Sanctuary Records Group Sued for More than $50,000,000 by 5.1 Label Group for Breach of Contract and Fraud

November 19, in DVD-Audio News

The 5.1 Group is suing Sanctuary Records for more than fifty million dollars. The complaint by 5.1, filed in Los Angeles Superior Court on July 5, 2005, charges that Sanctuary, owner of the world’s largest independent recorded music catalog, breached the terms of a September 29, 2003, amendment to the original agreement between the parties that provided for delivery by Sanctuary to 5.1 of up to 220 albums, at least 140 for release in DualDisc configuration. To date, Sanctuary has failed and refused to deliver to 5.1 for release on DualDiscs, the main purpose of the amendment, any of the top-line albums in its catalog, including those of Journey, Alison Moyet, Morrisey, Robert Plant, Meat Loaf, Black Sabbath, Emerson Lake and Palmer and Eric Clapton, among others. Sanctuary is also engaged in the business of artist management, representing such acts as Sir Elton John and Beyonce. In an amended complaint, 5.1 also alleges that Sanctuary committed fraud by making promises to deliver albums it did not intend to deliver to induce 5.1 to enter into the amendment prior to the end of September, 2003, “for the purpose of inflating its financial performance for its fiscal year ended September 30, 2003.” 5.1 asserts that “Sanctuary, for its own financial reasons, including but not limited to the reporting of its financial results and/or conditions to its shareholders, intentionally defrauded” 5.1 by making the promises and representations set forth in the complaint.

The agreement, as amended, contained a guarantee by 5.1 to Sanctuary of a minimum of $6,150,000 and required that Sanctuary make available to 5.1 all titles in Sanctuary’s catalog as of September 29, 2003, the effective date of the amendment, and all titles added to Sanctuary’s catalog thereafter, at the rate of five per month. A spokesperson for 5.1 asserted that as of August of 2004, nine months after the execution of the amendment, when 5.1 was preparing to announce its imminent release of a large number of DualDiscs as part of the industry rollout of that new format, which embodies a DVD on one side and a CD on the other, Sanctuary had not made available to 5.1 a single album for release in DualDisc format.

In an updated statement to the London Stock Exchange dated October 28, 2005, Sanctuary admitted that its Board “has carefully reviewed the accounting policies and judgements used in compiling its financial statements” and, as a consequence, “the Board believes that it is likely to make changes to accounting policies, which may give rise to prior year adjustments.” The update further noted that Sanctuary is likely to “alter its methods of estimation in certain areas,” “is continuing discussions with its auditors” and expects that the changes “will be to alter the balance sheet significantly” to show net liabilities on its balance sheet for the September 30, 2005, balance sheet.

During the negotiations leading up to the amendment of the agreement between Sanctuary and 5.1, Sanctuary made it clear that the amendment with the $6,150,000 guarantee had to be dated “as of” a September date to get within its then current fiscal year ending on September 30, 2003. The amendment, actually executed on or about October 15, 2003, was dated “as of September 29, 2003.” 5.1 is in the process of noticing depositions of Sanctuary personnel involved in those negotiations to investigate why they made the various representations about their need to expedite the finalization of the amendment or else the “deal will not count,” why it was so important that the United Kingdom auditors applying UK accounting rules had to accept the “explanation” of the deal, whether the guarantee or estimated earnings were booked over time or at once and why Sanctuary agreed to deliver the albums to 5.1 at the rate of 5 per month to close the amendment containing the guarantee only to violate it from day one by failing to deliver the albums.

Based in Los Angeles, California, the 5.1 Entertainment Group owns the immergent, Silverline and Myutopia record labels, 5.1 Production Services and 5.1 Music Publishing. The
Group has released the largest catalog of music in DVD worldwide and is part of the team comprised of the four major record labels and 5.1 that conceived and launched the DualDisc format. Additionally, the production division of the Group has produced projects for Norah Jones, Usher, Britney Spears, Eminem, R. Kelly, Janet Jackson, Fleetwood Mac, Sting, Eminem, Herbie Hancock, Dishwalla, Yellownote, A Perfect Circle, Radiohead, Rob Thomas, Queen, Robbie Williams and many others.

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