1. Phantom stock credits and “clears.”
106. Trans World receives, typically in the mail or over the wire, phantom ‘stock credits’ as a form of promotional funds. As the Labels and Studios know full well, the ‘stock credit’ states that Trans World is entitled to return stock that Trans World never actually purchased.
107. Instead, Trans World receives CD/DVDs that are pressed or distributed in facilities that have no reasonable controls over the number of copies being pressed and distributed. The resulting copies – called “clears” – are duplicated in this way without any originating record or invoice. These copies are in fact bootleg or pirated copies, in violation of Federal copyright law. Labels and Studios know full well that such “clear” copies are pressed and distributed domestically to be used as phantom stock credits – and also that such “clear” copies are diverted to retailers worldwide through underworld channels to be used as gray market contraband. Yet the Labels and Studios willfully blind themselves to the fraud by refusing to exercise reasonable monitoring or control of the bootlegging.
108. Trans World then uses these phantom stock credits or “clears” under the direction and control of the Labels and Studios to report inflated revenues and/or profits, motivated by the Labels and Studios efforts defraud the public and to reduce royalties paid to artists.
109. 20% of the CD/DVDs in distribution are “clears.” Labels and Studios receive 20% of their total revenue from the worldwide gray market for bootleg copies.
2. Bid-rigging.
110. Labels and Studios also pay cash consideration for services provided to them by Trans World or its subsidiaries, including, but not limited to, signage, advertising, data technology, real estate leases, and corporate jets. However, the cash consideration paid by the Labels and Studios, as they well know, far exceeds the fair value of the service provided by the retailers, and the payments result from “bid-rigging” that precludes competitive bids. Labels and Studios are willfully blind to the absence of a reasonable bidding process to determine the fair value of such services.
3. Indirect kickbacks to related third-parties.
111. Labels and Studios also pay cash considerations as kickbacks to third-parties related to Trans World, purportedly in exchange for services including, but not limited to, signage, advertising, data technology, real estate leases, and corporate jets. However, as Labels and Studios well know, the related third-parties in turn pay cash consideration as kickbacks to Trans World, which fraudulently inflates Trans World’s financial position. Labels and Studios are willfully blind to Trans World’s close relationship to the third-parties that the Labels and Studios pay.
4. Indirect kickbacks to Clear Channel
112. Labels and Studios also pay cash considerations as kickbacks to Trans World, while directing and controlling Trans World in turn to pay kickbacks to Clear Channel, a major chain of radio stations, by inflating revenues of Clear Channel’s CDs sold at Trans World and by bid-rigging inflated promotional expenses that Trans World pays to Clear Channel. In return for the kickbacks, Clear Channel then provides airplay of Labels’ and Studios’ CD/DVDs but fails to disclose that Labels and Studios have paid cash consideration for the airplay, in violation of Federal payola laws. Labels and Studios are willfully blind to kickbacks paid by Trans World to Clear Channel.
113. New York Attorney General Eliot Spitzer has issued subpoenas to Labels and Studios, requesting documents and information relating to payment of cash consideration to Clear Channel, directly or indirectly.
114. As a result of this investigation, New York Attorney General Eliot Spitzer has found that such improper practices are “pervasive within the music industry.”
