Cookie Synchronization: Everything You Always Wanted to Know But Were Afraid to Ask

[This is a deep dive in an academic paper on some of the manipulations of your privacy data that  the Data Lords engage in routinely.]

User data is the primary input of digital advertising, fueling the free Internet as we know it. As a result, web companies invest a lot in elaborate tracking mechanisms to acquire user data that can sell to data markets and advertisers. However, with same-origin policy, and cookies as a primary identification mechanism on the web, each tracker knows the same user with a different ID. To mitigate this, Cookie Synchronization (CSync) came to the rescue, facilitating an information sharing channel between third parties that may or not have direct access to the website the user visits. In the background, with CSync, they merge user data they own, but also reconstruct a user’s browsing history, bypassing the same origin policy.

In this paper, we perform a first to our knowledge in-depth study of CSync in the wild, using a year-long weblog from 850 real mobile users. Through our study, we aim to understand the characteristics of the CSync protocol and the impact it has on web users’ privacy.

Read the post on ArxIV

The Two Years War: Google’s Polish Footprint Behind Poland’s Lawfare Against Artists over EU Copyright Directive

Poland has the distinction of being the first country to tip Google’s lawfare strategy against the Copyright Directive–sue to have the whole thing overturned by Court of Justice of the European Union, the “CJEU.”  The CJEU has, among other things, the jurisdiction to  hear an “action for annulment” filed by a EU government like NATO member Poland.

So who is in Google’s Polish footprint?  According to the Google Transparency Project, we find a few revolving door people.  Want to bet one of them knows how Poland came to file their case so soon?

Sylwia Giepmans-Stepien:  Former Junior Officer in Poland Ministry of the Economy

Google Poland 1

Marta Kokoszka: Project Manager, Polish Information and Foreign Investment Agency

Google Poland 2

Marcin Olender, Head of European Union and International Affairs Unit, Polish Ministry of Administration and Digitization

Google Poland 3

Big Door Keeps on Turning: Recent Departure from Google to (where else) Uber: Agata Waclawik-Wejman

Google 4

But it’s not just the old revolving door.  Google has made a substantial investment in Europe, but in particular at the University of Warsaw.

Google Europe

The Google Transparency Project describes Google’s investment in the University of Warsaw:

In early 2014, according to domain registration records, Google expanded its academic relationships in Europe further East, creating the Digital Economy Lab (DELab) at the University of Warsaw.

The program is described as an interdisciplinary institute funded by Google for the implementation of programs concerning the social, economic and cultural consequences of technology.

There is little public information about the extent of the partnership, or the amount of Google’s funding. However, the DELab website does offer some clues.

DELab’s director, Katarzyna Śledziewska, has a distinguished career in European policy and academic circles.  She also serves as a member of another Google-funded initiative, the Readie-Europe Research Alliance for a Digital Economy….

Stay tuned, this case may turn out to be an excellent vehicle to find out more about the extent of Google’s investments.

 

Guest Post by Hattie Webb: The day I broke into the PledgeMusic office (@hrdwebb)

hattie webb

I did something relatively gutsy and not entirely unprovoked, I broke into the offices of PledgeMusic.

On the evening of Friday 1st February 2019 I saw artists posting online that PledgeMusic was in financial trouble. A shock of adrenaline surged through me. For 20 months PledgeMusic had been stalling paying me £5.4K, the final instalment of the money I had raised on the PledgeMusic site to pay for the making and release of my first solo album ‘To The Bone’. PledgeMusic received 3.1K in commission of the total 17.3K of income of pre-orders. (The campaign commenced in December 2015.)

On Monday 4th of February, with a fire in my belly and after no response from the phone lines at PledgeMusic, I looked up their office address, took the train to central London and went for the first time to the PledgeMusic offices in Soho (a very beautiful office I might add). When I was told by reception that the office would not receive anyone, I asked where the toilets were. I then walked past the toilets, hiked up the stairs, opened the office door and plonked myself down on the communal sofa.

A PledgeMusic associate approached me and I said I would not leave until I could speak with the director.

I waited. Malcolm Dunbar was on the phone in the main boardroom, I could see him through the glass wall. There were about ten people working at their computers across the office space. The environment looked buoyant. I had a moment thinking, “maybe this crisis is not as bad as we thought?”. My hopes were short lived. Malcolm signed off on his phone call and ushered me in.

I said because no one will reply to me, I have had to come to them. I demanded they transfer payment or I would not leave the premises.

After 20 months of having faith in their explanations, after my many phone calls and zillions of emails sent since my campaign completed in June 2017, I needed to see action.

One might ask why I had not seen the red flags sooner. I’m a little ashamed to admit, it was mainly because of the calibre of the other artists that chose to work with PledgeMusic, artists I admired immensely. These artists had chosen this new creative home, leaving their previous old music business model abodes, to great success. How current it is in todays climate, that credibility can be so blinding it shrouds the real truth. I was gullible as to what the real reasons were for these extensive delays.

These are some of the many explanations I had previously received:

“at the moment finance are going through some procedural changes and they’ve got a slight backlog in payments”…”we’ve been experiencing delays due to PayPal terminating us using them as our payment provider” …”a backlog exists, and the process is manual because it’s been forced that way by the hand we’ve been dealt” …“we now work with a far inferior back up payment provider” …”it’s where we’re at and we’re doing our very best to catch up” …”the knock on effect has been more impactful than we ever imagined it would be” …”I’m very very sorry to hear you’ve still not received this payment. I did request it back when we last spoke and am trying to find out why that wasn’t paid” … “I understand this is in no way helpful to you right now, but it’s where we’re at and we’re doing our very best to catch up.” …”I’m planning another payment this week against the balance owed and we’ll get the full balance up to date in early Jan 2019.”

The list goes on.

I said, I feel like an idiot for believing it all. Not once were the real reasons mentioned.

I spoke with Malcolm for over an hour and part way through, Paul Barton joined. They said that there was no way they can pay me until new potential partners come on board as New York has stopped all accounting.

I asked to speak with New York.

Malcolm called the new financial director Jim on his mobile phone in New York (who had apparently been with Pledge for a month) and passed on the phone to me. I asked for an explanation as to why we all haven’t been paid. Jim suggested that I get a lawyer to write to PledgeMusic to ‘stake my claim’. I said, I may have been previously naive, but spending another few hundred pounds to pay a lawyer to send a letter to sit at the bottom of an ever increasing pile was not something I intended to do.

I said I have actually been an ally and champion of PledgeMusic because of what they previously stood for. Their mission statement being that “PledgeMusic is dedicated to bringing innovative artists and passionate fans closer together than anywhere else…by giving artists a platform.” I know many extraordinary artists who haven’t had support from labels, who have taken the bull by the horns and with their bare hands, created, funded and released incredible albums with the support and platform of PledgeMusic.

I told them that eventually I had to get a loan for the amount of money owed to me by PledgeMusic to pay my team, print my cds, merch and to post them all out. I said that I only hope that this can be brought to a righteous place. That we all receive our rightful payments, raised with blood sweat and tears (truly) and to restore the belief that bands and fans had in them. That the level of transparency in their communications, particularly now in a challenging time, will shape how each of them individually and as a team are seen in this industry and in the world. How important is your word and code of honourability in life? To me, it is everything.

Paul said that the reason they have stopped answering my messages is that they had run out of things to say. I said there’s always something to say, even if it is to take responsibility for their current position and reiterate their intentions. I also said that when the public statement was sent out to press on Friday, how much it would have meant to all who had signed up with them, to have received an email illuminating us about the situation, versus us randomly reading about it online. I think we deserved that level of consideration. Surely there was one person in that office that could have been allocated that essential task? Or were the artists still a thing very low on the list of importance when it came to their music business model? This certainly didn’t fit their mission statement.

Malcolm and Paul said that it has been horrendous for them too, they looked deeply disheartened that so many artists are going through this and said that they personally have received a lot of abuse. I am sorry for this, no one should have to put up with abuse, but I truly believe that with more transparency, it could have been avoided.

They told me about their plans to have new investors and pay everyone by April. I asked directly…at this point, why would anyone have faith in their company name even if they do get bailed out? They said it would be the same platform with a complete rebrand. Plus that the artist’s money would never actually go to the PledgeMusic bank account, only the commission.

But it wasn’t enough for me without an explanation. I asked them how long the financial crisis has been going on at PledgeMusic? They said over a year. I asked them why they have prime real estate in the center of Covent Garden London as their offices (next to the very elegant private members club, ‘The Hospital Club’), particularly throughout the time they’ve been in financial trouble and whilst they are avoiding paying artists? I said this is not a good use of the money! I asked if there were some offices in Croydon or Staines, out in the suburbs they could have moved to? I didn’t mean to be condescending. We as artists had not been part of the conversation with how our money was spent. They both agreed and said those decisions came from New York.

They also said that the whole finance team had been fired due to disastrous and disorganised accounting.

Shockingly, they said that many of the PledgeMusic employees had been asked to max out their personal credit cards to help the cash flow.

They said that they had been financially sunk by the USA division of the company. Wrecked by the rebranding costs and an outrageous ambitiousness to compete with Spotify. Who really knows where the money went, but the money was gone.

I asked why someone hadn’t flagged this up sooner and reigned in spending money on fluff? Was this a trailblazing music industry model or just the same scenario swaddled up in community soaked language?

For someone like me who has also been through the sometimes deeply disheartening sausage factory of being signed to a major label, someone who has been financially and emotionally rogered by both major artist management and my own personal management, I’m sorry to say, I believed it. (I say all of this knowing I have been very lucky with the chances I have been given too, believe me.)

I laid it out that if they don’t reply to emails and now that their phone line is down, how can I trust their word that they will communicate with us moving forward? I have had the wool pulled for too long. What will happen if I walk out of this office, will I ever hear back from them again? They gave me both of their private mobile phone numbers.

When I left that day, I noticed their plastic ‘PledgeMusic heart-logo placard’ on the side table in their office. As I stepped outside onto the Soho street, there was a dark shadow where it had once been positioned on the outside main wall. It was an odd feeling, as if they didn’t want it to be known they were still there in residence.

(Side note: that night, I went to see Steve Ferrone play at the 606 with Hamish Stuart, it seriously kicked butt and was a welcome and joyful distraction.)

(Second side note: In December 2018 I did receive 1.5K of the amount owed, perhaps after my increasingly pressurising emails.)

Mostly, after the initial shock, at this point I feel sad to think of all the music, of the artists and their lives that have been detrimentally affected by PledgeMusic’s actions or lack there of. I know business is not a straight line, but for many, this situation is hugely more difficult than the shabby hand I have been served. Because my release was back in 2017, I was able to honour every one of the 524 orders of my album and merchandise that friends and followers had purchased, pre-investing in my album, before this shutdown.

Not everyone has had the chance for their work to see the light of day because PledgeMusic has a claim on it. There are also many people who have made purchases directly with PledgeMusic and haven’t received any merch. Most have had no response from PledgeMusic about the return of their money.

I am eternally grateful for those that invested and travelled with me on the journey of creating and releasing my record and for the extraordinary team of sound engineers, artists and collaborators I worked with. I had the time of my life making it.

I do feel heavy hearted that many artists with so much to contribute to this crazy world, have had a previously effective grass roots route destroyed. The connective tissue between creating and having the support to send that out into the world is an essential part of being an artist, there is a circular nature to it. The ability and freedom to fund and create has been savagely shredded by big business greed and a continuing lack of respect for the very artists that make it possible for the business side to exist. Not a new music business model as advertised.

Since all of this has happened, a community has been forming of artists affected in the fallout. For this I am also grateful.

At the heart of the matter, the passion at the core of creativity shall never be diminished! We are immensely blessed to have the freedom to express our truth in whatever form we feel, that is ever powerful.

As my friend Francesco Mastromatteo said “We work with something we can not see and we can never possess. Sound is simply always free and has an endless value”.

On Friday, I read that the sale had fallen through and that bankruptcy was inevitable for PledgeMusic. I read ‘the sale of which would be used to pay artists’. I immediately texted Paul and Malcolm to find out how these so called ‘remaining assets’ will be divided. Is it not the righteous decision at this final stage, to communicate directly with the artists with what will happen moving forward?

I have not heard back since.

[We’re honored that Hattie gave us permission to post her account of her personal experience with PledgeMusic.  You can find Hattie at HattieWebbMusic.com and her Twitter is @hrdwebb. Reading Hattie’s account is enough to make you stand up and salute as she banishes the ennui of learned helplessness to the dustbin of history.  I recall a Leonard Cohen lyric from “Everybody Knows” that could apply to the music business as a whole, more so with each passing day:

“Everybody knows that that boat is leaking, everybody knows that the captain lied….”]

@CMU Confirms: The Arlen Case Proves Again that On the Internet, It’s Always Someone Else’s Fault

DOROTHY

If you were really great and powerful you’d keep your promises!

from The Wizard of Oz, written by Noel Langley & Florence Ryerson and Edgar Allan Woolf, adapted from the book by L. Frank Baum

In an interesting twist, Complete Music Update has actually criticized songwriters when Spotify wasn’t sued.  (Or at least wasn’t sued yet.)  Yes, it’s true; sometimes man really does bite dog.  In that post about the recent case of SA Music LLC and Harold Arlen Trust LLC v. Apple, Inc., Amazon.com, Inc. and others, CMU may be demonstrating exactly what their motivation was behind attacking music publishers in their most reason consulting pitch.

Harold Arlen was a very successful songwriter, probably most famous for Somewhere Over the Rainbow from The Wizard of Oz.  (That song is not included in the lawsuit, probably because the studio owns the copyright.)

The Arlen case turns on a fundamental point:  The government won’t save you with a compulsory license for the reproduction of a sound recording if you didn’t have the rights in sound recording in the first place.  Simple, simple stuff.

But as it turns out, some of the services including CMU’s beloved Spotify, did get a fake license for at least some of Mr. Arlen’s songs at issue by sending an address unknown notification to the Copyright Office claiming that the Copyright Office records did not identify the owner of the song copyright.  (A complex process spelled out here.)

And the Arlen plaintiffs provide a handy guide to finding the song copyright owner in the Copyright Office records in an exhibit to their complaint that lists the copyright registration numbers for their works.

You know–the kind of information you would find if you actually looked up the works concerned as is required to get the address unknown fake compulsory license and which each service represented that they did when the filed a notice.  (Apple never filed these notices.)

Take Stormy Weather, for example, one of the classic Arlen songs.   A quick search of the handy SX Works NOI Lookup database reveals that both Google and Spotify filed “address unknown” NOIs for the song.

Stormy Weather

And yet–here it is in the Arlen complaint, along with that pesky copyright registration number:

Stormy Weather Complaint

The presence of the copyright registration number shows that Mr. Arlen was in the Copyright Office public records and the format of the number shows that the registration was filed before 1978 for a published work.

And let’s make a side bet that you can rinse and repeat for each song in the complaint–all of them will be subject to an address unknown filing and all of them will have been registered.  Which means that whoever was filing the address unknown NOIs on the Copyright Office didn’t bother to look–and it also means that all of those improperly filed NOIs are invalid, and that’s before you even get to the question of whether the sound recordings were properly licensed.  (And because invalid, neither group is subject to the new MMA safe harbor.)

How could that be you say?  These are the cognoscenti of the modern world at Google, Amazon, Spotify, et al.  How could they have made this boneheaded mistake?

And although it’s not part of the lawsuit currently being heard before Judge John F. Walter in the California Central District, Mr. Arlen’s classic Somewhere Over the Rainbow from The Wizard of Oz also was too difficult for some services to findthey sent in address unknown NOIs on that song, too.

Somewhere Over the Rainbow

There’s actually quite a simple answer that may explain why the services made these mistakes.  The Copyright Office online lookup only covers registrations after January 1, 1978.  Registrations before 1978–you know, the core of American popular music and the bulk if not all of Mr. Arlen’s catalog–pretty much require a manual lookup.  Which means that the Reading Room of the Copyright Office would have been a very, very busy place for a while there with gnomes from the services or their licensing companies looking up pre-78 copyright registrations to identify the copyright owner.  Or they could just have relied on the licensing services that Amazon and Spotify used to do their clearance work, both of whom bray about the breadth of their respective databases.

Or you could just lie when you represent on your NOI filing that you have searched the Copyright Office records but were unable to locate the copyright owner.  These filers attest that they have looked for the copyright owner in the Copyright Office public records as required in the filing instructions:

In the case where the Notice will be filed with the Copyright Office pursuant to paragraph (f)(3) of this section, the Notice shall include an affirmative statement that with respect to the nondramatic musical work named in the Notice of Intention, the registration records or other public records of the Copyright Office have been searched and found not to identify the name and address of the copyright owner of such work.

This language is fixed in the government spreadsheet template for each NOI served on the Copyright Office.   Each service filing the NOI has marked “YES” in that column for each song in the notice.

Why is this a problem?  Just ask Martha Stewart what happens when you make a false statement to the government.

It has long been my contention that the services violated the law on a massive scale but no one seems too interested in finding out.  Mr. Arlen’s lawsuit or one like it may provide just the vehicle to find out where the fault lies for these apparently false filings.

And guess what–the new Music Modernization Act safe harbor won’t protect the services on this one, CMU’s whinging notwithstanding.  This is not a failing of the licensing system, this is the desire of the services to Do The Wrong Thing correctly.  It is a failure that highlights why whichever candidate is designated as the MLC should have new blood and not keep recycling the old.

CMU tells us:

Nearly all the streaming services have been sued at some point in recent years in the US for failing to pay all of the mechanical royalties that are due on the songs they are streaming. In most cases, this failure to pay was mainly the result of the woefully inadequate licensing system operated by the American music publishing sector.

Actually the failure to pay was mainly the result of failing…to…pay.  Ahem.

Technically a compulsory licence covers the mechanical rights in songs Stateside, so that the streaming services don’t need bespoke licences from each writer or publisher. [Not just “technically”…actually.]  However, they do need to send notices and payments to each rights owners of each song streamed for the compulsory licence to apply.

Because the streaming services don’t generally know what specific songs are contained in the recordings labels pump into their platforms – let alone who owns the rights in those songs – in some cases notices and payments were not sent.

“Some cases”?  Does 25% of the repertoire count as “some”?  Do tens of millions of “address unknown” NOIs count as “some”?

What the Arlen case helps us understand is that the services or their clearance companies sent address unknown NOIs on songs where the address clearly was known.  It also provides at least circumstantial evidence that the services may never have tried to identify the song copyright owner in the public records of the Copyright Office, even in cases where they knew the title of the song and the name of the songwriter and where the songs were classics that were very well known to music fans.

It also demonstrates that nobody was minding the store on the either the song side or the sound recording side of these services in their mad dash to get big fast and line their pockets while deflecting attention away from their own culpability.  And when something misfires as much as song licensing has–where services are not even using the available tools correctly–it definitely gives the lie to the licensing system being “woefully inadequate” because you can’t find what you don’t look for.

I think that the truth that Howard Arlen’s lawsuit may uncover is that we should disregard the iconic image that the media has created of Big Tech.  Once it became apparent that independent songwriters like David Lowery and Melissa Ferrick were prepared to sue to enforce their rights, things got out of hand and it was pretty clear from the way this was handled that these guys were just not that bright.

But pay no attention to the man behind the curtain because on the Internet it’s always someone else’s fault.

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?

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.

 

@digitalmusicnws: Sony/ATV Ex-Chairman Marty Bandier: ‘I’ve Never Gotten a Call from [Spotify CEO] Daniel Ek’

[More insightful commentary by a senior publisher.  I can tell you that Marty did not move from a little office on Sunset Boulevard to where he is now by spending money on overhead.  It’s simple: if you earn, you spend, but if you can’t manage to earn, then don’t spend.  And if you don’t earn, don’t blame the songwriters–they just provide you with your main product, they don’t run your operation.  But the real reason Ek should have taken the avuncular Bandier to lunch is that he might have actually learned something about life from the seasoned publisher.  Just sayin’.]

Why didn’t Spotify CEO Daniel Ek reach out to music publishing’s biggest exec — even once?

Earlier this week, Sony/ATV Music Publishing’s former Chairman & CEO, Marty Bandier, revealed the strange fact, part of a broader slam against the streaming giant.  “Some people within Spotify have called me and sort of off-the-record apologized,” Bandier recently told students at his namesake Bandier Program at Syracuse University, referring the Spotify’s controversial challenge of publisher royalty rate increases by the U.S. Copyright Royalty Board….

…Spotify is now a public company. They have to figure out how to make money, but maybe they should start in their own house and figure out how to save money in general overhead instead of the royalties they pay out.

“If I ran a business and had that type of overhead I would have been fired a long time ago. You just can’t do that and expect to be successful.”

Read the post on Digital Music News