Home » Agents, Legal Stuff » Accountant embezzled $3.4M from famed literary agency

Accountant embezzled $3.4M from famed literary agency

30 May 2018

From The New York Post:

A Manhattan accountant cooked the books at a prestigious literary agency that represents top writers, including “Fight Club” author Chuck Palahniuk, bilking its clients of millions and leaving the company on the brink of bankruptcy, according to legal papers.

Darin Webb, 47, faces 20 years in jail on wire-fraud charges for embezzling $3.4 million from storied Manhattan agency Donadio & Olson, according to a recently unsealed federal criminal complaint.

Although the agency, which also represents the estates of “Godfather” writer Mario Puzo and radio legend Studs Terkel, was not named in court papers, a lawyer representing the firm confirmed to The Post that Donadio & Olson was the subject of the alleged theft.

. . . .

The stolen money — allegedly lifted between January 2011 and March of this year — was earmarked for author royalties and advances, the complaint says.

But the theft could be exponentially more, a source told The Post, noting that a forensic accountant is combing through Donadio & Olson’s books all the way back to 2001, Webb’s first year at the agency.

He allegedly fessed up to the theft in March in a videotaped interview with company executives and their attorneys at the agency’s Chelsea office, saying he filed monthly financial reports that “contained false and fraudulent representations in order to accomplish the theft and evade detection,” the complaint states.

. . . .

The alleged theft was first discovered last fall when an unidentified author who was expecting to receive a $200,000 advance from his publisher asked Webb why he had not received the payment.

According to the complaint, Webb put the author off for months.

“The author did not receive the payment because Webb had converted the funds to Webb’s own use,” says the complaint.

Link to the rest at The New York Post

For those who are new visitors to TPV, PG will repeat his previous observations about literary agencies – The agency adds no value for an author by receiving all or any portion of the royalties to which the author is entitled from the publisher.

The solution is split checks – the publisher sends 85% of the royalties directly to the author and 15% to the agency together with a royalties report to each.

Unfortunately, this is not the first time an agent or an employee of an agent has stolen money that should have been paid to the agency’s clients.

According to the OP, this alleged embezzlement has been going on for about 17 years.

What does this say about the agent’s financial management skills? Does the agency ever pay attention to its authors’ money? Does the agency have even the most rudimentary accounting systems and safeguards in place to protect authors? Does the agency care?

The Guardian has a story about Fight Club author Chuck Palahniuk who says that he is “close to broke” because of the embezzlement.

Agents, Legal Stuff

21 Comments to “Accountant embezzled $3.4M from famed literary agency”

  1. PG wrote: “What does this say about the agent’s financial management skills? Does the agency ever pay attention to its authors’ money? Does the agency have even the most rudimentary accounting systems and safeguards in place to protect authors? Does the agency care?”

    So I find it somewhat interesting that PG would ask this, or be at all surprised, as the same can be said of lawyer thefts from client trust accounts.

    IMO, the problem isn’t if the agency cares or their management skills — they cared enough to hire the proper accountant to do that for them, which often includes putting in place the systems that then get spun around and circumvented by the same person who designed them.

    Time and time again, when you see embezzlement being caught (who know how much goes undetected), the person who is caught is also the person trusted to make things work properly in the first place. And when the management asks, “Are we putting in place the right detection systems, can you check this or that?”, the person who is answering “Everything’s fine, nothing to see here” is the person they’re innocently trusting to tell them if someone is robbing them blind.

    One small area of interest for me is the idea that an audit, even a forensic audit, will find everything (or sometimes anything). In some cases, and I have no doubt it is true for the agency, they’ve probably BEEN audited before and nobody noticed anything. Sure, a forensic audit has a better chance, but short of repeating every single accounting transaction for the last 17 years (if they even have any of the paperwork past 5 years ago), the best they can do is spot checks.

    By contrast, where is the outrage at the stupid authors who never bothered to check their royalties? If Chuck P is bankrupt, I doubt the accountant is the sole cause of that situation.

    I’m curious though how much insurance the agency might have, if any, to cover these costs, particularly as the employee is protecting them out the wazoo to make them look like victims too.

    PolyWogg

    • . In some cases, and I have no doubt it is true for the agency, they’ve probably BEEN audited before and nobody noticed anything.

      I’m not saying an audit would necessarily catch fraud, even of this scale, but the one thing that would have been or should have been noted would have been any issues related to the agency’s internal controls. In the good old days this would mean the person who balanced the checkbook would NOT have been the one physically responsible for receiving payments nor be the one responsible for paying the bills. Not that such controls couldn’t be overcome with collusion, but it sounds like this guy was flying solo. Meaning he had to be responsible for/in control of far more than he should have been.

    • Paul – You raise a legitimate point about attorneys’ trust accounts in which funds belonging to clients are supposed to be deposited until paid. Funds in trust accounts have, on occasion, been improperly diverted to the attorney’s own uses.

      However, the state bar associations have become quite aggressive in auditing trust accounts upon the slightest indication that funds in those accounts are being improperly used. An email or phone call from a client to the state bar will result in a prompt visit to the lawyer’s office by an auditor. I remember reading that some bar associations conduct random periodic trust account audits even without a client complaint.

      During the last 10-20 years, the fastest way to become a former attorney is to mismanage a trust account. Disbarment is almost automatic.

      I don’t receive money that belongs to my clients anymore. When I did receive client funds (proceeds from the settlement of a personal injury claim, for example), I don’t believe any client funds ever stayed in my trust account for more than three days (to allow a large check time to clear through the banking system).

      • I don’t believe any client funds ever stayed in my trust account for more than three days (to allow a large check time to clear through the banking system).

        Now there’s a danger. A variation of the advance fee scam targets this behavior. A “client” contacts an attorney asking them to collect payment on some legal matter. The attorney does so and receives the payment with little fuss. The check is deposited and soon thereafter the balance minus fees is forwarded.

        Some time later it is revealed that the payment is not valid and it is reversed. Both parties are found to be fake and the money is gone.

        https://www.wvbar.org/attorneys-beware-of-client-trust-account-scams/

        https://www.lsba.org/NewsArticle.aspx?Article=25623fec-43fc-4f89-9d3c-ef34a9308462

        etc, etc.

      • Hmm, I guess it isn’t trust accounts. And I presume that not all bar assocs are created equal. There are enough lawsuits that drag on and on where it is clear that something was hinky for some time, and it takes lawsuits to let the auditors have a go at the books. I remember one recently that was covered where it was a will and the 2nd wife was the beneficiary in trust and then it would go to the children, but the bank and lawyers were playing very fast and loose with some of the accounts vis-a-vis investments.

        I’m wondering if I’m thinking of trusts as the right category…so PG, if you were going to embezzle client money, which accounts would YOU target? 🙂

        P.

        • None.

          I enjoy practicing law and would like my bar association to continue allowing me to do so.

  2. Terrence OBrien

    Lots of these schemes work very well until the crook does something dumb. Taking a single $200K payment is just dumb. Way too big of a bite. The nibbling might have gone on forever.

  3. Chuck P. said, and I don’t doubt it’s true for others, that the money just stopped coming.

    What’s interesting about this is that he assumed it was normal.

  4. Brings a song to mind …

    “Literary agencies, what are they good for?

    Nothing!”

  5. Felix J. Torres

    Periods of zero income would seem to raise no flags.
    Odd, no?

  6. It’s both a mindset thing and a legal thing to call an audit on an agency.

    The mindset thing is: The agency are taking care of me, and I get to write without a worry. To move from there to a mindset where you want control and checks isn’t always easy. Also, publishers – and thus agents – only pay out about twice a year. Add to that excuses and delays, and it’s not too surprising writers only think of asking after a year or so.

    The legal thing: I’m not sure if that has ever happened, but recent agency contracts have become draconic, and they might make authors waive the right to audit. And even so, it’s not easy to get an audit.

    Kris Rusch has a good write-up about auditing agencies, even though it is rather old: https://kriswrites.com/2012/11/14/the-business-rusch-agents-and-money/

  7. I agree about the payment split. How hard could it be for a publisher, who already has an accounting department, to send out TWO damn checks so the author doesn’t have to 1. wait longer than the agent to be paid (which is obscene, really) and 2. doesn’t have to worry about an employee of said agency ripping them off? Just has to worry about HIS/HER accountant or the bank. 😀

    Or, alternatively, send the whole payment to the author and let the agent wait for the 15%.

  8. And how many small-medium sized publishers run their finances exactly the same way? One person handling everything, with no checks and balances?

  9. Terrence OBrien

    It’s not just publishers. In 1995 the Barings Bank manager of their Singapore Futures Exchange operations brought down the whole bank with his undetected trading losses.

    It’s almost an axiom in trading that the trading is managed by one guy, and the back office clearing and accounting is managed by another. Barings didn’t do that. They had one guy managing both. He reported huge profits while he was actually making huge losses.

    The senior VP they sent out from London to verify the huge reported profits didn’t bother to walk across the street to the Bank of Singapore to pick up an account statement that would have immediately revealed the hoax.

    So after over 200 years in business, Barings failed.

  10. Question for you PG — is a literary agent subject to agency law (including owing the author a fiduciary duty?). Years ago I thought I’d seen a case (or something of authority) stating that even though literary agents call themselves agents, they’re not really agents under the law. But recently I’ve seen several people (including Kris in her blog posts linked above) say that literary agents owe their authors a fiduciary duty.

    I’m curious because if literary agent are indeed agents under the law, it seems like they engage in a lot of problematic behavior and should be held to a higher standard.

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