Vol. 12, No. 2,856W - The American Reporter - March 18, 2006

by Joe Shea
American Reporter Correspondent
Hollywood, Calif.

LOS ANGELES, August 15, 2001 -- Final arguments are due today in Los Ang= eles County Superior Court after a two-day hearing on accounting methods us= ed by the Walt Disney Co. to calculate Winnie The Pooh royalties paid to th= e heirs of "Red Ryder" producer Stephen A. Slesinger.

The Hollywood producer of movies and serials purchased U.S. and Canadia= n merchandise rights to the popular children's character from English autho= r A.A. Milne in 1929, and his widow licensed them to Walt Disney, Jr. in 19= 61.

Judge Ernest Hiroshige ruled in May that under terms of the contract, S= lesinger's heirs may sever their relationship with Disney if charges of fra= ud and beach of contract against the entertainment giant are proved. Testi= mony Tuesday indicated that Pooh has earned more than $10 billion in gross = revenues for Disney for character merchandise sales since 1998.

The heirs say Disney has cheated them of royalties by not reporting sale= s of Pooh merchandise to foreign licensees for years, and by not paying any= thing on other items they say were covered in their contract with Disney. A= Disney lawyer said yesterday that the Slesingers are not owed anything.

= The case has pitted two of the nation's best-known lawyers, Hollywood attor= ney Bert Fields for the heirs and O.J. Simpson figure Daniel Petrocelli for= Disney, against each other in a battle that Fields says could cost Disney = "hundreds of millions" in years to come. That figure would be formed by new= payments to Slesinger on disputed items including video and computer softw= are that Disney stopped paying for in the 1980s, shortly before those items= began experiencing meteoric growth.

The undisputed items in today's hearing, while important in determinin= g how other royalties due Slesinger may be compensated in the future, repre= sent just a tiny fraction of all the royalty payments that are at issue in = the case. A jury trial is expected to begin in February or March.

Slesinger's widow, Shirley Slesinger Lasswell, was in court for the seco= nd time today. Now in her 80s, she was widowed again in March, and lost he= r only sister in June. She declined to talk to the press today, but yester= day charged Disney with "absolute piracy" in its treatment of royalties due= the heirs on Disney's billions of dollars of revenues from Pooh toys and p= roducts. She filed suit in 1991 and Disney has significantly increased its = payments to the heirs since then.

The hearing is expected to yield at least a tentative ruling on Friday, = Disney corporate communications director Michelle Bergman said late Tuesday= . Whatever it is, both sides agree, a blizzard of motions and briefs will= follow.

For the second day, an accountant and an "accounting referee" appointed = in 1995 by Judge Ernest Hiroshige at Disney's request testified that they t= hought the accounting audit of payments for 1988 and 1994, which were thoug= ht to serve as two representative years of the lengthy contract, had produc= ed a "fair" result.

But in cross-examination by Fields, accounting referee John J. Costello= admitted he had served as outside counsel to the accounting firm of Gursey= , Schneider & Co. before he recommended them to Judge Hiroshige as the fore= nsic accountants in the complex case. After the hearing, Petrocelli rejected suggestions that the relationship = constituted a conflict of interest. Costello said the outside counsel posi= tion with the Gursey, Schneider firm was the only such contract he had.

P= etrocelli had seemed to make substantial inroads in the Slesinger case Mond= ay when he called forensic accountant Michael Miskei of Gursey, Schneider &= Co, and led him through a series of questions that undermined some of Misk= ei's testimony in a declaration earlier in the case. In his testimony, Miskei cast doubt on claims by Slesinger that its priva= te CPA, Steven Sills, had been "frozen out" of key decisions on the audit.=

Under cross-examination by Fields on Tuesday, however, Miskei said he ha= d no objections to Sills' presence during the audit at Disney's offices, an= d Costello testified that Disney officials -- allegedly concerned about oth= er clients Sills represented with claims against Disney -- "weren't going t= o let Mr. Sills look at unredacted information."

"They wouldn't let him in the door," Costello testified.

Miskei said Sills was permitted to examine "work papers" after they were= prepared by Miskei's team and transported to Gursey, Schneider & Co,'s off= ices.

Disney Objection Overruled

In another development, Petrocelli was overruled by Hiroshige after he o= ffered strong objections to testimony by Miskei on the topic of $100 millio= n in large one-time errors discovered by his team that were considered eith= er outside the scope of the audit or easily redressed, and were therefore n= ot included as part of the basis for an "error rate" that is soon to be "ex= trapolated" to determine how much, if anything, Disney should pay Slesinger= as back royalties on the renegotiated licensing contract since 1983.

Among those errors were three discovered during the 1994 audit that Disn= ey copncedes totaled $100 million. Disney eventually made a "catch up" pay= ment of $619,000 to Slesinger to correct those errors, but Miskei said audi= tors did not include them in formulating an error rate.

That led Judge Hiroshige to question Miskei directly about the exclude= d amounts, which he conceded would increase the error rate significantly. H= iroshige's questions won an admission from Miskei that there are no standar= d or generally accepted accounting principles that could be applied to the = circumstances of the Disney case.

"Yes, we're in uncharted areas. An audit like this or an examination l= ike this just doesn't have the kinds of rules, regulations and formats that= would allow you to know what to do under these circumstances," Miskei told= The American Reporter after the hearing.

Some of Tuesday afternoon's testimony touched on "black binders' prepa= red by the Big 4 accounting firm of Deloitte Touche, hired by Slesinger to = study Disney's royalty payments before the court-appointed audit. Those bin= ders contained hundreds of instances, Miskei noted, where apparent errors d= iscovered by Deloitte Touche were resolved during Miskei's audit by explana= tions from Disney personnel. Costello echoed Miskei on that point, noting = that "six inches" of Deloitte Touche error reports were reduced to "four pa= ges" by Disney's explanations.

Yet the absence of many records and the studio's arcane accounting pra= ctices did not prove so baffling to auditors hired by Disney, who produced = an error report for recent years that shows a miniscule error rate in payme= nts. Fields said he was not shown that report until the hearing began this= week.

Fields said he believes, but Disney does not, that Judge Hirsoshi= ge can rule "de novo" -- a legal term meaning "like new" -- on whether or n= ot the excluded amounts must be included in the error rate applied to all t= he years of the contract.

Hiroshige ruled late last year that the absence of many records that wo= uld have helped auditors was due to Disney's "willful destruction" of 40 bo= xes of Pooh-related legal and other documents. Disney's law firm, Skadden,= Arps, quit the case after the ruling when it became apparent that they mig= ht have to testify against Disney on the document destruction issue. Disny= was made subject to sanctions during the jury trial by the ruling.

And in a recent ruling allowing Slesinger to file a third amended compla= int, Hiroshige noted that despite Disney's arguments the case was not about= minor accounting errors "but breach of contract and fraud" that could allo= w Slesinger to end its 40-year relationship with Disney and seek another li= censee for Pooh products.

Fields said after Tuesday's hearing that Winnie The Pooh makes more mo= ney for Disney than any other character, including Mickey Mouse and Donald = Duck, and accounts for about 25 percent of all character merchandise manufa= ctured and sold by Disney's far-flung operations.

Fields said in court that Disney chairman Michael Eisner told the O= range County Register in 1998 that Pooh sales in 1997 were $3.3 billion= . The same year, Disney analysts estimated sales of Pooh merchandise wou= ld reach $6.1 billion in 2001. Pooh sales were $4.3 billion in 1999, Field= s said as he cross-examined Miskei.

Copyright 2006 Joe Shea The American Reporter. All Rights Reserved.

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