DISNEY ASKS NEW AUDIT OF POOH ROYALTIES
by Joe Shea
American Reporter Correspondent
August 17, 2001
LOS ANGELES, August 17, 2001 -- The Walt Disney Co., apparently stung by=
charges that accounting chicanery helped it conceal about $100 million in = revenues from one of its most significant royalty participants, asked Los A= ngeles Superior Court Judge Ernest Hiroshige Thursday to approve a new "hig= h level audit" of its Winnie The Pooh payments after an $800,000, 5,000-hou= r audit turned up little in the way of new royalties owed.
The move came after well-known Hollywood attorney Bert Fields, appearing= for Stephen Slesinger Inc., attacked a court-ordered audit of two six-mont= h periods in 1988 and 1994 that he said failed to include errors in payment= s from domestic licensing, Disney theme parks and the Walt Disney Stores. = The missing payments were not discovered by the audit but were due for the = periods covered by it and other years.
"They want to take higher error rates [from] when the business was new a= nd formative," Disney attorney Daniel Petrocelli of O'Melveny & Myers argue= d Thursday in asking for the new audit.
"I think [Judge Hiroshige] will order more [audit] work," Fields said af= ter the hearing, which opened Monday and was scheduled for two days, wound = up late Thursday afternoon. Fields and his firm, Greenberg, Glusker, Field= s, Claman, Machtinger & Kinsella, won a settlement of more than $300 millio= n for former Disney president Jeffrey Katzenberg last year.
Fields said the Slesinger heirs would be "thrilled" to have a new audi= t if their accountants were allowed to participate in the process, but Petr= ocelli ruled that out.
"These people are suing us," he said. "We don't want them going throu= gh our books." Under its contract, he conceded, Slesinger's heirs already = have the right to go through the books and perform an audit.
Disney doesn't dispute that it owed royalties to Slesinger, and it paid = out $619,000 in 1997 after a senior vice-president of Disney said in a depo= sition that the world's number two media conglomerate was obligated to pay = royalties on the higher of two revenue streams, one from domestic licensing= and the other from retail sales, and admitted that it had not done so for = 10 years of its 18-year contract.
Disney does not want the multimillion figures included as part of an err= or rate used to "extrapolate" the amount potentially due to Slesinger over = the entire term of the contract, which is still in force, because when appl= ied to the whole period it would produce "a bad result," said Disney's acco= unting expert, retired University of Utah accounting professor James Loebbe= cke.
Yet, said Petrocelli in his closing argument, "In our desire to finish a= nd resolve this, there is no quick fix." So, he said, Disney wants a new au= dit that would include the 1994-2001 period, in which it says 94 percent of= Pooh revenues it paid royalties on was earned.
Loebbecke said such an audit, using the same court-appointed accountan= ts as earlier, would take four people a month to complete and cost $100,000= . Judge Hiroshige is expected to rule on the request in September, after= a brief vacation.
Judge Hiroshige, apparently irked at the time it was taking, sharply r= eined in a Fields cross-examination of Loebbecke in the morning session, te= lling the veteran Hollywood superlawyer that he had to complete it in five = miuutes.
"If you haven't accomplished it by now, you're probably not going to," h= e said as Fields hammered away at claims by Loebbecke that he had written a= bout excluding large errors in a book he co-authored on statistical samplin= g for auditors. The judge ultimately agreed to take copies of a page and h= alf of the book and make his own decision in lieu of having it read aloud b= y Loebbecke and then examined by Fields.
Meanwhile, a dispute arose outside the courtroom when Walt Disney Co. di= rector of corporate communications Michelle Bergman rejected claims thatSte= phen Slesinger Inc. owns any rights other than merchandising.
"They don't get anything for movies, tv, DVD, VHS, computer software --= it is not part of their agreement," Bergman said.
But Slesinger family sources told The American Reporter Thursday night t= hat their contract covers "any and all uses" of Pooh and that their royalty= statements have shown Disney payments -- albeit very small ones -- for tel= evision and computer software for many years.
That issue is significant because Slesinger hopes to show at trial that = Disney has failed to pay royalties on areas that were covered by the contra= ct, including Pooh videocassettes and computer software. When those areas = are factored in, the revenues at issue for the year 2000 may be as high as = $5 billion, analysts say.
Currently, "The Book Of Pooh: Stories From The Heart" is the best-sell= ing video in America, according to a sample of national sales reports publi= shed by the authoritative Hoover's Online. Disney's total income from Pooh = is "proprietary," spokeswoman Michelle Bergman said Thursday.
Disney, who= se 2000 earnings topped $25 billion, would face the potential loss of Pooh = revenues -- about 25 percent of its annual revenue, stock analysts say -- i= f breach of contract or fraud allegations are proved at trial, Judge Hirosh= ige ruled in May. The ruling may still be under seal, as most records in t= he 10-year dispute are, but portions of it were reported earlier in The Ame= rican Reporter.
Disney also wanted all records sealed and the proceedin= gs made off-limits to the press in the Katzenberg case, but another Hollywo= od superlawyer, Pierce O'Donnelll, went to court pro bono and won an= open process.
But O'Donnell has already gone to the California Supreme Court on beha= lf of Los Angeles Daily Journal columnist Garry Abrams and other jou= rnalists, but failed in 1999 to get the records in the Slesinger case unsea= led. Disney already faces sanctions in the case for "willful destruction" = of 40 boxes of records in the case, including one lsited as "Winnie The Poo= h - Legal Problems."
Fields said again Thursday that the heirs of Stephen= Slesinger, the literary agent for Western writer Zane Grey who acquired th= e Pooh rights in 1929, would "probably" elect to bow out of the Disney cont= ract if the allegations are upheld next February or March, when the case is= expected to go to a trial by jury in Los Angeles.