right not to disclose what it doeswith their money is simply astounding. It is arrogant, and it is wrong.
The money does not belong to SoundExchange, and SoundExchange does nothave the right to dispose of it merely as it sees fit.The amount spent by SoundExchange is from money received fromlicensees for performances by my clients. That money, less the actualcost of administration of the collection and distribution process,
should be paid to them. That is the job SoundExchange promised to do.Any reduction of the payment on account of expenditures for apurpose unrelated to the royalties earned by my clients by theirperformances on satellite and Internet broadcasts is impermissible bylaw and a breach of the trust placed in SoundExchange. It doesn’t keepthat promise to pay the artists and labels what they have earned whenit spends money on something that doesn’t promote those specificgoals.. Any suggestion that the amount of that reduction is informationthey cannot have because it is “proprietary” is reprehensible. Myclients’ interests are not served by keeping that information private.
No one who is registered with SoundExchange is served by keepingthat information private. The only interests served by keeping thisinformation private are those of the individuals making thecontribution and the entity receiving it. Neither of these is equal to,
let alone paramount to, the interest of my clients. What right doesSoundExchange claim to keep it a secret?On behalf of my clients, I demand that you immediately publiclyrelease all information relating to the expenses incurred in themusicFIRST campaign by SoundExchange, and the extent of its commitmentto cover future costs of the campaign. My clients deserve to know whatyou are doing with their money. My clients want to know who approachedSoundExchange, who brought the matter to the Board’s attention, and whovoted for and against it.
Some time ago, you were quoted as saying that you thoughtSoundExchange’s operations should be “transparent.” This is youropportunity to prove you were telling the truth.
You and I have had some issues about SoundExchange secrecy before.
In 2005, you claimed that the list of artists you could not find wasproprietary information and you wouldn’t release it to me unless I
agreed not to disclose any information about the list. I declined,
saying I couldn’t place myself in a position to know what artists wereentitled to money but constrained from telling them, or asking anyoneelse to help me find them. In retrospect, all that was accomplished bykeeping that list secret was delaying, for over a year, any organizedeffort to find those artists and get them paid. Maybe that was thegoal. If so, it worked.The secrecy policy didn’t make any sense then, and it doesn’t makeany sense now. It leaves the deep impression that SoundExchange hassomething to hide, and that it is intent on hiding it from the peopleit is ostensibly working for. That imperious attitude might work for atrade association that only has to answer to its members, like theRIAA. For an organization like SoundExchange, the attitude is simplywrong.
As for your own statement, Mr. Van Buskirk classified it as notresponding to his question about the legality of SoundExchange’ssponsorship of musicFIRST. Perhaps you were misquoted, but it does notappear that you ever directly addressed the question. All too often infive months since the CRB rates were announced, SoundExchangespokespeople have not answered questions that were asked, but havesimply said what they wanted to say. It is immensely frustrating to tryto engage SoundExchange people in a dialog when they don’t payattention to what is being said by the other parties. You missed anopportunity to promote the discussion by actually entering into it,
rather than ignoring it.But let me try one more time to ask some questions to see if you will actually answer them.
Does it really matter who blows the whistle on SoundExchange violating legal and tax restrictions on its operations?
Does the fact that broadcasters may have brought this up this time mean they aren’t true?
Frankly, the questions, whatever the source, are nothing new. RustyHodge raised the same points on his blog nearly six weeks ago.
SoundExchange representatives, including Director Dick Huey, havedeigned to “explain” SoundExchange policy and procedures (inaccurately,
as it turns out) on Mr. Hodge’s blog before, but the questions aboutthe relationship between SoundExchange and musicFIRST went unaddressed.
Maybe you thought you could just ignore them when Mr. Hodge raisedthem, after all, he’s just a webcaster, and he must be a puppet forDiMA in your estimation. But now, Mr. Van Buskirk has asked them again.
I guess he’s a dupe of NAB, and that’s all the reason you need not toaddress what he asked.Enough dissembling, Mr. Simson. The broadcasters are notresponsible for SoundExchange violating the law. When that childpointed out that the emperor had no clothes, it wasn’t the child’sfault the emperor was naked, was it?
It appears part of the SoundExchange playbook to attack themessenger rather than the message, and you’re just sticking to thescript. Your Director Dick Huey indulged himself in an anonymouspersonal attack on me on p2pnet.net in an attempt to discredit mycriticisms there of SoundExchange operations. When he was caught at it,
he didn’t apologize for the personal attack, he just declared he haddirected it at the wrong person. The propriety of the personal attackdidn’t bother him in the slightest. And, just like you did on VelvetRope, after promising to answer any questions about SoundExchange, hedisappeared when his first statements were demonstrated to be untrue.
He came, he threw mud, he left. This hit-and-run tactic also appears tobe part of SoundExchange standard operating procedure. As long as itdistracts from the real subject at hand, it appears to be permissable.The third SoundExchange representative quoted in the Van Buskirk article is Michael Huppe, SoundExchange counsel.
Mr. Huppe is quoted as saying: “Funding provided by SoundExchangeto musicFIRST is authorized by copyright owners and performers who havechosen to become members of SoundExchange. These contributions comeonly from our members and not from non-member royalties, and wereunanimously approved by the SoundExchange board.”
I have reviewed the SoundExchange registration documents executedby my clients. I have pored over every page of the SoundExchangewebsite. I can’t find a single word that could be taken asauthorization to spend my clients’ money on something beyond collectionand distribution of Internet and satellite performance royalties, whichis the job SoundExchange promised to perform.
Please show me where that permission was granted by my clients.
As far as I can tell, my clients authorized SoundExchange tocollect royalties due them from Internet and satellite broadcasts oftheir recordings and to distribute those royalties, less a reasonablecost for administration. You’ve never even tried to explain what thatadministrative cost is, but let us save that discussion for anotherday. Just tell me where my clients approved SoundExchange sponsorshipof musicFIRST.
As far as those allowable costs are concerned, 17 USCA 114 (g) (3)
appears to limit costs that can be deducted from my clients’ share ofthe royalty proceeds to three types of expenses, the “reasonable costs”
of:
the administration of the collection, distribution, and calculation of the royalties;
the settlement of disputes relating to the collection and calculation of the royalties; and
the licensing and enforcement of rights with respect to themaking of ephemeral recordings and performances subject to licensingunder section 112 and this section, including those incurred inparticipating in negotiations or arbitration proceedings under section112 and this section, except that all costs incurred relating to thesection 112 ephemeral recordings right may only be deducted from theroyalties received pursuant to section 112.
My clients, your registered members, would like to know which onedoes SoundExchange claim applies to sponsorship of musicFIRST? Whichone permits SoundExchange to deduct the sponsorship costs from theirshare of the royalties?
Mr. Huppe says the money was taken from my clients’ share of the royalties.
Why? How?
The simple fact that SoundExchange’s board voted unanimously totake actions that violate the law doesn’t make those actions legal.
That fact might make your Directors personally liable for theunauthorized expenses (and the tax penalties incurred), because myclients will expect that SoundExchange be made whole again. They have aright to that. Of course, keeping secret the amount misspent onmusicFIRST will make determination of what should be paid back by eachDirector a bit more difficult.All of a sudden, I understand Mr. Ades said that information is considered "proprietary."
Please advise me how SoundExchange expects to recover the resources improperly spent on musicFIRST.
My clients are well aware of the problems SoundExchange hashistorically had in finding the artists it is supposed to pay. Theyknow that over 8,100 of their peers, 30% of the artists you canidentify, are still on the “unfound” list on your website. They believethat list is a indictment of operational ineptitude and indifferencethat brands as outright lies SoundExchange’s public statements ofrespect for artists.
They also know there are probably tens of thousands more artistswho have been played but SoundExchange can’t identify because you arerelying on sampling to allocate royalties. Artists who aren’t luckyenough to be in the sample aren’t going to earn any royalties at all.
You don’t even mention the fact that you rely on sampling in yourwebsite FAQ, but my clients know all about it anyway. They justconsider your lack of disclosure about that, and the misleadingstatements SoundExchange spokespeople have made about it to be furtherevidence that SoundExchange only cares about artists when they canserve as poster children for one self-aggrandizing campaign or another.My clients and I believe that when words don’t match the deeds,
believe the deeds. SoundExchange has given them enough words, and fewenough deeds, to make the choice an easy one. It isn’t inSoundExchange’s favor, Mr. Simson.To be blunt, SoundExchange already has a job it promised to do. It isn’t doing it well.
Not finding 30% of the artists you can identify is not doing a good job.
“Reserving” tens of millions of dollars a year, then absorbing thatmoney when you “can’t find” the proper recipients is not doing a goodjob.
Setting a schedule for forfeitures of millions of dollars, and thennot making any effort to publicize the forfeitures, is not doing a goodjob.
Being unable to explain how and why you rely on sampling toallocate royalties, and not even formally admitting you do, is notdoing a good job.
Claiming that the amount of money you spend on something clearlyoutside the limited function you have been granted by law is“proprietary” information, is not only not doing a good job, it is aslap in the fact of the people you are supposed to work for.
Attacking the people who point out that you might be violating the law is not doing a good job.
Deducting the cost of violating the law from the money of yourregistered members, in open and direct contradiction to the law, is notdoing a good job, no matter how many of your Directors approved.
SoundExchange shouldn’t even be thinking about extending its reachuntil it proves it can grasp what it has now and discharge those dutiescompetently. From where my clients stand, you have a long way to go.
Contributing to a campaign that will expand its authority, while 30% ofthe artists it already has money for remain unpaid, is not onlyillegal, it is presumptuous and the height of arrogance.Sincerely,
Fred Wilhelms
(via p2pnet; image from p2pnet)*
