@davidclowery: Pledge Music Fiasco is Weirder than You Think: Part I

[Editor Charlie sez:  What do the Panama Papers and Pledge Music have in common?  More than you might think….]

It seems to be a distraction, unintentional, but still a distraction from the fact Pledge Music’s  purportedmajority shareholder Joshua Sason, is the guy named first in the SEC complaint below.

(The other defendants Sharma and Salviola have an interesting history See here, here,  hereand  here. Also named is the fabulously named Zirk de Maison. He is also an interesting person: see here.)

Now this complaint doesn’t directly have anything to do with Pledge Music, but it is certainly part of the story.  The majority shareholder of a company running out of money gets an SEC complaint for what appears to be a fraud perpetrated by his other company? C’mon!  Anyone associated with Pledge pretending like it’s not part of the story? Well, that makes it part of the story.

If you read the complaint it alleges pretty crazy stuff. From the SEC press release that goes with the complaint:

“According to the SEC’s complaint, from approximately December 2012 to June 2013, microcap stock financier Magna Group, which was founded and owned by Joshua Sason, engaged in a scheme to acquire fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc. and then to convert those notes into shares of Lustros common stock. The defendants then sold the shares to unsuspecting retail investors, who did not know that the shares were fraudulently acquired and were being sold illegally. The defendants’ sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public.”

So this guy didn’t get charged because he forgot to file a form, or checked the wrong box. According to the SEC he is charged with violations usually associated with con men.  And according to the SEC he didn’t do it just once:

“The complaint also alleges that in November 2013, Magna Equities II, which was also wholly-owned by Sason, and Manuel, purchased another fake promissory note from Pallas Holdings. Magna Equities II and the note’s issuer, NewLead Holdings, Ltd., later agreed to retire the fake debt in exchange for shares of the issuer through a court-approved settlement agreement. To obtain approval of the settlement, Sason and Magna Equities II falsely swore to the court that the fake promissory note was a bona fide debt of NewLead. Kautilya “Tony” Sharma and Perian Salviola, who controlled Pallas Holdings, are alleged to also have participated in the scheme.”

It was shortly after this Sason reportedly invested 3 million in Pledge Music.

Read the post on The Trichordist

@crispinhunt: A Semi-Famous Musician Runs For Office in Brussels (Guest Column)

[Editor Charlie sez:  We should all be so lucky that Crispin Hunt should be seated as a Member of the European Parliament!]

Brexit leers menacingly across Europe, pregnant with risk. Populists are peddling their nostalgic fairytale about making Britain great again. The country is a global laughing stock. Is it time for Brit-pop to take on British populism?

I decided the answer was yes — so I’m taking a break from songwriting and trying my hand at wrong-righting. I’ve decided to run for European Parliament.

Read the post on Billboard

Another Loose End: PledgeMusic’s Non Profit Messaging But For Profit Motive

If you had to summarize the now bankrupt PledgeMusic’s public face, you might say that they were all about the greater good of artists rather than making money.  In other words, the company showed the world a kind of do-gooder public face commonly found in non-profits.  But always remember that Pledge was not a non-profit, they were a for-profit company.  And as the facts start to surface, they were apparently very much a for-profit company.

Reviewing the PledgeMusic documents filed with Company House in the UK (where private companies file certain documents) we find a debenture, or loan document, filed by PledgeMusic.com Limited as borrower and Sword, Rowe & Company as collateral agent.  We know what a borrower is.  A collateral agent is usually a lender which takes on administrative responsibilities for a loan syndicate.

Pledge Debenture

So I found that reference to be a little odd for a company that was scraping by on 15% of artist campaigns.  What was even stranger was the date of the loan:  February 12, 2019.

What was PledgeMusic doing borrowing money in February, mere weeks before it went into “administration” in the UK–roughly the equivalent of bankruptcy?  Who–besides the shylocks–would loan them money?

So who was in that loan syndicate?

facility agreement

PledgeMusic entities were both the borrower and a lender on the same loan, which by the look of the document was secured, which means whoever owns PledgeMusic SPV I, LLC was a secured creditor in PledgeMusic.com Limited and would at least arguably have a priority in bankruptcy.

Pledge SPV

The reference to “SPV” is very likely a company operating as a “special purpose vehicle” which is a way to shelter assets in the through-the-looking-glass bankruptcy rules.  As I understand it, SPVs can have a legal status as a subsidiary that makes its assets secure even if the parent goes bankrupt.  (There is, of course, the question  I don’t know the answer to of whether SPVs are recognized in UK insolvency law and administration.)

The debenture spells out that the lenders have a “first fixed charge” over assets of Pledgemusic.com Limited including a lot of bank accounts in both the US and the UK.  A “first fixed charge” looks to be something like a first position security interest, meaning that the lenders get their money back before anyone else.

Charged Accounts

This may be important if, as has been reported, Pledge failed to maintain a separate escrow account for the artists’ pledges and simply co-mingled all of Pledge’s money with the artists’ money.

But follow the next step:  By using the SPV method, it is possible that Pledge might try to extract the money from its own accounts to repay the loan that it made to itself (along with the other lenders in the syndicate) by foreclosing its security interest on its own bank accounts in which it co-mingled funds.

Bank Account Security.png

Of course, if the artists’ money was held in trust that the officers and directors breached, then the co-mingled funds didn’t belong to Pledge so couldn’t really be legitimately subject to a security interest as that portion of the funds shouldn’t be “standing to the credit of such accounts.”  And good luck sorting that one out.

Regardless of how all this turns out, the introduction of an SPV is a relatively sophisticated financing structure for a company like Pledge that leads one to think that someone was thinking about how all this would end up.  Whoever that someone was, they intended to be in the black and not in the red when the music stopped.

It seems like someone had a plan, and they had the plan because Pledge was very, very definitely a for profit effort.  I think that you really have to look at the entire situation skeptically until proven otherwise.  Because if they did not have a plan, then what explanation is there?

@digitalmusicnws: I’m a Former PledgeMusic Employee. Allow Me to Spill a Few Beans…

[Editor Charlie sez:  How do you say “ponzi”? “A&R and Campaign Managers were only told to “launch launch launch” new campaigns so that payments could be distributed to other projects. They very well knew that they were unable to pay artists, but needed to launch new campaigns in order to gain more revenue. Employees knew that this was not ethical, but at the end of the day had no choice. “

What really happened at PledgeMusic?

Here’s an email from a former employee, received earlier this week.  Last week, PledgeMusic announced its intentions to declare bankruptcy, while offering no assurances that unpaid artist balances — potentially in the millions — would be repaid.

As a former employee at PledgeMusic, I have information that is useful for anyone who is interested in knowing more details about what happened to the company.

1. Dominic Pandiscia is the one to investigate….

Read the post on Digital Music News

@LAUREN_FEINER: YouTube and its users face an existential threat from the EU’s new copyright directive

[Editor Charlie sez:  Let the FUD farming begin!  Google fires up the addiction tactics in Europe after its miserable anti-artist message was rejected by the European Parliament.  Read this article if you want to know what Google’s talking points will be in Europe.]

[Now here’s some objective journalism:  “EU member states still have two years to write the vague language of the directive into law, and YouTube is not done pushing back on it.”]

YouTube and other tech platforms have argued that the only practical way to avoid liability will be to install even more restrictive content filters than the ones they currently have to prevent infringement. The EU directive does not require tech companies to do that and it makes exceptions for using copyrighted material in parody or commentary, as would be the case in Jones and Bardsley’s reviews.

But experts say it will be difficult for platforms to create automated filters that can distinguish this context, at least at first. That could mean a channel like “NitPix” would have to avoid using any movie or TV clips in their reviews to ensure their videos upload to the site in a timely manner.

Read the post on CNBC

 

Where Was the Board? Some Thoughts on Potential Legal Issues in Pledge Music “Administration” Bankruptcy

We’ve had a lot of questions about what is going on with the Pledge Music crowdfunding platform which appears to be either on its way or already in a bankruptcy filing according to reports.  This post will be a few thoughts about the current situation which is evolving.  This is not intended as legal advice and if you’re involved in the Pledge situation you need your own lawyers and you need them right now.  Consult your local state bar association (in Texas, that would be www.texasbar.com)  Don’t ask me questions in the comments as I won’t be able to answer them, so I’m afraid this is a one-way communication.

If this is all news to you, that’s understandable because if you go to the company’s website, there’s no indication that anything is amiss, which I find to be just downright bizarre in and of itself.  Normally what one would expect is that there would be some conclusive message blazoned across the landing page, but there’s nothing.

There certainly would not be testimonial endorsements from artists who are blasting the company which arguably qualifies as false advertising even if the site as a whole does not.

Pledge Landing Page 5-11-19

This lack of communication is, unfortunately, fast becoming what I find to be the hallmark of Pledge Music’s waning days, days which have been waning for a long time now.  I’m not a bankruptcy expert but one thing I can say from experience is that companies typically do not get into bankruptcy overnight and the seeds of their destruction often go back many months if not years.  In fact, those seeds are often found in the basic business plan.  So don’t let nostalgia allow you to let anyone out of their responsibilities and don’t let anger cloud your judgement.  Easy for me to say, I know.

Which Kind of Bankruptcy

Bankruptcy in a common language sense comes in two flavors:  liquidation and reorganization.  In liquidation bankruptcy the company ceases operations, the company’s assets are sold off, the proceeds used to pay creditors (including employees in some cases), and that’s the end of it.

In reorganization, it’s literally what it sounds like.  The company intends to keep operating (often with the same management as incredible as that may sound) and it reorganizes its finances, pays off creditors as best it can, and then re-emerges on the other side with a new balance sheet and having dealt with (some might say shirked) its obligations.  iHeart is a prime example of how artists and songwriters get screwed in reorganization bankruptcy.

It would be nice if Pledge had at least made a clear statement about what its future intentions are–like you know, on its website–but I don’t think we know definitively today.  It sounds like they’re liquidating.  I saw a lot of that in the Dot Bomb era when “entrepreneurs” burned through the investors money, ran the company into the wall at 100 mph and then flipped the keys to the first bum on the street.  A bit harsh, but that’s essentially what was happening all the time in the Silicon Valley testing range.

The difference is that they did it with the investment from sophisticated investors.  It’s looking more and more like Pledge did it with the artists and fans’ money at least in part.

Creditors

Creditors also come in two flavors and this is important:  secured and unsecured.  An example of a secured creditor is a bank that lends money to the company.  It appears that Pledge had a loan from one Sword, Rowe & Co. that may be secured.  There may be others.  We don’t know, but based on open source materials, it appears to be at least one entity that could be a larger secured creditor.  If it’s this Sword Rowe & Co., they are based in New York and Nashville and specialize in music industry lending.  The Bloomberg profile on a Sword Rowe & Company appears to be the same company, and it is a successor to Sword & Company, a New Jersey based investment bank of long standing.

Secured creditors typically will be ahead of practically everyone in the bankruptcy pecking order, and sometimes can essentially wipe out any available assets.

Another attribute of a secured lender is that they typically have the benefit of loan applications and due diligence to have a good look at the financial condition of who they are lending to.  So in the “what did they know and when did they know it” race of the rats running for the door, we have to think that a sophisticated lender would know or should have known of the company’s financial condition whenever they made the loan.  Of course, investment banks sometimes have private equity arms, so it may not be the case that Sword is a secured lender.  It seems inconceivable, however, that they did not know what was going on with the company at some point.

When is a Creditor Not Creditor

The big difference–at least to me–between the kind of creditor relevant to bankruptcy and the artists whose fans pledged money is that the fan did not intend to give money to Pledge for its own use.  I think it’s fair to say that the fan paid money to Pledge to hold the money in trust, deducting solely the agreed 15% commission to Pledge, conditioned on Pledge fulfilling all of its obligations.  Given the reaction online so far, I think that the reality bears this out.  Like I said, I’m not a bankruptcy expert, but I don’t know of any rule that allows a company or its officers and directors to take money “pledged” to a third party and paid to the company in trust, spend it on themselves without authorization from anyone, and then declare bankruptcy to get out of paying it back.

There is, of course, the practical question of where the money comes from to pay the artists as originally intended, refund pledges to the fans who paid the money in the first place, and also refund all or part of any commissions taken by Pledge.  Not an easy answer, but this is why “what did they know and when did they know it” becomes an important question in my view.  If it turns out–and I can’t see how it couldn’t–that someone in a position of authority at the company like an officer or director, or perhaps even a secured creditor, knew that the money was improperly handled and spent–much less even co-mingled with the company’s own money–that person may have the responsibility to pay it back 100 cents on the dollar to either the artist or the fans.

This is one reason why you have directors and officers liability insurance.  That insurance arguably provides another pool of money (assuming Pledge had the insurance coverage).  Crimes are excluded, of course.  It’s worth asking if the coverage was in place (sometimes required by investors or lenders) and explore if one could make a claim against it in good faith.

On the other hand, bankruptcy can be a complex and confusing process that has its own set of rules, so artists and fans may wish to determine how they can perhaps argue in the alternative that they can claim creditor status if they initially take a position that they are not creditors.  That status issue likely would have to be ruled on by a court, so getting the issue in front of a judge quickly will likely be of critical importance.

This is a complex area, so if you’re involved you need to get to a lawyer quickly.

Credit Card Refunds

Fans may be able to pursue a refund through their bank or credit card company.  There are often limitations on how long a card holder can wait to make a claim for an improper charge, sometimes 90 days.  This may explain why one of the few public statements that Pledge made was to ask for 90 days to put its house in order.  By delaying any refund requests for 90 days, the company may have hoped to preclude anyone seeking a refund.

However, consumers might be able to successfully argue to their bank or credit card company that they did not know conclusively that their funds were being misused until the day that Pledge announced it was going into bankruptcy in the UK, which was last week.  One could argue that the clock to disallow the charge did not start running until that time as the company’s public statements indicated that they might ultimately fulfill their obligations to the fan (or “pledger”).

If it turns out that there was fraud involved, the credit card company may actually become your ally as they will have been duped as well.

Law Enforcement Agencies

The scope of this meltdown suggests that law enforcement agencies may at least investigate what happened.  It may turn out that there’s no criminal dimension to the situation, but I don’t think it can be ruled out at this point.

If Pledge violated state consumer protection laws, federal bank or wire transfer rules, mail fraud rules or other criminal statutes, this could be a 51 jurisdiction issue in the U.S. regardless of the choice of law provisions in a click through agreement.  I suspect that law enforcement agencies may be reviewing the situation now.

Artist Rights Groups

So far the only artist rights groups to jump in on the Pledge situation are UK Music and the UK Musicians Union.  I know the Musicians Union has been monitoring the Pledge situation for quite a while to their everlasting credit.

The silence is deafening.