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July 25, 2005

Sony Payola Settlement -- Or, If You Don't Do Compliance, the Government Will

New York State Attorney General Eliot Spitzer just settled a payola case against Sony BMG Music Entertainment. (According to a New York Times article, the other three major music companies -- Vivendi, EMI, and Warner -- are in for similar treatment.) Sony was accused of making payments for radio stations to give preferential play list treatment to its artists, which violates federal and state law. Sony apparently disguised these payments as promotional expenses. For example, give the station’s music director an iPod or big screen television as payola, but disguise it as a promotional item for a station call-in contest.  The NY AG's press release describes the conduct as follows:

"Our investigation shows that, contrary to listener expectations that songs are selected for airplay based on artistic merit and popularity, air time is often determined by undisclosed payoffs to radio stations and their employees," Spitzer said. "This agreement is a model for breaking the pervasive influence of bribes in the industry."

After receiving tips from industry insiders, Spitzer's office conducted a year-long investigation and determined that SONY BMG and its record labels had offered a series of inducements to radio stations and their employees to obtain airplay for the recordings by the company's artists.

The inducements for airplay, also known as "payola," took several forms:

• Outright bribes to radio programmers, including expensive vacation packages, electronics and other valuable items;

• Contest giveaways for stations' listening audiences;

• Payments to radio stations to cover operational expenses;

• Retention of middlemen, known as independent promoters, as conduits for illegal payments to radio stations;

Payment for "spin programs," airplay under the guise of advertising.

Of course, given that such payments were illegal, one must assume that Sony had a policy prohibiting the payments. So, the problem appears to be a serious breakdown in (or lack of) internal controls that assure compliance. Indeed, the settlement agreement requires Sony to implement policies, training, documentation (to be kept for five years), monitoring, reporting (including a hotline), and auditing measures that cover virtually all of Sony’s music promotion activities. These measures include a massive, searchable database that collects information on Sony’s promotional activities with radio stations. Further, Sony must appoint a Compliance Officer (acceptable to the NY AG’s office) to oversee the design, implementation, and operation of the required promotions compliance measures. And for five years, the CO must make annual reports on the status of the compliance program to Sony’s board as well as the NY AG’s office.

As with deferred prosecution and other settlement agreements, the Sony settlement does not impose unfamiliar compliance requirements. All of the elements appear in the organizational sentencing guidelines. The big deal here is that the government takes an active role in the who, what, and when of the program. The settlement has timetables for Sony to meet, removing timing from Sony’s full discretion. The NY AG plays a role in choosing the Compliance Officer. Also, scheduled reporting on the compliance program will be made to the government. The lesson once again is that an organization’s failure to do compliance on its own terms in a timely manner may mean that compliance will ultimately be done on the government’s terms.

July 25, 2005 in Cases, Compliance in the News, Enforcement Actions, Monitoring, Auditing, and Evaluating, Training | Permalink

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» Sony Payola Settlement from White Collar Crime Prof Blog
Paul McGreal on the Corporate Compliance Prof Blog has an excellent post (here) on the settlement that Sony reached with the New York Attorney General's office regarding payola -- one of my all-time favorite made-up words. In a practice as [Read More]

Tracked on Jul 26, 2005 5:42:40 AM