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An iconic literary agency is fleeced by its accountant

13 June 2018

From Melville House:

Usually, when sums of cash north of one million dollars are invoked on this blog, it is because a celebrity has just received a mega-advance to write a book, or because Amazon has avoided paying that much in taxes.

Today is different, though. We’ve got a real caper on our hands.

The New York-based literary agency Donadio & Olson represents some huge talent — such as Chuck Palahniuk.  Last fall, one of the agency’s clients was expecting a $200,000 advance payment that never arrived. The author tried to contact agency accountant Darin Webb, but still didn’t receive the check for months.

That’s because Webb had processed that payment, and many others like it, as a payment to himself. Crazier still, he’d been running this skim-scam since 2011.

. . . .

The agency now has a forensic accountant investigating nearly twenty years of financial records to determine the full extent of the theft, and to begin re-paying the authors unfortunately caught up in the con.

A lawyer for D&O has stated, “The agency’s singular focus at this time is ensuring that all of its impacted clients are made whole to the greatest extent possible, and the agency is cooperating in every possible way with the government’s efforts.”

Link to the rest at Melville House

PG realizes there is not much new information in the OP that hasn’t been included on prior posts on TPV.

However, he wants to provide as much information as possible about this matter because it should be thoroughly understood by authors.

The quote from the attorney for Donadio & Olson, “The agency’s singular focus at this time is ensuring that all of its impacted clients are made whole to the greatest extent possible,” is structured in a telling way.

“The agency’s singular focus”, “ensuring that all of its impacted clients”, “are made whole”, all sounds very reassuring for authors who have lost money for years.

Unfortunately, these statements are limited by, “the greatest extent possible”.

PG suspects the agency cupboard is bare or almost bare. One of the many questions that immediately come to mind is whether the agency principals received any of the embezzled funds. Were they victims or co-conspirators?

Either answer to that question should ruin the reputation of the agency principals. If they were victims, even preliminary evidence points to a conclusion that these people do not know how to properly operate a literary agency and carry the responsibility for safeguarding money that belongs to other people.

Did none of the agency’s clients contact the principals about low royalty payments over the many years of embezzlement? After presumably multiple queries by multiple authors did the agency principals ever question their accountant? Or have an outside accounting firm come in to look over the books?

If they are co-conspirators, then criminal punishment would seem very likely.

The press release announcing embezzlement charges against Donadio & Olson’s accountant from the US Attorney for the Southern District of New York does not mention the name of the agency, referring only to “a Manhattan-based literary agency”, “the Agency”, or “a firm in the book business”. PG doesn’t know whether this is part of a strategy by the US Attorney or the result of the persuasive abilities of Donadio & Olson’s lawyers.

While PG has visited New York on many occasions, mostly for business purposes, he is definitely not an expert on the city or state. However, his impression is that the New York state legislature is quite active in passing laws on a wide variety of subjects.

Presumably, it is of some financial and social benefit for the city and state of New York to be the headquarters of the traditional publishing industry in the United States.

While he is certain members of New York’s political class do not pay any attention to him, PG proposes some legislation to maintain the reputation and status of the publishing biz. The principal elements of the proposed legislation follow.

  1. No one may act as a literary agent in the State of New York without being properly licensed as such by the State of New York.
    1. The State may establish minimum qualifications for persons seeking to be licensed as literary agents, including the requirement that a prospective agent take and pass an examination covering an agent’s duties and obligations under New York law.
    2. A person located outside of the State of New York will be deemed to be acting as a literary agent within the State and be subject to the State’s regulations respecting literary agents if such person is representing authors in the negotiation of publishing or licensing agreements with any company whose primary business is located within the State and has successfully concluded more than one such negotiation on behalf of an author during a given calendar year.
  2. A literary agent is obligated in his/her fiduciary capacity to safeguard the funds of each client represented.
    1. Failure to do so may result in revocation of the agent’s license and/or additional penalties.
    2. An agent may be held personally liable for damages resulting from a breach of the agent’s fiduciary obligations to an author.
    3. Each agent working in a literary agency has an obligation to promptly report any improprieties of which he/she becomes aware involving the safeguarding of client funds to appropriate state authorities.
  3. Each literary agent must maintain a separate trust account with a New York bank or similar financial institution for the purpose of depositing and disbursing all client funds.
    1. All client funds must be deposited into the trust account as soon as possible after their receipt.
    2. All payments from the trust account must be paid to the agency’s clients within 15 days of receipt by the agency.
    3. On at least an annual basis, an agent will provide each client with a full and complete written accounting of trust account activity involving the client’s funds.
    4. Commingling client funds with agency funds is prohibited.
    5. On at least an annual basis, each agent will retain an independent outside accountant to conduct an audit of the agency’s trust accounts and provide a written report of his/her/its findings. Any client may request and shall promptly receive a copy of the accountant’s report for any year during which the agent was representing the client.
    6. The State of New York may audit an agency’s trust account for purposes of ensuring compliance with the law at any time.
    7. The agency’s trust account obligations shall not apply to any funds paid directly to its clients by publishers or other third parties with which the client/author has a written contract.
  4. The Attorney General of the State of New York is authorized to receive compaints from any person respecting a violation or potential violation of these laws by an agent or literary agency. Within 90 days of receipt of such a complaint, the Attorney General shall make the contents of the complaint available online to the public.

PG welcomes any additions, changes, etc., to his proposed Literary Agent Licensure Code.

He notes that, as a general proposition, he does not support widespread occupational licensure requirements (hair braiding, etc.), but, given his experience with authors and agents generally and the latest from Donadio & Olson, he thinks the time for licensing agents or imposing some type of effective regulation on their actions and practices has arrived.

Agents, The Business of Writing

19 Comments to “An iconic literary agency is fleeced by its accountant”

  1. Seems like some sort of insurance to cover the theft or misuse of client funds while they’re in the agent’s hands would be appropriate.

    And maybe some provisions about agency contracts (between the writer and agency), identifying certain predatory provisions or ones that could conflict with, say, the intent of copyright law, and prohibit them (or automatically nullify any agency agreement that has them).

    • In order to insure, the insurance company would have to have the right to audit them whenever they’d like, so a non-starter.

      When I worked Dell’s server tech support I got calls from customers wanting Dell to insure they never lost any data. And for a time there was a package that Dell would do just that – guarantee their data. But only the data they had copied to their Dell server. And there was a fall-over Dell server the data was also on. And UPS systems that could keep everything going until a clean shutdown could finish. And tape backups – and offsite storage of those backups – and verifications would be done to insure the backups were actually good.

      Normally that was enough to change their minds about data guarantees, but there were a couple other stipulations that they also didn’t like/want. Little things like only a Dell rep could manage the server – Dell can’t be held responsible if ‘your’ admin was messing with the array settings and wiped your system (actually got ‘that’ call. 😉 ) Only the databases and data under the contract could be stored on the systems, onsite spare parts and always on-call local Dell certified tech in case any part of it went down.

      The only ‘safe’ way to not be cheated by an agent is to not let any of ‘your’ money go through their hands (or of course not to use an agent in the first place.)

  2. kriswrites.com did a great write up of this. My takeaway from her article is that they all do this. Which is why no one at the agency questioned him. If they did any kind of outside accounting more than just the one guy would get nailed so everyone keeps their mouth shut.

    Really, tradpub you get it coming and going. I can’t think of a single reason to ever submit tradpub.

  3. Any company that fulfills a fiduciary role should have to be audited by an outside auditor. And pushing this sort of thing is where all those author organizations who like to claim they work for the authors could be useful.

    • “And pushing this sort of thing is where all those author organizations who like to claim they work for the authors could be useful.”

      Too bad they’re lapdogs of the publishers and will never bite the hands that feed them – or their agent friends …

    • I have a feeling the NY State tax authorities and the IRS will be getting involved at some point and they will probably do their own audits. 🙂

      • Terrence OBrien

        Anyone use an agent and a trad publisher?

        Who issues the IRS 1099 for the author at the end of the year? Publisher or agent?

        • The publisher issues the 1099. The agencies with which I was briefly affiliated did as little paperwork as they could get away with.

          • Terrence OBrien

            That would make it very difficult to keep any author income from the publishers who send 1099s.

  4. Highly agree. I had an agent who sent me a bad check, then asked me not to cash it. He said my advance had not cleared his account yet. He did make good on it in a while, but why was he putting it in his personal checking account? Later he failed to send me royalty reports for a period of years,before finally paying small royalties long overdue. And doing a bad job of representing me overall. He was a member of the SAR in good standing, so to speak. I got another agent, but they seem to do anything they want about money and should be regulated.

  5. At 3.3., I suggest the addition of ‘or upon a client’s written or email request.’

    My representation contracts gave client’s the right to a statement of their trust account on request. Only one client ever requested such. From the time I read the request to the time the statement went out was about 10 minutes.

    Everybody got a statement at the end of the calendar year.

  6. Split cheques. Just don’t let any agent handle cash in the first place.

  7. Per Anonymous above (hm, a lot of us on this today), I had $1400 in ebook royalties one period, ZERO the very next period, and in the same statement all three books in my series were bounced back out of “earned out” status by returns of *precisely* 600 copies per book in the same period. Really? I couldn’t tell who was robbing me, the publisher or the agency. Big agency, too.

  8. Seems like this sort of activity would have been detected much sooner if the company used a 3rd party auditing company. I could be off the mark but I’ve worked for a few didn’t companies had to do that.

    • Terrence OBrien

      There would have been nothing to detect if the company had asked an accounting firm to review their systems. It’s much easier to avoid the problem rather than fix it after the fact.

      If you call a locksmith, and he walks up to your door and sees no lock, he would probably recommend a lock. Or, one could call the police after the stuff is gone. The first thing the cops would say is, “Hey, dummy, where’s your lock?”

  9. I find it telling that the headline is about how the agency got “fleeced” by the accountant, not that the agency stole from authors. Melville House apparently cares more about the poor widdle victim agents than the authors on the brink of bankruptcy. There is literally no way the agents weren’t either complicit, willfully blind, or terrifyingly incompetent. Any way you look at it, they aren’t victims, they are part of the problem. That they are trying to paint the agency as the victim in all this makes me sick.

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