Accountants Mismanaged Her Money, Rihanna Says
(CN) - Pop star Rihanna claims in court that her former accountants' blatant mismanagement cost her millions on her 2009 Last Girl on Earth tour and got her audited by the IRS, while they charged "exorbitant and excessive" commissions.
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Robyn Fenty aka Rihanna and her concert touring company, Tourihanna, sued Berdon LLP and its certified public accountants Michael Mitnick and Peter Gounis in federal court in Manhattan for fraud, professional negligence, breach of contract, breach of fiduciary duty, unjust enrichment.
In 2005, when she was 16, Fenty says she hired Berdon for accounting and business management services, and extended their agreement in 2007 and 2009.
She continues: "On February 1, 2010, Fenty entered into a fourth written engagement agreement with Berdon, pursuant to which defendants agreed they would provide certified public accounting and other services. In the 2010 Engagement Agreement, defendants again agreed, among other things, to review investment opportunities upon Fenty's request, to advise her of their economic and tax implications and income potential and to invest excess funds in short term securities to maximize Fenty's return on her funds.
The singer says Berdon had an unusual system of making commissions off her money, and that the accounting firm hid the true state of her finances from her in order to keep the commissions rolling in.
"Under the Engagement Agreements, defendants earned 'commissions' based on a percentage of Fenty's gross receipts. Plaintiffs are informed and believe, and on that basis allege, that this type of arrangement was not standard for the accounting and business management industry, and that defendants' 'commissions' were exorbitant and excessive. Plaintiffs are further informed and believe, and on that basis allege, that this financial arrangement motivated defendants to conceal material facts regarding plaintiffs' finances from them, in that, had they known the true facts regarding defendants' negligence and wrongful conduct, as alleged herein, plaintiffs would have terminated defendants, thereby depriving defendants of their 'commissions.' Moreover, defendants drafted the Engagement Agreements without negotiation or review of their terms, including terms governing compensation, by independent financial and legal professionals chosen by Fenty.
And the firm took on extra duties while neglecting to paint an accurate picture of her financial situation, Fenty says.
"Plaintiffs are informed and believe, and on that basis allege, that from 2005 through 2010, defendants assumed business management, accounting and advisory roles well beyond the services provided for in the written Engagement Agreements and, in providing their services to Plaintiffs, exerted substantial control over Plaintiffs' financial affairs.
"Plaintiffs are informed and believe, and on that basis allege, that in providing these services to plaintiffs, defendants failed to follow applicable industry standard accounting and business management practices, as alleged herein. In particular, plaintiffs are informed and believe, and on that basis allege, that, among other omissions and failures, defendants' recordkeeping and accounting methods failed to provide sufficient information and/or detail regarding, and/or failed entirely to account for, Plaintiffs' revenue and expenses and failed to ensure maximization of Plaintiffs' revenue and Fenty's personal net worth and long term wealth.
Berdon formed her touring company without planning for its taxes and transferred money between her companies without accounting for the transfers, Fenty claims.
"On information and belief, defendants failed to properly manage Fenty's cash flow and expenses. For example, Defendants formed various limited liability companies to manage Fenty's cash flow and expenses. Plaintiffs are informed and believe, and on that basis allege, that defendants formed these business entities, including Tourihanna, without proper consideration of tax consequences, resulting in substantial unnecessary losses to Fenty. Plaintiffs are further informed and believe, and on that basis allege, that under defendants' direction, these companies made frequent inter-company loans to pay Fenty's expenses without proper accounting.
Accountants ran up the expenses without Fenty's okay and didn't properly budget her Last Girl on Earth tour, according to the complaint.
"Defendants also failed to implement sufficient mechanisms to obtain Fenty's approval of standard or non-standard expenses on a regular basis, as required by accounting and business management industry standards. Defendants further failed to create and implement sufficient financial and cash management controls for plaintiffs, which are standard in the industry. In particular, defendants failed to ensure a proper budget was created for the Last Girl on Earth tour, failed to sufficiently monitor or minimize Tourihanna's expenses during the tour, failed to report to plaintiffs regarding Tourihanna's revenue versus expenses, and failed to reconcile tour expenses and generally put Tourihanna's books in order upon the tour's completion. As a result of defendants' gross mismanagement, plaintiffs lost millions of dollars on the Last Girl on Earth tour. Astonishingly, however, due to its improper financial arrangement with Fenty, Berdon paid itself millions of dollars in commissions for the Last Girl on Earth tour based on Fenty's gross receipts from the tour. Plaintiffs are informed and believe, and on that basis allege, that Berdon's receipt of commissions measured as a percentage of Fenty's gross receipts created a conflict of interest, in that Berdon had no incentive to counsel plaintiffs to reduce expenses, implement sufficient and appropriate financial controls, or consider net receipts, because Berdon would be paid based upon gross receipts, regardless of expenses or net receipts. Plaintiffs are further informed and believe, and on that basis allege, that Berdon was further motivated to conceal from plaintiffs the true state of their finances and Berdon's mishandling of their accounts in order to ensure Berdon's continued receipt of commissions from, and employment by, plaintiffs.
"Plaintiffs are informed and believe, and on that basis allege, that defendants failed to conduct thorough monthly planning, tracking or record-keeping with respect to Fenty's personal expenses and her business enterprises, including Tourihanna, and failed to sufficiently discuss expenses with Fenty, as required by accounting and business management industry standards. Nor did defendants consistently prepare written monthly budgets for Fenty personally or for her business enterprises, including Tourihanna. On information and belief, from 2007 through August 2010, Defendants failed to maintain a proper set of detailed accounting records for Fenty, personally, and for each business entity, including Tourihanna. Moreover, defendants failed to maintain any electronic records in connection with Fenty's accounts, instead compiling incomplete and incoherent paper records. In fact, defendants' files reflect that less than 25 percent of expenses charged to Fenty's personal credit card were actually retained. During 2008 and 2009, alone, defendants retained only two to four percent of all receipts for expenses charged to Fenty's credit card.
"In addition, on information and belief, defendants paid millions of dollars in commissions to third-parties without any written representation agreements and with only limited approvals from Fenty authorizing a fraction of such payments. From January 2007 through September 2010, Defendants also authorized hundreds of thousands of dollars in reimbursements for stated third-party expenses without any supporting documentation or any written agreement regarding reimbursement.
"During the time period in which defendants provided Fenty with business management, accounting and advisory services from 2005 through 2010, defendants failed to sufficiently and consistently report to Fenty the current state of her finances pursuant to industry standards. In particular, defendants failed to prepare and provide Fenty with monthly detailed reports of cash receipts and disbursements, personal financial statements or statement of net worth, revenue and expense for Fenty, personally. defendants further failed to prepare and provide to Fenty monthly comprehensive financial statements, including balance sheets, statement of operations and statements of cash flows for each of Fenty's business entities, including Tourihanna. In addition, plaintiffs are informed and believe, and on that basis allege, that defendants failed entirely to create or implement any long term strategic plan for preservation of Fenty's wealth. Furthermore, plaintiffs allege on information and belief that Berdon intentionally concealed the true state of their overall finances in order to ensure Berdon's continued employment by them and continued its receipt of exorbitant commissions pursuant to their improper and non-industry standard financial arrangement with Fenty.
"Indeed, with the exception of providing Fenty with a single personal financial statement for the first quarter of2005, defendants failed to report information to Fenty in any consistent or meaningful manner as required by accounting and business management industry standards. On information and belief, defendants' files related to Fenty's accounts, including that for Tourihanna, contain only a fraction, if any, of the accountings, reports or approvals which are standard in the accounting and/or business management industries and these omissions fall well below the applicable standards of care," the complaint states.
In the 39-page complaint, Fenty also alleges Berdon mismanaged her taxes, resulting in an ongoing audit from IRS, as well as her royalties and endorsements, leading to the accumulation of millions of dollars in unpaid royalties.
Fenty claims while she was losing a substantial amount of money on her Last Girl on Earth tour, Berdon "gave Fenty a budget to purchase a new home in an amount which, unbeknownst to Fenty, was inadvisable at that time, due to the then hidden losses occasioned by Defendants' mismanagement...."
She adds: "...throughout the five-year period during which Berdon provided them with business management, accounting and advisory services, Mitnick, Gounis and two other Berdon employees were the only Berdon employees assigned to Fenty's accounts. On information and belief, defendants failed to properly staff Fenty's accounts with sufficient personnel having the requisite music industry expertise, including a failure by defendants to ensure proper supervision of more junior employees working on Fenty's accounts and failure to add more staff to these accounts as her career grew.
"From January 2007 through September 2010, when Berdon was terminated, Berdon earned millions of dollars in commissions on Fenty's gross receipts in an amount constituting approximately 23 percent of Fenty's net income during that period. Plaintiffs are informed and believe, and on that basis allege, that Berdon' s receipt of commissions calculated as a percentage of Fenty's gross receipts was not standard in the accounting and business management industry and created a clear conflict of interest, in that Berdon was not motivated to counsel Plaintiffs to reduce expenses, or to implement standard financial controls and budgeting standard in the industry. Plaintiffs further allege, on information and belief, that Berdon had incentive to conceal material information from them regarding their finances in order to ensure Berdon's continued employment by plaintiffs and their continued receipt of excessive and improper commissions.
"Plaintiffs are informed and believe, and on that basis allege, that of the millions of dollars in excessive commissions earned by Berdon from 2005 through September 2010, Berdon provided time sheets for only 17 percent of the time billed for work done on Fenty's accounts. Indeed, nearly 75 percent of the invoices Fenty received from Berdon contained little or no explanation or description of the work done by Berdon's employees, despite the fact that some employees purported to spend anywhere from two to 10 hours per day working on Fenty' s accounts."
Fenty says it was not until she turned 18 in September 2010 that she learned of Berdon's wrongdoing.
"In September 2010, despite having earned tens of millions of dollars in revenues during Berdon's tenure, Fenty learned that her net income after payment of expenses and exorbitant commissions to defendants, as alleged herein, was a fraction of that amount," the complaint states.
Robyn Fenty aka Rihanna is an international rhythm and blues artist with six chart-topping albums and 11 number one singles on the Billboard Hot 100 chart, the youngest solo artist to accomplish this feat.
According to the complaint, "She is also the highest-selling digital artist in US history, having sold 47,571,000 singles as of 2012. Some of her singles have earned their place on the list of best-selling singles worldwide. All told, since 2005, Fenty has sold more than 25 million albums and 60 million singles worldwide. Also in that time, Fenty has won nearly two hundred awards for her work, including five Grammy Awards, five American Music awards, eighteen Billboard Music Awards, three BET Awards and two Brit Awards. In 2007, Fenty won the World Music Award for World's Best-Selling Pop Female Artist and Female Entertainer of the Year. Since 2007, Fenty also has received endorsements from several high profile companies, including Secret, Cover Girl, Giorgio Armani, Gillette, Gucci, Nokia, Doritos, Totes-Isotoner, Vita Coco and Optus Funds."
Fenty seeks compensatory, exemplary, punitive and general damages, as well as "disgorgement and restitution of all Defendants' illgotten gains."
She is represented by Cindy Minniti and Meagan Crowley from Reed Smith in New York.