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The Big Secret Why Behind Everything so Far

7 June 2018

From Chuck Palahnuick:

On the plus side I’m not crazy.  For several years my income has dwindled.  Piracy, some people told me.  Or the publishers were in crisis and slow to pay royalties, although the publishers insisted they’d sent the money.

More recently, the trickle of my income stopped.  Not that there wasn’t always a good excuse.  Someone’s mother was suffering from Alzheimer’s and needed constant looking after.  The bank’s wire transfer system wasn’t secure, and hackers were a new threat.  You don’t question someone who claims to be the caregiver for a mother with dementia.  You let it slide.  I let it slide.

That’s why my big shows on book tour stopped.  Because the payment for Fight Club 2 and the two coloring books and Adjustment Day never seemed to arrive.  Years of income.  Each of those big shows cost north of ten grand to stage.  Money I paid.  For the glowing beach balls, the severed arms, the $150 leather-bound books as prizes, not to mention the dog toys, the shipping, the candy.  So much candy.  For each event, shopping carts full of candy.  It was justified in my mind because most of my readers had never attended an author reading, and I wanted their first to be exceptional.  But when my income stopped, when I had to choose between health insurance and autographed rubber arms… the shows stopped.  There, I’ve said it.

In comics, you pay your own way.  Invitations arrived from Comic-Cons, Dragon Cons, Wizard Worlds, but my money for travel had dried up.  Instead of income, I got excuses.  But this entire time an idea nagged at me:  What if someone’s stealing?

But that, that was insanity.  I’ve worked with the same team of people since 1994.  To suspect anyone was stealing, I had to be crazy.

And then I wasn’t.  You may have read about this over the weekend in the New York Post.  All the royalties and advance monies and film option payments that had accumulated in my author’s account in New York, or had been delayed somewhere in the banking pipeline, it was gone.  Poof.  I can’t even guess how much income.  Someone confessed on video he’d been stealing.  I wasn’t crazy.

Link to the rest at Chuck Palahnuick’s blog

PG is interested to see a couple of articles describing the literary agency, Donadio & Olson, as a victim of the wholesale theft of client funds.

If a community bank closes because of financial improprieties that have continued for years, is the president of the bank regarded as an innocent bystander? Can he/she credibly point to a clerk and say, “It was all her fault! I had no idea this was happening over all these decades.”

In a criminal trial held in a court of law, the president is presumed innocent until proven guilty. In the court of public opinion, the president is presumed to be part of the scheme or too incompetent to be responsible for running a bank.

PG suggests that in the court of public opinion, the agents that own (and have owned) and operated Donadio & Olson during the lengthy period of time over which client funds were stolen from authors should be similarly judged.

In the  event of a bank failure or financial difficulties, typically, an aggressive federal agency swoops in late on a Friday afternoon and takes over the books and records and operations of the bank. All the bank’s employees walk out the  door while the government agency figures out what went wrong and who is entitled to how much money. The bank reopens on Monday morning under the direct management of the Federal Deposit Insurance Corporation. (Similar enforcement actions by other government agencies if a bank is not federally insured or a savings & loan has problems.)

It is PG’s impression that, like California, New York’s legislature has passed a law about nearly every subject imaginable. New York City prides itself as being the center of the traditional American publishing industry.

Where is the government regulation requiring that, if literary agencies are receiving and holding money that really belongs to someone else – authors – the literary agencies act like banks that receive and hold money belonging to other people and be treated as custodians of funds held to the highest standard of care?

If Big Publishing really cares about authors and doesn’t take them for granted, why don’t the standard terms of a traditional publishing contract include provisions that pay royalties directly to authors and agency fees directly to agents? Publishers will do this if asked by an attorney for the author. Why not make it the default?

As PG has stated before, nothing that is good for the author happens when an agency receives royalty payments to which the author is entitled. Passing funds through the agency bank account adds no value whatsoever and only provides an opportunity for something bad to happen to those royalties.

Big Publishing, Contracts, Legal Stuff, PG's Thoughts (such as they are)

32 Comments to “The Big Secret Why Behind Everything so Far”

  1. “On the plus side I’m not crazy.”

    I’ll disagree as it’s crazy to blindly trust others that only ‘like’ you for your money … 😉

  2. “A sex worker deserves a billion times more respect, than the mystical fraudsters of the society, such as astrologers, psychics and tarot card readers.”
    ― Abhijit Naskar

    Maybe we should add agents to the quote.

  3. If an author that big can’t bring himself to demand a regular auditing of the business practices of his agent, because of what?, there is little hope for most authors signed with literary agencies of having whatever it takes to hold accounting principles and demand a regular recount. They’re afraid of getting blackballed – and losing their ‘career’ with said agency.

    I’m sure there are many smaller embezzlements routinely sucking the lifeblood out of royalties – because it is too easy to do.

    • If you sign with an agent, the author-agent agreement should clearly state that the agent provides copies of all royalty statements from the publisher and copies of the checks from the publisher to the agent and from the agent to you.

    • Depending on the size of the company and the auditor’s rates, I’d expect an audit of a company that size to run between $5K and $30K. That’s a lot of money for most authors to pay just on suspicion.

      The state or Fed can swoop in and announce “You’re being audited!” and there’s not much you can do about it. But a company doesn’t have to agree to a private audit. If they balk, the customer would have to go to court, present evidence better than “maybe I’m crazy”, and get a court order for an audit. Most people would have to pay a lawyer to handle that; rates vary so much for legal representation I can’t make a guess between “a couple of thousand” and “a lot.”

      Now your accountant shows up with a court order, and proceeds to substantially disrupt the operations of your company for some time between a week and a month. Meanwhile, word of the audit gets out (it will), and the phones start ringing; authors, newspapers, other agents.

      So, after the auditors finish, you can pretty much expect that author/agent relationship is over, no matter what the auditors come up with. If they’re the only agent you’ve ever had, that you’ve been with since 1994, that’s a pretty big step, because there’s no way it’s going to come out well for you. And while there agents who’d sign up a piece of roadkill if they might get a buck out of it, good luck finding a “name” agency who’ll sign you up after that… even if they’re straight up honest, audits are no fun at all.

      It’s doubtful Palaniuk was the only one being ripped off. Nobody else hired an auditor either.

      • I read that the ability to request some kind of accounting is in traditional publisher contracts (don’t make me prove that, because I can’t).

        Seems trad is run on fear; but losing that much money makes people braver.

        Blackballing is very real. The alternative now is looking like a total idiot when the embezzling of millions is suddenly big in the news.

      • Most traditional contracts have a clause saying that if it turns out that there is more than a 5% discrepancy, the publisher pays for the audit. Less, and the author pays. But when you know foreign editions have been published, and you haven’t seen anything on your statements, this may not be that much of a gamble.

  4. Terrence OBrien

    I eagerly await word from the Authors Guild, Authors United, and Douglas Preston.

    • Why would any of those lapdogs snap at their masters? Pretend to whine a little perhaps, but not complain about any unfairness done to those mere writers locked in their pens …

    • What? You don’t already know that it was Amazon’s fault?

      (aka, you my friend win the internet for the day for the best line…)

    • Don’t hold your breath…

  5. This is terribly sad, and what happens when authors decide they can’t act like a business owner.

    In the anthology of works from “Scratch” magazine, one of authors mentioned that her MFA program did not offer one single class in anything money-related, including how to read a contract.

    In Chuck’s case, these were people he had been working with for decades. I can see why he wouldn’t want to question what was happening. At the same time, he also couldn’t go to them and say, “I’m broke. Where’s my money?”

  6. In her post today, Kris Rusch highlights something in particular: Palahnuik was one of the authors going on about piracy. He apologized, saying that his publishers were paying him, and any piracy was small. The problem was his agent. Kris observes:

    Now, I want you to think about how many big-name writers you’ve seen railing against piracy and how it’s cutting into their book sales. I want you to think about how many big-name writers blame Amazon (!) for ruining the book business and causing book sales to decline.

    I want you to think about how many big-name writers who have said there’s no money in writing, not like there used to be.

    All of those writers have agents. All of them.

    It does make you wonder …

    • It does make you wonder, doesn’t it? So many authors trust the people they’re in business with, and listen to them when they say someone else is to blame for low sales. But as we indies see, Amazon can actually make us money, not take it.

      I feel sorry for Chuck, I really do. I hope that others can learn from this terrible situation and start taking control of their careers and their money. No one should have to go through this.

  7. Writers might also consider carrying umbrella insurance and similar coverages to guard against employee theft, embezzlement, etc. Does this cover crimes of third parties against your company? I’d talk to my commercial agent about this. Just a thought.

    IRS laws on casualty losses and theft also offer help in recouping lost money with a tax deduction against income.

    • Speaking of strategy, if you suspect they are ripping you off then raise hell. The agency will kick you out.

      That’s a win.

      Especially for Chuck P. He has a big enough name to self pub from here on and do fine. Or at least I’d like to think so.

      • Chuck could absolutely kick ass self publishing. He’d have to take control, be willing to learn a new way to do business (don’t let your agent publish you, Chuck, just sayin’), but I think he could do it.

  8. Felix J. Torres

    Twenty years of work undermined.
    Twenty years of trust betrayed and not just by the bookkeeper.
    My heart goes out to him.

    Some lessons should never have to be learned. Especially not this way.

    • This is also a case where the owners of the company would be expected to notice a discrepancy between “money in”, “money out”, and “what’s in our bank account.” And maybe, “gee, we don’t seem to be making money like we used to.”

      If the accountant was working alone, he was stealing from his employer too. Who could have called for an audit on his own initiative, and probably written it off as a legitimate business expense.

      • Depending on the setup, he probably wasn’t stealing from the agency’s 15%, not for big incoming funds. If he had sole control overseeing all incoming funds, reconciling banking statements with an internal accounting database like Quickbooks, cutting the checks to authors, entering those checks and when they cleared into the internal database, doing the tax work, setting up bank accounts, picking up the physical mail (bank statements and tax statements), getting all the email (bank statements, author correspondence to the agency about their checks), and creating statements for authors (either in print format or via email) he could easily set up separate unknown bank accounts for diverting small payments to authors that the agency and authors would never know about. He’d start small with stuff nobody would notice and test the tolerance of different authors. In the course of testing authors he’d find out who was the easiest to put off (in terms of discouraging the author) and who were the easiest to discredit (he gets confused easily, he’s a whiner, he didn’t read his contract, etc.).

        He could also have gotten fancy and created a whole separate bank account, parked some checks there for 90 days, collecting interest, and then forwarding them into the firm after establishing some publishers as “chronically late payers”. Or he could have done the same with outgoing checks, especially for clients who where supposed to be paid quarterly but oh gee we changed the pay schedule to twice a year… I mean, some people don’t keep track of their incoming money.

        If he created statements for authors without having to supply supporting documentation he could’ve done anything.

        If he hadn’t gotten greedy or sloppy to the tune of a $200k payment (!) he’d still be doing it.

  9. I think I saw someone else ask, and now I can’t find it, if the “agents” had any status like real estate agents or other agency roles, and if the “fiduciary duty” to clients was a real legal one for publishing agents or simply a moral one?

    P.

    • That was my question from May 30:

      “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.”

  10. Patricia Sierra

    I was having some small problems with getting royalties, no big deal, but I decided to ask the publisher to deposit my tiny royalties directly into my bank account and send the agency whatever they were due. I had to get the agency to sign off on that. They were probably happy to do so because I kept nagging them — reminding them royalties were due, or correcting errors in what they sent me. After they agreed to my having direct deposit, it was just a matter of signing some papers with the publisher to make it happen.

  11. Forget outright theft for a moment. If Super Duper agency has a considerable stable of top authors and handles huge money they are making even more by sitting on it. If their total receipts are ten million per year and they invest money at 6% interest, holding the money 90 days before paying authors earns them 1.5% interest. That’s 150k. And that is unethical.

    And it happens all the time. The author waits while the agency uses their paychecks to invest or pay rent or buy office equipment or whatever.

    The fact that these people are unlicensed and unregulated is insane

  12. Agents that hold their clients’ money are acting as fiduciaries and should be held to the standards of fiduciaries. When I practiced, I held clients’ money as a fiduciary and had systems in place to keep track of it and report to the client(s). It was tedious but not hard. That is, it was not fun, just necessary.

    IMO Donadio & Olson breached their fiduciary obligations to their clients. The accountant committed malfeasance. D&O committed nonfeasance. I bet they will not survive their gross omission. Nor should they.

    In the old days in Japan, for this somebody would commit seppuku. Some days I think we should bring back that tradition.

    • Agree. If agents are acting as fiduciaries, they should be held to fiduciary standards. Crooks are crooks. Some literary agents are honest, but there are bad apples in every barrel. I am even willing to say that D&O may have been sloppy rather than intentionally evil, but they are still at fault.

      • Terrence OBrien

        We can probably find some financial sloppiness in most organizations, but it gets discovered and fixed. We go way beyond sloppy when structures and practices that violate the basic norms of financial management persist year after year.

  13. I think this is a very good example of how authors need to pay attention to their business. I’m a hybrid author and I’m always so surprised by my trad published author friends who don’t check their royalty statements — don’t even look at them. This is my livelihood, you better believe I check royalty statements and keep track of what I have and haven’t been paid!

    And it’s not just Chuck here — this agency represents several estates. They can’t claim “precious artist who can’t be bothered with paperwork” as an excuse. Their entire job is to check the paperwork.

  14. When I first heard about this horrible case, I thought–and still think–that it should serve as a wake-up call.

    Why on earth do we stick with the wildly outmoded system in which all monies are paid to the agent, and then doled out to the author? This dates (I believe) from the days when it was hard to distribute money, especially since most agents were in New York and most authors weren’t.

    Today, we have direct deposit. Amazon uses it. Barnes & Noble uses it. Google Play uses it. My former publisher uses it for me, also.

    The process is simple: The publishing or production company pays the agreed-upon percentage directly to the author, and the rest to the agent. It’s called split checks.

    Duplicate royalty statements are emailed or posted on a password-protected site accessible to both agency and author.

    Let’s not waste time as authors pointing the finger at who should pay more attention or who should act more responsibly, not that these aren’t legitimate issues. Instead, let’s seize on this as a watershed moment when the system changes, once and for all, to direct pay to authors.

    If you have an agent, you can demand this now.

  15. Terrence OBrien

    I’d be interested in the accountant’s system for getting the money. A time-tested way is to send invoices from a bogus company. If the same person both approves invoices and makes payments, it’s wide open.

    Or did he have more imagination, and become a client himself, sending his pen name royalties for some book that didn’t exist.

    The place to start is with the checks. Who signs them?

    The next question is how many agents are quietly calling auditors?

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