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PledgeMusic Disclosures Would Bring Sunlight to Fans and Artists and @InsolvencyGovUK

August 6, 2019 Comments off

There appears to be some unusual statements regarding the unusual PledgeMusic liquidation bankruptcy currently underway in the UK involving at least one of the Pledge companies, PledgeMusic.com Limited.

In a nutshell, Mr. Benji Rogers (who is very quick to haul out the implied, ostensible or actual invisibility cloak of working on a “voluntary basis”) has posted and also told Variety:

Note: PledgeMusic cofounder Benji Rogers, who left the company in 2016 but returned on a voluntary basis earlier this year, contested that claim in a blog post last week: “Pledge pursued a range of sale options with a basic hierarchy to try to achieve the best outcome for the creditors,” it reads in part. “In order for an administration to be successful any sale would have needed to generate a minimum price and although we were in contact with several interested parties, ultimately none offered that price and so we were unfortunately unable to appoint an administrator. The final and least desired option was to place the company into liquidation which was done on the 31st of July.”

He has also said something similar in the linked Medium post:

The problem for those in Mr. Rogers neighborhood is that the company never made a public statement disclosing that liquidation was at least a plan and that the liquidation filing had already occurred as of June 13.  Why is that important?

A number of reasons, but let’s start with the lack of candor toward those whom I would call the coerced investors in Pledge, being (1) the fans who gave them money to hold for the artists in good faith, and (2) the artists who relied in good faith on Pledge to pay them that money.  The artists who themselves undertook obligations to vendors recommended by Pledge in good faith and (3) the vendors who agreed in good faith to undertake reciprocal obligations to perform based on the expectation of future payment by Pledge.  There are probably other categories of coerced investors as well.

Here is the required bankruptcy notice from the London Gazette, which is a newspaper of record for legal notices in the UK.

Pledge Windup

Let’s unpack what was in that notice.  One purpose of the publication is to inform the public of an upcoming hearing on whether Pledge should be allowed to wind up.  Since it was the company itself that was filing the petition, it’s pretty safe to say that the only people who might oppose it might be creditors.  Those creditors might show up in court and make various arguments against the petition (subject always to proof), such as anyone running a ponzi scheme should not be allowed to seek the legal protection of the courts, misuse of funds generally, self enrichment, the whole range of comments that one can find about Pledge with a quick review of social media.  Or it could be as simple as why allow a company to wind up that hasn’t filed pubic financials since 2016:

Pledge Companies House

As indicated by the arrow, this petition was published on July 17, nearly a month after it was filed with the court.

Pledge Windup Publication Date

The petition was “presented on 13 June 2019″:

Pledge Windup File Date

It was filed “on behalf of the directors of PledgeMusic.com Limited (the Petitioner)” presumably authorized by a board and shareholder vote at some time prior to June 13.

Pledge Windup Filed By

Often wind up petitions are filed by creditors, including relatively small creditors.–£750 or more.  When the debtor company itself elects to enter wind up, that may be at least an ostensibly legal tactic to get the benefit of any stays of litigation or other protections.

Mr. Rogers seems to be saying that the reason that Pledge filed for winding up is in case they could not find a buyer after months of looking, a buyer that would allow the company to enter administration (which is like a reorganization where the company comes out on the other side and continues to operate).  What he does not explain is why the company did not share this situation and strategy with the coerced investors, namely the fans, artists and vendors.

This is particularly odd because winding up a company is one of the biggest events in any company’s history.  No one person makes this decision in some kind of autocratic ruling in a company with as complex a corporate structure as Pledge, SPVs and all–it typically will require at least a board vote if not a shareholder vote as well.  This vote is based on a “resolution”.  When that resolution is put to a vote, it is usually accompanied by statements from at least the officers (and directors in the case of a shareholder vote), and a fairly detailed explanation of why ending the company’s life is the right course of action.   There is typically a set period of time that shareholders have to respond to the vote notice, further calling into question the sequence of events at Pledge.  It would not be unusual to see a somewhat detailed discussion of the company’s financial situation that gave rise to the wind up, WARN Act analysis if applicable, and other downside analysis, tax payments, potential claims, some or all of which the Official Receiver at the Insolvency Service may also review now that the petition order is granted.

If the company’s minute book and board records were shambolic up to that vote, there is usually a rush to clean up any missing minutes (which is where resolutions usually start before they are voted on by the board in a telephonic or in-person board meeting).  That final vote is usually carefully drafted because when the company submits to the jurisdiction of the courts and their agencies (the Insolvency Service and the Official Receiver in this case) it’s entirely possible that someone in the government is going to start with the basics–a close review of the corporate maintenance records.  Failing to keep proper books may be a sign of things to come, so that’s one reason they may start there.

What this should say to you is that there’s an easy way to clear this up–just publish the board resolution authorizing the wind up petition.  The filing was on behalf of the board of directors, after all so it’s not like they were responding to a creditor complaint.

And as Mr. Rogers said, this was all part of the plan, and the plan should be written down to one degree or another in board resolutions authorizing continued efforts to sell the company (even by a volunteer) or in the alternative wind it up if no sale can be had.

And here’s another reason that board resolution is important, both its existence and what it says.  When the notice was filed in the Gazette it would have been discovered in any due diligence review of the company by a potential buyer.  If I found it with a casual search, a buyer would have found it in a purposeful one.  So keeping it “secret” for strategic reasons with a potential buyer was just not going to fly, particularly because a buyer would also get the corporate records as part of their due diligence (as well as what appears to be the horror show financials).  And if it got to the asset purchase agreement stage, there’s any one of a number of customary representations that Pledge would have to make that would have triggered this issue.

So why didn’t Pledge publish the petition on their website as early as June 13 when it was filed?

Pledge Windup Objection Date

In order to be heard by the Court at the July 31 hearing, you would have to have given notice to the Court by 4pm GMT on July 30, i.e., close of business the day before.  But if you didn’t know that you had to give that notice, then no one would show up.  American creditors could have hired a lawyer to appear for them as a group, for example, sometimes called an unsecured creditors committee.  Or a pesky unsecured creditors committee that can get underfoot.  And a good way to be fairly certain no one was going to show up would be not to tell anyone through the Pledge website and instead only publish the notice in the London Gazette, a newspaper that artists, fans and vendors were very, very, very unlikely to read.

Pledge Windup Hearing Date

On the hearing date, the only people concerned with the interests of the artists caught up in this thing who were there was UK Music, the very effective trade group representing a wide variety of interest groups in the UK (which was organized by the artist Feargal Sharkey, OBE, lead singer of the Undertones and his extraordinarily able crew–take note US readers, we could use something like this).

UK Music

What did we hear from Pledge?  On or about July 25–six days before the hearing and six weeks or so after filing their petition, the site simply went dark with this message;

pledge statement

Digital Music News noted that an earlier version of the post had additional sentences in bold that was quickly deleted:

The company will go into administration at some point this week or early next which means that any funds received for the assets of Pledge will be distributed to all of the creditors involved.  This will include all of the artists who are owed money.”

Why was that deleted?  Someone knows.

Note as late as July 25 the company was guiding to administration–although that language was changed to the more cagey “work with outside counsel”  (therefor privileged communications if no crimes or fraud were involved).  The company also said it would take “the most appropriate next steps” which could literally mean anything but it seems to me in retrospect that in this case it pretty clearly referenced the wind up petition.  As Paul Resnikoff reported in DMN “Exactly how the board is planning to ‘update’ artists and fans on ‘appropriate next steps’ is unclear, though most likely, there isn’t another word from the company.”

This statement would have been the perfect time to call everyone’s attention to the filing deadline of July 30 for the July 31 hearing.

Mr. Rogers also tells us in a blog post:

This [liquidation] was not the route that I personally wanted for PledgeMusic and I wanted you to know that the last line of the many options that I had to get a sale of the company in administration, was cut on the evening of the 28th of July by text. This was the last viable option that I personally had after all previous attempts failed.

It was actually an option for the company.  So Mr. Rogers knew that the wind up liquidation was going forward on Sunday, July 28–two days before the deadline for notices in the wind up hearing on July 31.  I can’t find any place that he disclosed this impending deadline or its import.

It must be noted that Pledge’s insolvency likely meets two common insolvency tests: balance sheet insolvency and the failure to meet obligations when due.  There may be other liabilities that come to light in the course of the wind up proceeding, such as liabilities relating to taxes or the commingling of funds.

It seems to me that Pledge can make a few disclosures to begin to rehabilitate itself.  I mention these for the record and the list certainly is non-exhaustive.

–Publish the board resolution and voting records authorizing the winding up of the corporation, including all provisions made for paying debts or resolving liabilities, if any;

–Publish the July 25 text Mr. Rogers says he received (which he should have preserved);

–Publish any materials from the company’s accountants regarding their “going concern” warnings from the financials (which they should have preserved);

–Publish a bring down of the company’s financials that they are required to file with Companies House (not filed since 2016 per Companies House, see above);

–disclose which of the other Pledge companies are involved in the wind up;

Pledge Affiliatesand, of course, any US companies; and

–Publish any internal correspondence relating to the decisions to withhold from the creditors the fact that Pledge had filed for wind up on June 13 if such correspondence exists.

While there will be further disclosure to come, these documents would enlighten the public and the Official Receiver as to what are their appropriate next steps.

And here’s a tip:  In future be very skeptical of any company that has “.com” in its corporate name.

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How to Contact the Court in PledgeMusic Case–The Trichordist

August 3, 2019 Comments off

PledgeMusic had posted this information on their website when we checked today:

As a result of the making of the order, the Official Receiver becomes liquidator of the company. Any enquiries should be forwarded to LondonB.OR@insolvency.gov.uk, quoting reference LQD5671373.

We gather that what that means is that if you are (1) an artist who is owed money by PledgeMusic, (2) a fan who gave money to an artist who you think did not receive your money from PledgeMusic, or (3) a vendor who didn’t get paid because PledgeMusic didn’t pay your artist, then you should write to that email address which we assume is for the “Official Receiver” who is now in charge of running the case.  (OK, that does sound like a character out of Harry Potter, but that’s how it is.)

We also assume because Pledge didn’t say that there is a deadline for submitting your claim there probably is one.  That’s probably why PledgeMusic didn’t say what the deadline was, a fact they almost certainly know very well.  Because if you fail to get your claim in on time, there’s more for them in the pot.  Ponzi to the very end.

You should take legal advice about what you should say and how to handle it, but if you can’t afford a lawyer you could say in your email that you think you are owed money, how much and why, and ask them what you should do about it.  It probably wouldn’t hurt to tell them what you have done to try to collect your money from Pledge and the approximate or exact dates you tried to get their attention.

And be sure to tell the Official Receiver if you think Pledge breached its obligations to you or otherwise did you wrong, threatened you, or any other bad stuff.

The Official Receiver probably frequently deals with people who are owed money and have no lawyer so don’t be shy about it.  The Insolvency Service (who actually appoints the Official Receiver) also responded to Chris Castle on Twitter:

Insolvency Service 1

We will keep you posted with more information as we find out.

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Reply from the UK Insolvency Service on PledgeMusic Debacle

August 2, 2019 Comments off

We got the first straight answer that we’ve ever heard about PledgeMusic.  This is from the UK Insolvency Service regarding the PledgeMusic debacle in response to my tweet yesterday:

Insolvency Service 1

We really appreciate the Insolvency Service taking the time to respond so quickly.

MUST READ: @myemuisemo Gives PledgeMusic’s Public Financials A Microbial Scrub

August 1, 2019 Comments off

I commend to you the fantastic and detailed analysis of PledgeMusic’s open source financials created by Eilonwy’s emu (@myemuisemo) that is a real eye opener.  Read her post “Plunging into PledgeMusic’s Financial Statements” on her site Myemuisemo.

Her extensive analysis suggests that the circle of interesting persons may be expandable to include the PledgeMusic accountants who could be interesting witnesses.

Here’s an excerpt:

My horrified fascination at the ways in which “the PledgeMusic fiasco is weirder than you think” (Part 1, Part 2) — the investor being investigated by the SEC! the mysterious Panamanian seed investor! the loan that makes no sense and the share allotments that never show up in official filings! — left me wondering what I would have done if I’d read their financial statements back when I participated as a fan in a pledge campaign, back in 2015.

The artist’s label was using PledgeMusic for pre-orders, and it was important to me to show up and be counted as a loyal fan — so I can’t believe I would have revealed anything that would have undermined him. But I definitely would have found some things that left me running in circles going “wtf, wtf, wtf?” like a pissed-off chicken, in the privacy of my own home. Now that the chicken shit is all over the barn yard, let’s check out a few mysteries and terrors of PledgeMusic’s financial statements.

Because PledgeMusic was a private company in the UK, its filing requirements were sparse. Early versions of their annual accounts are one step above a scribble on a napkin. However, we can ask questions and make educated guesses. To get here, I spent a lot of time with the Trichordist and Artists Rights Watch articles that you’ll see linked extensively below, as well as with PledgeMusic’s regulatory filings.

pledge spreadsheet

 

 

PledgeMusic Winding Up Hearing July 31 in London

July 30, 2019 Comments off

Pledge Windup

It appears that PledgeMusic has not planned on going into administration (like reorganization bankruptcy), at least not since June 13, 2019.  Therefore, any statements the company or its representatives have made since that date must be looked at anew.

Because the company had guided all of its potential creditors toward administration, everyone was looking the wrong direction.  I only discovered this petition today by searching The Gazette, which is the official paper of record of the UK government and is used pretty much exclusively for legal notices.

I had not done so previously because I assumed, like everyone else, that Pledge was going into administration.  Because that was what they said they were doing.

But–something in the far recesses said, “Did you check The Gazette?”  “No.  Why would I, they are going into administration.”  Long pause.  “And how do you know that exactly?”  “They…said..so.”  “Well, smart boy, what if they…you know…lied.”  “Guess I better check.”  “Guess you better.”

And sure enough, there it was.

The company had been clearly guiding us to believe they were going into administration which would have given artists, fans and vendors at least a chance to be heard on the rather bizarre behavior by the company’s board and officers.  For example, Benji Rogers said that directly in a widely read Medium post under the apparent authority of the company (if you can just cut through the sanctimony):

Benji Statement

But a couple days ago Pledge took the pledgemusic.com site down (why is much clearer now) and posted this absurd message:

pledge statement

Now if you were thinking “the most appropriate steps” meant administration based on all the other communications from the company and from Benji Rogers on the company’s behalf, no one would fault you for thinking “the most appropriate next steps” meant filing reorganization/administration after weeks of delay–NOT liquidating the company.

And you certainly couldn’t be blamed for not realizing that “the most appropriate next steps” meant “we already filed for liquidation weeks ago suckers!”

UPDATE:  The trade group UK Music sent a representative to the Pledge winding up hearing in London according to MusicWeek:

UK Music attended the hearing at the Royal Courts of Justice today (July 31).

In a letter to Business Minister Kelly Tolhurst, Kiehl said: “Many musicians across the UK relied on crowdfunding website PledgeMusic to deliver payments from patrons, to pay for album recordings and other costs. The winding up of this company represents an entirely unsatisfactory development for the many music fans and creators who have invested so much into projects through this scheme.

“I ask you to again consider the merits of a ministerial referral to the Competition and Markets Authority to investigate what went wrong with this case.

He added: “I would also like to ask you to consider taking up the case with the Financial Conduct Authority, which holds responsibility for regulating certain types of crowdfunding, to consider the activities of PledgeMusic and whether there have been any regulatory breaches.

“Furthermore, I would like to ask for a meeting with you to consider further possible Government interventions to ensure the issues which have arisen from PledgeMusic can never happen again.”

What’s the Current Status of PledgeMusic Case?

July 22, 2019 Comments off

 

What are the chances that PledgeMusic will just disappear into the night, never file bankruptcy and never pay back the artists, fans and vendors?  The less you talk about Pledge’s misdeeds, the more likely they simply are never pursued by anyone.

 

 

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

May 13, 2019 Comments off

[This post first appeared on Artist Rights Watch]

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.

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