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 Angeles Superior Court Judge Ernest Hiroshige Thursday to approve a new "high level audit" of its Winnie The Pooh payments after an $800,000, 5,000-hour 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-month periods in 1988 and 1994 that he said failed to include errors in payments 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 and formative," Disney attorney Daniel Petrocelli of O'Melveny & Myers argued Thursday in asking for the new audit.
"I think [Judge Hiroshige] will order more [audit] work," Fields said after the hearing, which opened Monday and was scheduled for two days, wound up late Thursday afternoon. Fields and his firm, Greenberg, Glusker, Fields, Claman, Machtinger & Kinsella, won a settlement of more than $300 million for former Disney president Jeffrey Katzenberg last year.
Fields said the Slesinger heirs would be "thrilled" to have a new audit if their accountants were allowed to participate in the process, but Petrocelli ruled that out.
"These people are suing us," he said. "We don't want them going through 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 deposition 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 error rate used to "extrapolate" the amount potentially due to Slesinger over the entire term of the contract, which is still in force, because when applied to the whole period it would produce "a bad result," said Disney's accounting expert, retired University of Utah accounting professor James Loebbecke.
Yet, said Petrocelli in his closing argument, "In our desire to finish and resolve this, there is no quick fix." So, he said, Disney wants a new audit 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 accountants 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 reined in a Fields cross-examination of Loebbecke in the morning session, telling 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," he said as Fields hammered away at claims by Loebbecke that he had written about excluding large errors in a book he co-authored on statistical sampling for auditors. The judge ultimately agreed to take copies of a page and half of the book and make his own decision in lieu of having it read aloud by Loebbecke and then examined by Fields.
Meanwhile, a dispute arose outside the courtroom when Walt Disney Co. director of corporate communications Michelle Bergman rejected claims that Stephen 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 that their contract covers "any and all uses" of Pooh and that their royalty statements have shown Disney payments -albeit very small ones - for television 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 contract, 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-selling video in America, according to a sample of national sales reports published by the authoritative Hoover's Online. Disney's total income from Pooh is "proprietary," spokeswoman Michelle Bergman said Thursday.
Disney, whose 2000 earnings topped $25 billion, would face the potential loss of Pooh revenues - about 25 percent of its annual revenue, stock analysts say - if breach of contract or fraud allegations are proved at trial, Judge Hiroshige ruled in May. The ruling may still be under seal, as most records in the 10-year dispute are, but portions of it were reported earlier in The American Reporter.
Disney also wanted all records sealed and the proceedings made off-limits to the press in the Katzenberg case, but another Hollywood 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 behalf of Los Angeles Daily Journal columnist Garry Abrams and other journalists, but failed in 1999 to get the records in the Slesinger case unsealed. Disney already faces sanctions in the case for "willful destruction" of 40 boxes of records in the case, including one listed as "Winnie The Pooh - Legal Problems." Fields said again Thursday that the heirs of Stephen Slesinger, the literary agent for Western writer Zane Grey who acquired the Pooh rights in 1929, would "probably" elect to bow out of the Disney contract if the allegations are upheld next February or March, when the case is expected to go to a trial by jury in Los Angeles.