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UNITED STATES TAX COURT - TRIAL

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ESTATE (OF MICHAEL J. JACKSON DECEASED)
EXECUTORS: JOHN G. BRANCA. AND JOHN MCCLAIN

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COMMISSIONER OF INTERNAL REVENUE (IRS)

February 7th 2017

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Presiding Judge Mark V. Holmes

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Jacksons estate is represented by Avram Salkin, Charles Paul Rettig, Steven Richard Toscher, R
obert S. Horwitz, Edward M. Robbins Jr., Sharyn M. Fisk and Lacey E. Strachan of Hochman Sa
lkin Rettig Toscher & Perez PC, Paul Gordon Hoffman, Jeryll S. Cohen and Loretta Siciliano of
Hoffman Sabban & Watenmaker and Howard L. Weitzman of Kinsella Weitzman Iser Kump &
Aldisert LLP.
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The
IRS is represented by its attorneys Donna F. Herbert, Malone Camp, Sebastian Voth, Jordan Mus
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en and Laura Mullin.
--------------------------------------------

David Dnn - Shot Tower Capital

(Financier Michael Jackdon 2005)
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Mr. Toscher: Your Honor, we have another witness, but we
thought there was going to be cross examination so ...

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Judge Holmes: I did, too.

Mr. Toscher: ... I beg The Court's indulgence to ... can

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we start tomorrow with Ms. Karen Langford.

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Judge Holmes: What's her role in this?

Mr. Toscher: Karen Langford is Mr. Branca's assistant. She has

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the title of a paralegal.

Judge Holmes: Oh, okay. I know who you're talking about.

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Mr. Toscher: That understates ...
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Judge Holmes: Her significance.

Mr. Toscher: Yeah. I don't want to ...

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Judge Holmes: I do remember her now. What other witnesses will we

have tomorrow?
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Mr. Toscher: David Dunn, who's the investment banker Mr.

Branca referred to, and there may be ... we're not quite sure.
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We think that'll take the day.

Judge Holmes: Okay.

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Mr. Weitzman: Your Honor, may I, Your Honor, please with

respect to Mr. Branca's potential recall.
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Judge Holmes: Yes.

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Mr. Weitzman: I assume that won't be this week. And I wanted to
ask through The Court could inquire whether or not it's
anticipated they want to recall him this week because ... it's

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okay if I do this, right ... because this is Grammy week. He's
really kind of backed up this week.

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Judge Holmes: It's Grammy week?

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Mr. Weitzman: Yeah. In other words, it's a ... it's a huge
business week in the music industry.

Judge Holmes: I've heard of Grammys.

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Mr. Weitzman: I know tomorrow or Wednes- - - Thursday and
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Friday are really going to ...

Judge Holmes: Okay.

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Mr. Weitzman: So if you can just inquire of the Government ...

Judge Holmes: I mean, we don't have to call him during ...

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Mr. Voth: No, absolutely not. No, we won't.

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Judge Holmes: ... like this industry convention or something.

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Mr. Voth: We have a great working relationship with Petitioner's

counsel and ...
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Judge Holmes: Yeah. Try to work those kind of things out ...

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Mr. Weitzman: Thank you, Your Honor.

Judge Holmes: Very good. Ms. Langford and Mr. Dunn tomorrow.

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Mr. Toscher: Yes, Your Honor.

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Judge Holmes: We are done for today. Thank you very much.

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Mr. Voth: Thank you, Your Honor.

Judge Holmes: Good morning. The hearing is starting late this

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morning. The floor is yours, Mr. Toscher.

Mr. Toscher: Good morning, Your Honor.

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Mr Camp: Good morning.

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Judge Holmes: Please be seated.

Mr. Toscher: Your Honor, can we make our appearances first or

are we okay with that?
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Ms. Herbert: I don't think we need to do that.

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Judge Holmes: No, it's continuing.

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Ms. Herbert: But Your Honor, I do have one small housekeeping

matter to bring up.
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Judge Holmes: Oh, go ahead.

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Ms. Herbert: Now Respondent did not serve a subpoena on Mr.
Branca because he's a party in the case, and we do, as we
discussed yesterday, we anticipate cooperation from Petitioner's
counsel to bring him back during our case-in-chief. But we just
want to ask whether the Court would prefer that we issue a

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subpoena to Mr. Branca?

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Judge Holmes: You're a man of honor, aren't you?

Mr. Toscher: There's no need for that, Your Honor. We object

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to the government's procedure, but Mr. Branca will be here.

Judge Holmes: Yeah, that's fine.

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Ms. Herbert: Okay, thank you. Just wanted to clarify that.
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Judge Holmes: I understand.

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Mr. Toscher: Your Honor, Petitioners would call as their next

witness David Dunn.

Court Clerk: Good morning. DAVID DUNN sworn. You may be seated.
Please state your name and address for the record, and a business
address is fine.
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A. Sure. Dave Dunn, and the business address is 621 East Pratt,
Baltimore, Maryland, 21202.
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DIRECT EXAMINATION
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Mr. Toscher:
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Q. Good morning, Mr. Dunn. Could you tell us your occupation for
the record please?

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A. Sure. I'm an investment banker.

Q. Are you married?

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A. I am, two kids.

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Q. Children?

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A. Two kids.
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Q. Before we get into your company, can you give us a little bit
about your educational background?
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A. Sure. I've got a B.A. in Economics from Bucknell University,
and I also have a J.D. from the Washington College of Law at
American University in Washington, D.C.
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Q. Do you hold any certifications or licenses?

A. I have multiple, you know, I'm a broker- dealer, so I've got,

let me see, Series 7, Series 24, Series 62, Series 63 and a
Series 79 for, you know, various lines of business practice as
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required by FINRA. I'm also a certified valuation analyst.

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Q. Would you go back, start the post-college your employment

history?
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A. Sure. My first job out of college I was an economist at the

Bureau of Labor Statistics, which is the entity in Washington
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which calculates the Consumer Price Index, and I actually ...

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my area of focus was costing out labor costs and specifically
collective bargaining agreements as sort of part of the inputs
into, you know, into the equation that ultimately derived the CPI

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and the PPI. While I was doing that, I actually my second year I
started going to law school at night, and continued to work at
the Bureau of Labor Statistics that then, you know, my last year
in law school. So I started working as a law clerk at a firm by

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the name of DLA Piper.

Q. And you said you had a J.D., so you graduated law school?

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A. I graduated law school and then went to work in the Corporate
and Securities Group of Hogan, what's now Hogan Lovells, but at

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the time was Hogan and Hartson, which was a large D.C. law firm,
and my areas of practice were really corporate and securities law
and M&A. ae
Q. And how long did you do that for?
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A. I did that for approximately three years.

Q. Okay, and what did you do when you left there?

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A. While I was there, I worked pretty extensively with an

investment banking firm by the name of Alex Brown and Sons,
which is based in Baltimore, and at the time was the nation's
oldest investment bank and, you know, I was offered the
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opportunity to go work with them in the Media Investment Banking

Group, and so I decided to leave the practice of law and make a
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little career change early on.

Q. So you wanted to leave the practice of law? Okay. Sorry for

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... so did you go to Alex Brown?

A. I did.
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Q. Okay, and what did you at Alex Brown?

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A. You know, I was in the Media Group, so we, you know at the
time there was a lot of deregulation going on in the broadcast
industry. So I spent a large part of my young career on

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consolidation of the radio industry. You know, as I advanced
through, I had to find my own area of expertise and so continued
to do a bit on the broadcasting side and also, you know, the XM

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satellite was coming so I worked on that IPO. And you know then
started focusing on publishing, not music publishing in, you
know, after 2000 or so.

lJa
Q. Okay. So we're about in the 2000 area right now, just starting
with Alex Brown? ae
A. Yeah. I started a little earlier than that.
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Q. Okay, and how long were you with Alex Brown and Sons?

A. Well Alex Brown and Sons was acquired by Deutsche Bank, so I

believe it was 1999 it was acquired by Deutsche Bank, so I was
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actually with Deutsche Bank until 2004.

Q. And what were your areas in Deutsche Bank?

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A. My areas of focus were again media companies, primarily

broadcasting and publishing.
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Q. And when did you leave Deutsche?

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A. I left midway through '05. I mean it was really an instance

where Deutsche wanted folks to consolidate in London and New York
and I had that opportunity, but my wife's entire family is from
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Baltimore, and so ultimately decided, made the personal decision
that we would stay in Baltimore.

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Q. And where did you go to? Were you employed by somebody after
Deutsche Bank?

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A. Yeah. My post-Deutsche Bank career was primarily spent at a
firm by the name of ... I guess almost equally spent at a firm
by the name of Signal Hill Capital, which was comprised of a

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number of former team members from the Alex Brown/Deutsche Bank
team. So I was there until 2011, at which point I left and
started my own firm, Shot Tower Capital. Again, for the entire
duration I was always, always been focused on media.

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Q. So what does the media entail, the media area?
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A. You know, it's fairly broad in terms of what it can entail.
But you know, my area of focus has really been limited to a
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couple of things, and let me first say when I left Deutsche Bank,
Deutsche Bank was a very different platform than any other kind
of platform, because we did a lot of larger leveraged buyout
transactions. And so you know, spent equal amounts of time in
M&A, as well as large structured debt finances. So when I left
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and went more the independent route, it was more focused on M&A,
and while I did bank some of the companies, honestly I was
looking for areas that weren't bank sheet, balance sheet
intensive, which was balance sheet was a pretty important
criteria in 2004-2005 in terms of the amount of leverage. So you
know, that's actually when I started looking at music for the
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first time.
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Q. Okay, and so just so I'm clear, you started getting into music
assets or music companies when you were at Signal Hill?
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A. Yes, yes. That was ... actually a little before. I mean I

had an interest in it. You know, my model is a little more
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contrarian. When I banked yellow page directories, and they had a

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significant amount of EBITDA, and it was the melting ice cube
theory. And you know, as a banker it's kind of interesting,
because it wasn't that crowded. But you know, some of these

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companies have north of a billion dollars of EBITDA. So I did a
number of very large structured financial transactions, where you
just sort of take a bet on the duration of the capital, what's
going to last. So when I went independent, you know, I started

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looking around saying okay, where could I focus, and at that
point, you know, in '04, you had Napster. The iPad just came out.
The industry was totally out of favor. So valuations had been
coming down and, you know, I just decided it was an interesting

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place to look. So my first music deal was in 2005.

lJa
Q. So when was Shot Tower Securities ...

A. I left Signal Hill at the end of '11, and we officially

launched in March of 2012.
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Q. So tell us a little bit about Shot Tower.
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A. So it's, you know, essentially the same practice. I have Rob

Law, who I've worked with since 2006. I have my same assistants,
and then we have, you know, a number of associates and analysts
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who assist us in executing transactions. We've done a lot in the

music space, you know, in addition to the things we've done for
the Estate of Michael Jackson, and we also have done, you know, a
number of media services-related deals that are tangentially
related to the film industry. So really media and entertainment
continues to be the core focus.
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Q. How many employees at Shot Tower?

A. We have normally seven to eight. I think we are right now at

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seven, but we have an associate who we made an offer to, so we'll

have eight again soon.
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Q. Okay. So someone would come to you if they were looking to buy
or sell some music assets?

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A. You know, normally we participate on the sell side. We'll
occasionally assist someone in buying an asset but, you know, or
a company. But it really has to be a good long term client and,
you know, given the lessons learned at Deutsche Bank in terms of

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structure and finance on the debt side, you know, we're also
pretty competent in dealing with structured debt and equity, to
the extent that that's, you know, a need that someone or a

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company has.

Q. Would you say a specialty of Shot Tower is the music sector?

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A. Yes. ae
Q. And I may have asked you this or you may have said it before,
Shot Tower is a registered broker-dealer as well?
ich

A. Shot Tower Capital is the parent company. Shot Tower

Securities is the registered broker- dealer.
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Q. Okay. We're going to get into in a second the work you did for
Michael Jackson before he passed away in June of '09. But could
you just briefly summarize, and you ... I'll ask you. You've
also done work with the Estate after Michael passed away?
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A. I have.
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Q. We're going to get into it in a little more detail. Could you

just summarize the areas you've been working with the Estate from
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after Michael passed to the present day?

A. Sure.
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Q. Briefly and slowly.

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A. Okay. It's primarily they're related to the music assets, and
the first, our first involvement was refinancing Mijac in
December 31st, 2009, really to eliminate the playing field, which

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was the ... I guess we'll talk about it, but the second lien
lender against the Mijac assets, which is Michael's personal
works and some of the copyrights he acquired over time. In 2010,

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the NHT II or New Horizon Trust II financing was maturing, which
is ...

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Q. Let me just interrupt you a second. So I keep getting
confused. New Horizon Trust II owns which asset?
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A. That is the bankruptcy remote entity which holds the interest
in Sony/ATV.
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Q. Okay, okay. I just want to make sure. I get confused. I don't
want the record to be confused, okay.

A. Okay.
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Q. All right. You said you were working on a refinancing for the
Sony/ATV?
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A. Yeah, for Sony/ATV in 2010, and then we subsequently did a

refinancing of that same entity in 2013. And then on the M&
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A. front, we assisted the executors in connection with a

negotiation of the EMI administration agreement, and also the
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Estate's ... the Estate receiving a position in the EMI music

publishing entity, which is administered by Sony/ATV starting in
2012.
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Q. What about assistance to the Estate in connection with the IRS
appeals process?

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A. Yep, and I've assisted the Estate in the IRS appeals process
and was involved in a number of those discussions and

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negotiations, and I think really the last thing I assisted the
Estate on was the sale of the Estate's interest in Sony/ATV to
Sony pursuant to Sony's exercise of the buy-sell process at the

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end of 2015.

Q. So how did you come about working for the Estate? How did they

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find you or you find them?

A. So good. It's a fairly random story, you know. Being from

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Baltimore, Maryland, you know, it's fairly interesting to bump
into somebody. But I was at a charity event and I was having a
conversation with a gentleman I knew who was a bankruptcy lawyer
by the name of Greg Cross, and you know, we were having a couple
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of cocktails and you know Greg's like well, you're in the media
space. You know anything about music? I'm like yeah, I've done a
couple of music deals.
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Q. Slow down.

A. Okay, and you know, so we started talking a little bit about

music. Then he asked me if I knew Fortress Investors, and I
happen to have done a transaction in 2002 for a company by the
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name of Pinnacle Towers, which was a sell in a prepackaged

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bankruptcy to Fortress. So I got to know Wes Edens, who was one

of the co-founders quite well through that process. Greg say
well, you know, there's something we should probably talk about.
So I got a call from him early in the week and he gave me some
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details. I then went out to meet with Michael Jackson, to talk

about what was going on and the need to do a refinancing at the
end of 2007.
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Q. Okay. So what ... that's what I was going to ask. What year
are we talking about?

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A. So this was in ... the discussions with Greg started in
February of 2007.

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Q. And did he tell you at first this issue was for a client
Michael Jackson or did he tell you later?

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A. He told me later.

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Q. Okay. So I interrupted you, I apologize. A meeting was set up
to where you met Mr. Jackson?
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A. Well, first I asked to see some of the information and
materials related to Sony/ATV, including the operating agreement.
I got a little up to speed on that. I also asked to see some of
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the documents related to the 2006 refinancing of the interest in
Sony/ATV, just to familiarize myself with the structure and, you
know, what was required. And then after I was a little more up to
speed, I had a meeting with Michael Jackson.
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Q. Okay. So what was the purpose of ... I assume you were

eventually retained?

A. I was eventually retained.

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Q. And why did they need your services?

A. So the way in the history of the various loans is Michael

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really had been incurring debt secured by these assets, you know.
There was a transaction in 1995 when the venture was formed that
I think sort of resulted in the debt going away. Then it
incrementally crept up, and there were a number of refinancings
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that were, you know, at the time, prior to the 2007 financing,
secured by both the interest in Sony/ATV as well as Michael's
ownership of Mijac, which were all his personal music

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compositions and, you know, various compositions that he acquired
from third parties over the years for, you know, really you could
say investment purposes, but because he loved certain copyrights
he wanted to own them. So as you move through, as the debt

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increased, Sony began to guarantee the debt in various ways, and
you know, really starting I guess in the late 90's and all the
way up through the 2006 financing. But the 2006 financing was
really a refinancing that was the result of Bank of America owned

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Michael's debt. When the trial was going on in 2005, they wanted
to remove themselves ...

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Q. Wait one second please. I'm sorry. Bank of America ... I'll
just interrupt you to say Bank of America owned which debt?
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A. Bank of America owned the debt at the time that was secured by
Sony/ATV and Mijac.
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Q. Oh okay. So Bank of America was the creditor at the time, and

you mentioned a trial was going on in 1990 ...
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A. In 2005.

Q. 2005. What trial are you referring to? 249

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A. The sexual molestation trial.

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Q. Okay. So '95, when you got in in '97, was Bank of America

still the creditor?
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A. Well, in 2005 Bank of America sold the note to Fortress, and

then in 2007 Fortress still held the debt, but there was one
intervening financing in 2006 prior to us getting involved.
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Q. So what is Fortress? What type? Is it a bank or ...

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A. You know, Fortress is I think by best definition a distressed
hedge fund. You know, they're opportunistic is the way they would
describe themselves. So they tend to make loans in order to

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ultimately play for the underlying assets or entity, and they,
you know, they tend to come into situations where they can buy at
a good value and take advantage of distressed situations.

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Q. Okay. Do you know why Bank of America sold their position to
Fortress?

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A. I did learn that in 2007, when we talked to some of the
original lenders that, you know, there was just concern about ...
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Ms. Herbert: Objection, hearsay.
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Judge Holmes: Overruled. Not admitted for the truth of the

matters.
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A. And I can ... and in 2007, I had discussions with the

representatives of Bank of America who
and they basically were concerned that
reputational damage to the extent that
was different than it actually was.
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were involved at the time,
they would suffer
the outcome of the trial

Mr. Toscher:
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Q. Let me turn your attention a second to Mijac Music. What

entity owned Mijac Music?
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A. Currently?
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Q. Well no. Back in ... I guess back in '07, when you're first
focusing on the refinancing?

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A. Prior to the refinancing or after?

Q. After the refinancing.

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A. Okay. So that the entity that after the refinancing that held

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the interest was a bankruptcy remote entity called New Horizon
Trust III.

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Q. Okay. So New Horizon Trust III owns the Mijac music?

A. Uh-huh.
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Q. Okay. You talk about a bankruptcy remote entity. Sort of just
explain that and why that structure is there?
ich

A. The structure is there because the lenders against the asset

had concerns that claims against Michael could ultimately creep
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through to the assets, and additional liens could be filed

against the assets, which could impact their ability to realize
value to the extent that there was an event of default. So it was
really put in place to isolate the collateral against any
personal claims, any claims that may have come against Michael
personally.
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Q. Okay. So just for definitional purposes, New Horizon Trust

Roman numeral III owns what asset?
w.

A. The Mijac.

Q. No, III. Oh, III is Mijac.

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A. Yeah. III is Mijac.

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Q. New Horizon Trust II?

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A. Is the interest in Sony/ATV.

Q. I'll have to test myself later on, but I think you have it

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straight. Okay. Let me go back a second to 2007, when you fist
met with Michael. What was your observation of his financial
condition then, as you were getting in to start getting into his

lJa
refinancing?

A. Well I mean you could look at ... I think his financial

condition at the time was pretty weak. I mean he had a couple of
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things. The loan that Fortress made in 2006 was expected to
mature in December of 2007, but when I started analyzing it even
prior to engagement, I discovered that there wasn't enough
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interest in the interest reserve to get it through to maturity.
You know, essentially the interest reserve was really ... if
you look at the 2006 financing at the time, Sony/ATV was
distributing 6-1/2 million year to the Michael Jackson side and
mM

6-1/2 million a year to Sony. Unfortunately, the interest that

was accruing on the loan at the time was in excess of the amount
of the distribution.

Q. Okay. Let me stop you a second. What loan are you referring
to? The loan that Michael had borrowed money and financed it with
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his Sony/ATV interest?

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A. In 2006, the collateral ... it was actually a single loan,

and the collateral was both Sony/ATV and Mijac. So all his
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interests were part of that 2006 loan.

Q. Okay, and the interest payments due on that loan were?

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A. You know, I can't remember exactly what they were, but it was
about 270 million at about seven percent. So you know

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approximately $15 million a year in interest.

Q. And what's your recollection of what the annual distributions

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were?

A. They were 6-1/2 million per year under the operating

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agreement.

lJa
Q. Okay. So just to make sure it's clear for everybody, the
distributions from Sony/ATV to Michael under the operating
agreement, 6-1/2 million not enough to serve as the interest on
the debt?
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Ms. Herbert: Objection, asked and answered.
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Judge Holmes: Overruled.

A. That's correct.
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Mr. Toscher:
Q. So let me ... can we put up the stipulation? Yeah, the
stipulation. Go to stip paras 105 to 45, 105 to 145. We'll have
some questions. We're going to focus now, Mr. Dunn, on the 2007
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refinancing of the Mijac capital, okay. We may ask you some

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questions ... well that's the documents that relate to the

document. It's the other one. Okay. So what was your ... you
met with Michael. What was your ... what was your goal? What
were you trying to achieve after you met with him?
w.

A. Well, it was ... it was to refinance the existing

indebtedness, which was coming due in December, but there were
ww
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also some short term things that we needed to deal with. For
example, you know, I believe my engagement letter was signed at
the end of April.

n.c
Q. April of 2000 ...

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A. April of 2007, and as far as the math was concerned, the
excess funds in the reserve necessary to pay interest above the
Sony distributions was going to deplete in late July to early

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August.

Q. Slow down, okay. So you say the ... you're talking about an

lJa
interest reserve?

A. Right.
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Q. And there wasn't enough money in that reserve to service the
ich
debt?

A. Into maturity, that's right.

mM

Q. So we're talking about August of 2007. Weren't these loans put

in place in 2006?

A. They were, yes. In March of 2006, these loans were put in

place.
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Q. Okay, and by ... so August of 2007, they were almost going

into default because not enough interest reserve?
w.

A. Yes. They were going to go into default.

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Q. Okay. So when you met with Michael ... okay. So you're
trying to ... you said you wanted to take care of some
preliminary matters first and seek refinancing. What were those?

n.c
A. Well, there was a lot going on at the time, and you know, the
fact that the gentleman who brought me in was a bankruptcy lawyer
can probably tell you the amount of litigation. There were

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multiple unsecured creditors, and there was a fair amount of
concern that to the extent they organized, they could force him
into bankruptcy. So there was like literally ongoing negotiations

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with multiple creditors, just to try and buy more time, until we
could get the refinancing done. I mean there were judgments
against him, there were claims.

lJa
Q. Let's slow down for a second. So we're talking about ...
you said judgments against him. You're talking about Michael
Jackson?
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A. Uh-huh.
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Judge Holmes: You have to say yes or no.

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A. Oh, I'm sorry, yes. I'm sorry about that.

Mr. Toscher:
Q. Do you recall what kind of judgments these were?
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A. From the 2006 refinancing, he had signed contracts with two

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agents, where he had agreed to pay each of them a $3 million fee

whether or not, you know, or $6 million fee whether or not an
entity, you know, a transaction closed or not. So that I think
there were two parties he owed a total of $6 million to. There
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was litigation. I mean I think there was litigation with some

former business partners including this gentlemen Weisner that,
you know, there were judgments. There were still legal bills from
ww
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the 2005 molestation trial that, if I recall correctly, they were
about $6 million. So you know, if you added it all up, you know,
there was a fairly substantial amount of money that was owed to a

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number of different parties, most of whom were legal
professionals.

Q. Okay. Do you have a recollection of an amount overall, just an

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estimate?

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A. Approximately $20 million.

Q. At that time when you got involved with Michael in 2007, what

lJa
was his source of money to live on, if you know?

A. You know, I don't know exactly, but I do know that his master
ae
recording agreement in MJJ Ventures were not subject to any of
the liens. So I'd imagine that was the source of income.
ich
Q. Okay. Sony/ATV would not have been a source of income though?

A. Sony/ATV was not a source of income because all of the

mM

distributions from that were required to go to service the

interest on the New Horizon debt.

Q. Okay. So as you started working with Michael, was he aware of

his financial circumstance?
a
Te

A. He was aware of his financial circumstance, and you know,

going into this, I sort of pledged that I needed to be as up
front as I possibly could with him, because the situation, you
know, was fairly dire and there were a lot of people around him
w.

who were basically telling him we can do this or we can do that,

it's all going to be great.
ww
 om
Q. Cheerleaders in other words?

n.c
A. Yeah, yeah, and you know, it was a little bit of a challenge,
because there I am the half empty glass guy coming to see him and
there are four people waiting to see him or telling him
everything's going to be fantastic. And you know, so he was aware
of his financial situation. I made a pretty big effort to sort of

so
teach him about enterprise value and finance and how it bleeds
through his equity and, you know, where cash flow is and where
you can potentially get it and emphasized really the weight of

ck
the debt. So I did spend a fair amount of time with him, and I do
have to say I mean he's ... he wasn't necessarily financially
experienced, but he kind of made a pretty strong effort to learn

lJa
and was interested in spending a fair amount of time trying to
really understand it.

Q. Okay, and he understood the extent of his financial

circumstances?
ae
ich
A. He understood ...

Ms. Herbert: Objection, leading.

mM

Judge Holmes: Sustained.

Mr. Toscher:
Q. Did he understand the extent of his financial circumstances?
a
Te

A. He did, but you know, I think that would ebb and flow over
time, depending on who he was talking to about what they could do
to help him. So we did have challenges as we were going through
the process.
w.

Q. But your communications with him, you communicated to him what

ww

you described as dire financial circumstances?

 om
A. Yes. The loan was going into default and, you know, we were
going to have to do some pretty significant restructuring to get

n.c
the amount of capital required to refinance the debt and satisfy
the claims, and he also wanted to get a little bit of incremental
cash that he could live on.

so
Q. So what would have happened if you weren't ... we're going
to talk about the restructuring in a second. We're going to talk

ck
about some of the documents. What would happen if you weren't
able to achieve the refinancing?

lJa
Ms. Herbert: Objection, calls for speculation.

Judge Holmes: Sustained.

ae
Mr. Toscher: What would have happened if - - Your Honor, I'm
asking what would happen if he wasn't able to refinance. I don't
ich
think that is speculation.

Judge Holmes: Specify the particular refinancing.

mM

Mr. Toscher:
Q. What would have happened if you weren't able to refinance the
debt held by Fortress?
a

A. Well, there's a provision under the operating agreement that,

Te

you know, provides exactly what does happen in that instance.

It's actually ... there's portions in the operating agreement
with the credit facility with Fortress that also sort of laid it
out. You know, basically what would happen is the asset would be
w.

put up for sale. Sony would be in a position where they could

tender a credit bid, and you know, it would basically go to
market. I think part of this was, you know, Fortress was and I
think Fortress was, based on their actions and who they are as
ww
 om
entity, were probably looking for that to occur, to give them an
opportunity to get in there. They would also wind up with Mijac,
which was also part of the collateral at the time.

n.c
Q. Both Sony/ATV and Mijac?

so
A. Right, right, and I can't tell you whether they were moving
for the ATV piece or the Mijac piece but clearly, you know, they
had an interest in the interest and assets.

ck
Q. You refer to the credit facility with Fortress as to the fact,
but you also referred to an operating agreement before. Was that

lJa
... which operating agreement are you talking about?

A. I'm sorry. You know, it would be the credit facility with

ae
Fortress is the loan document, and then there was an operating
agreement with Sony/ATV, the Sony/ATV operating agreement which
set out the agreements between Sony and Michael Jackson, and with
ich
each refinancing that was amended to cover some of the terms
associated with the various financings.

Q. Okay. I just want to be clear for the record. So let me ...

mM

going into 2007, just so I understand, because I want to try to

keep it clear, the loan to Fortress was secured by both Michael's
interest and Sony/ATV?

Ms. Herbert: Objection, asked and answered.

a
Te

Judge Holmes: He can pitch from the wind up on this one. Go

ahead, Mr. Toscher.
w.

Mr. Toscher:
ww
 om
Q. Thank you, Your Honor, was secured by the interest in Sony/ATV
and the Michael's interest in the Mijac catalogue?

n.c
A. Yes.

Q. Okay. So let me ... now I want to separate them out a

so
little bit, because I want to make sure we're clear. In the
course of being retained to get refinancing, did you learn what
Mijac catalogue was?

ck
A. Yes.

lJa
Q. Would you tell the Court what your understanding of what the
Mijac catalogue was at that time?
ae
A. The Mijac catalogue was comprised of compositions composed by
Michael Jackson, as well as compositions composed by a number of
ich
third party writers that Michael had acquired or obtain over the
years.

Q. Okay. Tell us what you did, what actions you took to go about
mM

to try to secure the refinancing of the Mijac catalogue? What is

the first thing you do? What do you look at and then how do you
approach? What you do as an investment banker?

Ms. Herbert: Objection, compound.

a
Te

Judge Holmes: Sustained on that one.

Mr. Toscher:
w.

Q. Is there another word for multiple compound? No objection,

sustained. I appreciate that. Tell us how you started out
evaluating how you seek refinancing Mr. Dunn?
ww
 om
A. As soon as we are engaged, the first mission here was, you
know, what can we do and can we do it without a Sony guaranty,

n.c
because Sony had been historically guaranteeing this
indebtedness, so the big question is how much leverage does Sony
actually have relative to what we need to do.

so
Q. Okay. Let's stop for a second, because I think this is an
important point. So historically when you got involved in 2007,

ck
this debt which was secured, there was a Sony guaranty. Tell us a
little of what your understanding of that Sony guaranty was at
that time?

lJa
A. The Sony guaranty at that time basically required that Sony
submit a bid equal to the amount of the outstanding debt in a
sale.
ae
Q. So okay, and that's the nature. I'll try to get there. So this
debt that Michael owned on his interest in the Sony/ATV, the debt
ich
to Fortress and collateralized by Mijac, Sony guaranteed a
portion of that debt or all of that debt?
mM

A. All of that debt.

Q. Okay, and do you know how that Sony ... how that Sony
guaranty came about?
a

A. The Sony guaranty came about at an earlier financing, because

Te

Michael was unable to borrow that amount, you know, just given
the loan to value and the amount of cash flow that was being
generated by the assets. He was unable to borrow that without the
Sony guaranty, and Sony came in as an accommodation to assist
w.

him.
ww
 om
Q. Okay. Who would have required that guaranty at that time when
it first came about, the lender?

n.c
A. The lender.

Q. Okay. I just wanted to make sure that was clear. So I sort of

so
interrupted you. So tell us how you went about trying to obtain
refinancing in 2007? What did you do?

ck
A. So the first thing is we, you know, we wanted to do it without
the Sony guaranty, because I think there was a history that when
you read the operating agreement, you could see every time Sony

lJa
issued a guaranty, they removed rights from the operating
agreement and transferred them to the Sony partner. So the major
decisions were eroding. ae
Q. Okay. Slow down please.
ich
A. Okay, and so we called a number of lenders and you know,
fortunately having been a Deutsche Bank with a large balance
sheet, you know, I had former colleagues both there who had left
to go to other banks. So they were some of my first contacts, to
mM

just get an honest assessment of whether we can get this done on

a cash flow basis. If we could get Sony to up the distributions,
you know, could we do it if we could you know if ... what did
we need to do exactly to do this, you know. Look at the loan to
value, look at the cash flow that was being distributed from the
asset and would this actually work without the Sony guaranty. So
a

that was our first step.

Te

Q. And did you come to any conclusions at that time whether there
could be a refinancing without the Sony guaranty?
w.

A. We came to the conclusion very quickly, and you know.

ww
 om
Q. And what was that conclusion?

n.c
A. That we needed the guaranty.

Q. Why?

so
A. Sony as the ... essentially Michael was not in a position
to control anything at Sony/ATV. He couldn't say reduce your

ck
focus on growth to distribute more cash flow. He couldn't change
the distributions without Sony's consent. So essentially, you
know, if you look at Michael's loan, you have Sony/ATV which is
the operating company, which had a significant amount of internal

lJa
debt because they were focused on growing and acquiring assets,
and that's here. And then Michael's debt was outside of that,
which was basically borrowing against his interest in Sony/ATV.
So Michael's debt was really almost, you know, kind of like a
ae
margin loan secured by the interest in ATV, and it was behind all
of this debt. On top of that, you know, the repayment that was
really dependent on the distribution of cash flow from the
ich
Sony/ATV entity, where Sony was the managing member and
effectively had the ability to decide how expenses were incurred,
what monies were distributed and there was a detailed waterfall
in the operating agreement ...
mM

Judge Holmes: I'm sorry, waterfall?

A. So basically what the waterfall outlines is it outlines the

priority of cash distributions to the members.
a
Te

Mr. Toscher:
Q. Members of?
w.

A. The Sony member and the Michael Jackson member.

ww

Q. Okay, and you're referring now to the operating agreement ...

 om
A. The operating agreement.

n.c
Q. Of Sony/ATV?

so
A. Yes, sorry.

Q. Okay. So just for the record, if we refer to operating

ck
agreement ...

A. That's the Sony ...

lJa
Q. It's going to be the Sony/ATV unless we've specified
otherwise, okay. All right, thanks. So the ... okay, and you
ae
gave the reasons. So you came to the determination that you would
not be able to refinance without the Sony guaranty?
ich
A. Yes.

Q. So how many potential lenders did you contact? Do you recall?

mM

A. You know, I think there's a little more detail if I could give

it in terms of how we changed the structure of the financing.

Q. Do you think we should state that first before ... yeah.

a

For clearness, please go ahead.

Te

A. I do, because there are ... there are ultimately three

different groups of lenders we contacted, and ...
w.

Q. As long as you go slow.

ww
 om
A. Okay. So after determining that we couldn't do it without a
guaranty, and we looked at the amount of money that we needed to
borrow, we made the determination that structurally we would be

n.c
able to borrow more to pay off the unsecured creditors, fund a
new interest reserve for ATV if we separated Mijac and Sony/ATV
into two different assets. So Sony had at this point expressed a
willingness to guaranty up to 300 million against Sony/ATV alone,

so
and separately we were going to look to finance Mijac as a
separate asset with a different group of lenders. So we
ultimately had a group of lenders for the Sony/ATV interest,
which is New Horizon Trust II, and we had a separate group of

ck
lenders for Mijac or New Horizon Trust III. So in terms of the
number of lenders we approached, we approached banks, we
approached alternative financing sources and you know, it was a

lJa
fairly sizeable list. It was in excess of 50 potential financing
sources.
ae
Q. Okay. We all know what a bank is. What do you mean by an
alternative financing source?
ich
A. Well, there are ... and you know so for example with Mijac,
there are banks who lend to smaller music assets, but there are
BDCs which are, you know, it's ...
mM

Judge Holmes: BDC.

A. BDC, yeah, like a business development corporation which is,

you know, an exemption but they would, you know, they were not
necessarily bank lenders, but they were doing lending at the
a

time, and there were also hedge funds. You know, we have to
Te

remember when we started this process, it was the height of the

credit bubble. So there were a number of different avenues
available and lots and lots of lenders. On the New Horizon Trust
piece, we had a couple of things we were ...
w.

Mr. Toscher:
Q. Which asset are we talking about?
ww
 om
A. Sony/ATV, I'm sorry.

n.c
Q. Good, Sony/ATV. Let's ...

so
A. I'll go Sony/ATV.

Q. No, no, let's do ... either one is fine.

ck
A. So on the Sony/ATV piece, you know, we had a couple of
options. So I think the first thing to remember about raising

lJa
debt is it really comes in two forms. There is what's called best
efforts financing, and then there's something called the fully
committed financing. So in a best efforts financing, you'll go to
a lending bank and they say okay, you know, we're going to
ae
contribute $100 million to this, and then we're going to go raise
the other 200, and we'll do our best. But if it doesn't happen,
sorry, you know, you're out of luck. And then there's the
ich
committed financing, where the bank says okay, we're going to put
100 or 200 million in this. We're going to go raise the rest, but
you know what if we can't get it done, we're going to stand
behind the full amount. And you know, when you looked at it as an
mM

advisor, no surprise, you'd get better pricing on a best efforts

financing because the underwriter isn't taking any risk. On a
committed financing, they're taking risk. So the incremental cost
that they're going to charge you in terms of up front fees and
interest, you know, is going to be higher. Given where Michael
was, I believe ...
a
Te

Q. What do you mean "given where Michael was"?

A. Just in terms of the number of unsecured creditors

w.

outstanding, the risk of potential bankruptcy if they

collaborated, I felt it was more important to perhaps pay a
little more interest and secure a committed financing. So we were
ww
 om
certain that we could show up on the refinancing date and close
the transaction. So that ...

n.c
Q. We're talking about Sony, his interest in Sony/ATV?

A. Sony/ATV, yes.

so
Q. Stay on that one.

ck
A. Yes. So we reached out to a lot of folks, and you know, there
were various reactions, some financial. There were also a number

lJa
of folks who expressed concern like Bank of America did when we
reapproached them in '07, that they weren't sure that they wanted
to be involved with Michael Jackson right now.
ae
Q. And did they give you non-financial reasons for that?
ich
A. Yes, reputational risk is the classic response, you know,
headline risk.
mM

Q. Okay.

A. So there were a fair number of folks, and ultimately we got

down to two lenders for committed financing and those were
Deutsche Bank, my alma mater, and then Barclays, who a colleague
of mine at Deutsche Bank had gone over to be the co-head of
a

Investment Banking. So those were the two who offered us

Te

committed financing proposals and, you know, we got a little

sidelined because another Michael advisor thought we should also
talk to Cerberus, and you know, if people aren't familiar with
Cerberus, Cerberus is a lot like Fortress. So they are a
w.

distress lender.
ww
 om
Judge Holmes: They named themselves that through the three dog
...

n.c
A. Yes.

Judge Holmes: Three-headed dog act.

so
A. Yes. Do a Google search. There's some good reading. And so,

ck
you know, one of the advisors went and said oh, this asset's
worth billions of dollars and you know, the Cerberus guys are
like and he's got a lot of debt, great. So we got involved in
that discussions, and you know, they were initially saying we

lJa
could lend 400 million. We don't need a Sony guaranty. As
Cerberus got more and more into it and understood the nature of
the cash flow, the nature of the agreements with Sony, you know,
they started looking for more collateral. They said okay, can you
ae
bring Sony in? Can you bring Mijac in? Can we bring the recorded
music in, and by the way, we'll give you some incremental
capital, but it all has to go to developing you and getting you
ich
back out. You're going to have to record. You're going to have to
tour, and Cerberus was going to effectively have all of that.
After all that work, they ultimately called up and, you know, I
give them credit. They said you know Dave, we've looked at this
mM

and you're better off going with the guaranteed financing because
we can't make sense of this. We'd be able to do a 12 month loan
at that amount, and if you can get a guaranteed debt from a
traditional lender, you should probably do that. So effectively
they couldn't get comfortable ultimately with the collateral
value, and were gentlemen and passed.
a
Te

Q. What did ... you mentioned Deutsche, Barclays, Cerberus.

A. Cerberus.
w.

Q. Cerberus.
ww
 om
A. There were a lot of other lenders we talked to as well.

n.c
Q. Okay, but what did these ... in looking at the loan to
Sony/ATV, what do these lenders look at?

A. Well, and it might make sense, because we ultimately then

so
narrowed it down to Barclays, and basically for ATV, which was an
operating company and again ...

ck
Q. That's Sony/ATV?

lJa
A. Sony/ATV, which is an operating company, and the fact that we
were refinancing debt that was outside of it, but was going to be
guaranteed by Sony. There were a couple of things that the
lenders looked at. They looked at the Sony guaranty and all of
ae
the documents that that entailed and the structure of the
guaranty as agreed to with Sony. They also looked at the
operations of the company, you know, revenue generation, audits,
ich
financials, global head count, offices. They asked for employee
information, salary data, you know. They asked for backup on
support services and other costs, which are those costs which
Sony provided, and then billed through to Sony/ATV. So they asked
for, you know, basically everything that you would typically ask
mM

for if you were making a loan to the operating company, because

they viewed that as the fallback collateral if for whatever
reason there was a problem with the Sony guaranty.

Q. Okay. So when you say "the operating company," you mean

a

Sony/ATV?
Te

A. Yes.
w.

Q. Okay, all right. So the ... did you eventually consummate a

refinancing with Barclays?
ww
 om
A. Yes. We closed a $300 million bond deal on December 7th of
2007.

n.c
Q. Okay. Can we flash that back up there? So the ... explain,
it's not as simple as the promissory note. We have an exhibit
which is exhibit ... I don't think that's admitted.

so
Ms. Strachan: Which one do you want?

ck
Mr. Toscher: The $300 million offering.

lJa
A. That's the Mijac one.

Mr. Toscher:
ae
Q. Okay. We don't need to do this. Okay. Take it down. You
mentioned a bond offering. How did that fit into the refinancing,
just so we know?
ich

A. So when you go to the credit markets and frankly our

structure's changed over the years in terms of refinancing the
Sony/ATV interest a couple of times, you have to look at sort of
mM

what ... what's the most favorable structure. At the time, you
know, again we're in the midst of the credit boom, so there were
people everywhere who had raised capital and are buying different
various pieces of debt. So we had the Sony/ATV paper which was
guaranteed by Sony. So it was something that people would look at
and say okay, I guess we can look at as a Sony credit, and then
a

we can discount it back a few notches and maybe get some

Te

incremental interest as a result. So if you want to go to the

broadest base of buyers, which you know Barclay agreed to be the
initial purchaser, meaning they would acquire the full $300
million of notes, and then their strategy was we're going to sell
w.

it off to folks who might want Sony credit. So bonds are a much
easier way to sort of segment the units to a broader base of
potential buyers at that time, as opposed to doing a loan where
they'd syndicate it out to other banks. So rather than spreading
ww
 om
the debt among banks, you know, hedge funds can buy it, various
money managers could buy it and they were ... the increments
were $5 million. So they were sort of large tickets, but you

n.c
know, for someone who wanted to get a Sony-like credit at a
higher rate, you know this offered them the opportunity to do
that.

so
Q. That's good. I wanted that clarification. So the proceeds were
how much of the bond offering?

ck
A. The bond offering was $300 million.

lJa
Q. And do you have a recollection as approximately where that
money went to, what it was used for?
ae
A. 270.5 million went to repay the Fortress debt. There was an
interest reserve fund to cover, and again the distributions
increased from 6-1/2 to 11 million, but the interest rate that we
ich
were able to achieve was 5.792 percent, you know, on a fixed
basis. So you had about 17.4 million of interest. You had roughly
another 100,000 of annual expenses associated with the trust. So
we had $11 million against $17-1/2 million of annual expense. So
we had to put into reserve ...
mM

Q. So you're going fast, so just so I understand.

A. Sorry.
a
Te

Q. At this point, the Sony/ATV, Michael's share of the Sony/ATV

distributions went up to 11 million, but there was an annual cost
of 17 million?
w.

A. 17-1/2 million.
ww
 om
Q. And what did that 17-1/2 million consist of?

n.c
A. 17.4 million of interest and about 100,000 to deal with, you
know, an audit of the trust for Barclays and things like that.

Q. Okay, okay. So we were talking ... thank you. So we were

so
talking about the proceeds. You told us what went off to pay
Fortress. How much went into the interest reserve?

ck
A. The interest reserve was a little over $20 million, and then
the balance was fees and expenses, and some of it was used to pay
some of the more aggressive creditors that we were worried about.

lJa
Ultimately, you know, and I know we'll get into the Mijac
financing, ultimately we didn't quite have enough to sort of
cover all the fees and expenses, and an escrow that Sony was
requiring for one piece of litigation. So we did that out of the
Mijac refinancing.
ae
ich
Q. Okay. So that is a good segue, but before we go there, do you
know whether Michael received any money out of the proceeds of
the 300 million refinancing?
mM

A. He did not.

Q. And in fact I think you just testified before that there

wasn't enough to even pay all of the creditors?
a

A. That's correct.
Te

Q. Answer?
w.

A. That's correct.
ww
 om
Q. Okay, for the record. Let's turn to the Mijac refinancing now.
You told us briefly what the Mijac catalogue consisted of. Tell
us what your approach was to obtain the refinancing for the Mijac

n.c
catalogue?

A. Our approach was to reach out to folks who had specific

experience in music, and who had made prior loans against

so
catalogues. It was really to, you know, obtain a loan that would
be secured by Mijac and 100 percent of the cash flow, as well as
any cash flow coming from Broadcast Music, Inc., which

ck
represented another royalty stream that was paid directly to
Michael for his writer's share of performance income.

lJa
Q. Okay. So the Mijac catalogue, I think you testified before,
what were the assets of the Mijac catalogue, just so we're clear?
ae
A. The assets were all compositions written by Michael Jackson or
co-written by Michael Jackson, his interest in those
compositions, and then you know, a number of third party works as
ich
well.

Q. Okay. These were all compositions?

mM

A. Yes.

Q. Okay.
a

A. Music publishing compositions.

Te

Q. Music publishing, okay. The possible lenders you approach, are

they a different pool than those which you would approach to
w.

finance Michael's interest, refinance Michael's interest in

Sony/ATV?
ww
 om
A. There was some overlap but very little. So essentially it was
a different pool of lenders.

n.c
Q. Okay. So some overlap. What type of lenders and why is it a
different pool?

so
A. You know, the lenders we were talking to, just to give you
some of the names. Bank of Ireland was a music lender at the
time. HSBC Private Bank who ultimately did it, you know. Certain

ck
smaller banks like City National Bank and Comerica. So they tend
to be, you know, SunTrust. They tend to be banks who don't do as
large of loans and couldn't have done a bond deal, but have
experience in music and can lend against copyright.

lJa
Q. Okay. So the ... what do ... you talked a little before
of what the lenders looked at concerning the Sony/ATV refinance.
ae
What do they look at regarding refinancing the Mijac catalogue?
ich
A. Mijac is a good bit easier, because it, you know, it
copyrights. So you know, they would look at the Warner-Chappell
administration agreement to assess the cost of administering the
asset. They would review all the historical royalty statements,
review the, you know, the EMI agreement and the guaranty, the
mM

advance payments and recoupments there, and then they would also
look ... you know, one of the primary focuses is chain of
title. How did these works come to be in the possession of Mijac?
So that would be looking at the original songwriter agreement,
Michael's original songwriter agreement, and then any of the
deals he acquired, how did he obtain ownership? The other piece
a

of that was also, you know, infringement claims are pretty

Te

standard fare in music, and there were a number of active

infringement claims outstanding at the time. So the, you know,
the copyright lawyers would look at the infringements claim and
make a determination if there was any merit with respect to those
w.

claims.
ww
 om
Q. Okay. So is it fair and correct that chain of title is an
important focus in looking at the Mijac catalogue?

n.c
A. Yes.

Q. How to ... just maybe describe, since you've done them both

so
now, how does looking at what the lenders look at for the Mijac
catalogue differ from what they look at when they're financing,
refinancing Michael's interest in Sony/ATV?

ck
A. You know, I think at the end of the day, the lenders want to
see the potential cash flow that can come out of the asset, and

lJa
make an assessment as to what they think the value is to the
extent that there's some fault, and they have to go down that
road. But you know, the Mijac analysis was much more about
looking at the copyrights. The Sony/ATV refinancing was much more
ae
looking at the operating enterprise of Sony/ATV and its business
and the cash flow that develops, and then also looking at the
Sony guaranty and how that was structured.
ich

Q. Were you able to achieve a refinancing of the Mijac catalogue?

mM

A. We were.

Q. And could you describe that briefly for us?

a

A. Sure. So as we progressed, the number of claims increased, and

originally my hope was to just do a facility with the HSBC
Te

Private Bank for $30 million, which would be secured by Mijac,

and in that case that would have been a loan where there was
sufficient cash flow to pay the interest and it also would have
allowed you to pay down the debt in the Mijac piece.
w.

Unfortunately, you know, the amount of claims increased and

Michael also wanted cash out. So as a result, we actually added a
second lender behind HSBC for $40 million. So it was, you know,
ww

at conclusion it was $70 million of debt. We had 30 million which

 om
was owed to the HSBC Bank, and 100 percent of the interest ...
100 percent of the cash flow from EMI and the Mijac copyrights
went to both pay interest on that and reduce the HSBC debt. The

n.c
second piece was a $40 million loan from Plainfield Asset
Management, which was, you know, a term of art what's called a
PIK. They had no interest due ...

so
Q. PIK, a PIK?

ck
A. PIK, paid in kind.

Q. Paid in kind.

lJa
A. So it had no cash interest payment due. The interest would
accrue annually at a rate of 16.5 percent, and it would be added
ae
to the principal balance that Michael would have to repay. So
it's jumping out of the Fortress frying pan into the fire, but
just on the Mijac asset. It was very, you know, he made the
ich
conscious decision, because he wanted an ... he received about
12-1/2 million of cash out of that deal. Obviously if we had
borrowed less, the rate would have been substantially lower. But
he wanted the incremental cash to fund his living expense.
mM

Q. And you said the rate on that loan was how much?

A. 16-1/2 percent. The rate on the cash pay portion was just
under seven percent, the HSBC loan, and because it was so deeply
a

subordinated in the overall value of the asset, you know, they

were getting effectively equity-like returns because if you're at
Te

the back end of that 70 million piece you're taking some risk,
and they charge for it.
w.

Q. And how was Michael going to be able to service the interest

on that debt?
ww
 om
A. Well, I told him I didn't think that he was going to be able
to, and he was putting the asset at tremendous risk and what he
needed to do upon the completion of that refinancing was to find

n.c
assets he could sell, get back to work and, you know, generate
other sources of income so he could raise a certain amount of
equity that would allow us to refinance Plainfield out. So I
don't think that there was any way out of that debt short of him

so
contributing a substantial amount of money to do a refinancing of
Mijac.

ck
Q. Okay. So we're at the end of 2007 now?

A. Yes.

lJa
Q. Okay, and do you recall how long the Plainfield debt, the 16-
1/2 percent interest debt was going to run for?
ae
A. Yeah. So it was HSBC, if I recall correctly, was about five
ich
years and Plainfield matured just after the HSBC debt. The senior
lender required that, you know, they get their refinancing and
get out first, and Plainfield, being the subordinated lender,
meaning all their rights were subordinated to HSBC as the first
lien lender, you know, they would have to stand back until HSBC
mM

was effectively made whole and then, you know, they could move
for the collateral.

Q. You know what? You said, I think, that Michael did receive
some proceeds out of the Mijac security financing, you said $12
a

million approximately?
Te

A. Yes.
w.

Q. Do you know what he did that, what he used it for?

ww
 om
A. I was told it was living expenses, you know. I think he wanted
to buy a home of some type, but I don't know exactly what
happened to that money.

n.c
Q. And through that financing were the rest of the claims and the
settlements be able to pay off the Mijac refinancing?

so
A. You know, it's interesting. I wasn't directly involved in the
payment, and there were some large sums of money that were wired

ck
through the escrow accounts of law firms that Michael worked
with. So ultimately if those claims were satisfied from those
monies, I can't say. But the money was certainly intended to pay
off those claims. ..

lJa
Mr. Toscher: ae
Q. So this is the refinancing in 2007, having refinanced Mijac
music assets, Michael's interest in Sony/ATV. In the course of
those refinancings, and you talked to a number of different
lenders, did any of them ask for a pledge of collateral in
ich
Michael's name and likeness?

A. No.
mM

Q. Let's move on to the 2009 refinancing of the Mijac capital.

Can we put up the doc stipulation 124-145, because we're going to
get into it. So I think you're doing a good job, Mister ...
yeah, 124 to 145. You're doing a good job, so maybe we don't need
to get into the documents. I just want the Court to be able to
a

associate, when he looks back, the documents with the testimony.

Te

But I think we're doing pretty good. I don't want to sidetrack

us. So at the end of 2007, actually what I want is the
stipulation.
w.

Ms. Strachan: The actual stipulation?

ww
 om
Mr. Toscher: Yeah, the stipulation and then I can

n.c
Ms. Strachan: Sure.

Mr. Toscher:

so
Q. It's up there. Let's go on with the testimony. You closed the
refinancings at the end of 2007. We're going to probably circle

ck
back to this on the specifics, but the next refinancing I have,
and we're talking about the Mijac refinancing in 2009. Tell us
generally what was going on in 2008, that following year in terms
of your involvement with Michael's finances.

lJa
A. So there were a number of various meetings, some with Michael,
to talk about where he was again, to remind him that it was still
ae
a very precarious situation that he had to work his way out of.
So that was early in 2008.
ich
A. little later that same spring, the Neverland note was due,
which was also held by Fortress, and Plainfield had offered to
actually refinance the note and wrap it into their collateral
package at, you know, the very, very high rate. So there was a
mM

financing that was in the works to have Plainfield refinance

Neverland debt as part of the overall package.

Q. Good. Let me go back. I think it's better to go

chronologically. Let's talk about that for a second. So you were
a

involved in the refinancing of the debt on Neverland?

Te

A. And you know, I wasn't really involved. I'm not really a

mortgage banker. I mean I really don't know, but you know, much
about it. But the Plainfield guys that ... there were a lot of
w.

people working to try and refinance it without success. So I

thought maybe it's worth a shot if I just call the Plainfield
guys who were again an opportunistic hedge fund, and see if they
ww
 om
might do something to at least prevent the asset from going into
foreclosure.

n.c
Q. Okay. So what I'm trying to get at is what we're in the first
few months or six months of 2008, what was your understanding of
the status of the financing on Neverland?

so
A. That it was going into foreclosure. It was in default and
Fortress could foreclose on the asset.

ck
Q. And do you recall how much that loan was?

lJa
A. You know, again I was tangentially involved. But I think it
was in the 20 to 25 million range if I recall correctly.
ae
Q. Okay. So you said that you're not a real estate mortgage
broker, but you would call the Plainfield people regarding this,
ich
because the other people were not having success financing. What
did you do with respect to the Plainfield people?

A. I talked to the gentlemen at Plainfield and said okay, you

mM

guys have, you know, this Mijac second lien. Would you be
interested in looking at the Neverland note? They said yes. I
sort of, you know, I said well I need to get some thoughts
together. They sent over a term sheet and then I just provided
the term sheet to the legal team that was involved and their real
estate folks, and I sort of just stepped back. Again, I was not
a

going to add any value there.

Te

Q. Okay, and do you know whether that refinancing ever went

forward?
w.

A. The refinancing was very close to being concluded and

Plainfield was very close to buying the note, but before that
could occur, Michael went silent and then like over the course of
ww
 om
a weekend, Colony Capital purchased the mortgage directly from
Fortress.

n.c
Q. Okay. Can you give me an estimate of the time frame in 2008
that that happened?

so
A. This was all happening in, you know, really April-early May of
2008.

ck
Q. Okay. So what is Colony Capital? It's a new name that you're
introducing here.

lJa
A. Colony Capital is a real estate investment fund based in
California, run by a gentleman by the name of Tom Barrack.
ae
Q. And do you know how Colony came about to buy the Fortress note
on Neverland?
ich

A. So a gentleman by the name of Tohme Tohme, I guess, had

started talking to Michael, and said he had someone who could
help him with the Neverland process, even though there was this
mM

concurrent process that was moving forward. Tohme Tohme got

involved and, you know, I guess convinced Michael to sell to
Colony.

Q. Okay, and what was your understanding of that transaction with

a

Colony? This is in 2008; correct?

Te

A. This is in 2008, and you know, at the time I really didn't

have any understanding of what it was. It happened so quickly.
Clearly they weren't they didn't do a refinancing right away, you
w.

know. My understanding is they just bought the note and then they
were going to sort of figure it out later and you know, obviously
in the interim the Plainfield deal went away. I mean that's
really as much as I know about that.
ww
 om
Q. Okay. So Colony ends up buying the note on Neverland. Was
there a subsequent transaction with Colony that Michael entered

n.c
into regarding Neverland?

A. My understanding is he entered into a transaction which

so
involved conveyance of a portion of ownership to Neverland, and
then some residual stake basically in consideration of Colony
purchasing the mortgage.

ck
Q. Were you involved in that transaction at all?

lJa
A. I was not, no.

Q. Okay. So did you, since we're focused in 2008 here, did you
ae
have any other dealings with Colony regarding Michael's finances?
ich
A. I was asked by Michael to meet with Colony in May of 2008, to
basically review Sony/ATV, because Michael hoped they could
potentially be a partner in a buyout of the Sony interest. So I
flew to California. I sent them some documents and I, you know,
some of the financials and projections, and I met with Tom
mM

Barrack and I met with a couple of gentlemen, a gentleman by the

name of Richard Anula (ph), who was sort of working with Tom
Barrack at the time.

Q. Could you say that last name again or ...

a
Te

A. Richard Anula. I'm not ...

Q. All right with an N?

w.

A. With an N, yes.
ww
 om
Q. Okay, thank you.

n.c
A. Yes, yes.

so
Q. Okay. So Michael asked you to fly out there because he was
looking for somebody to go into partnership with him?

ck
A. He wanted to try and buy out Sony out of Sony/ATV.

Q. Okay. Michael wanted to try to buy out Sony out of Sony/ATV?

lJa
A. Yes. ae
Q. Okay, and he asked you to go meet with Mr. Barrack and tell
us. You said you flew out. Tell us about that meeting?
ich

A. Well, I went and had a ... sat down with Tom Barrack,
Richard Anula, and that was very ... a lot of pleasantries in
general, you know, where are we. Then there was a more detailed
mM

meeting in which there was a retired accountant and a couple of

lawyers and a gentleman who also worked for Colony by the name of
Paul Fuhrman (ph), who was going to take point at looking into
this. We had a discussion about the numbers. There were a lot of
questions, you know, that they had about, you know, Sony and
whether they were, you know, cheating Michael and, you know, I
a

think this was a lot of ... obviously Michael conveyed this,

that he felt that they weren't spending money appropriately. So
Te

we talked about that. We reviewed the audit and I shared my

opinions, and you know, then that was sort of meeting one.
w.

Q. Okay, and what was the result of that meeting one?

ww
 om
A. The result was more follow-up calls and meetings, you know,
over the course of a few months, and ultimately Colony concluded
that they just, you know, they wanted to be helpful, but they

n.c
weren't really interested in ATV. I think Richard Anula expressed
a couple of concerns, you know, that he really was concerned that
they didn't necessarily see value the same way Michael did. So if
we got into the buy/sell process, there was probably a higher

so
probability that they would lose, and he also expressed concerns
that the buy/sell procedures were very convoluted and you know
obviously Sony was in a position with the purchase option to buy
the asset at a below market value if you did it, and I think they

ck
ultimately concluded that, you know, it's just not a transaction
that made sense for them.

lJa
Q. Okay. So okay. You indicated you gave them, Mr. Barrack and
Mr. Anula and whoever else your views regarding this issue of
Sony expenses. What were your views?
ae
A. You know, Sony is audited by PWC. There is no fraud. They have
a lot of rights under the operating agreement to manage the asset
ich
and, you know, it wasn't the first conversation I had. I had
conversations with Sony about it, you know, because at the end of
the day you have this big corporation who just wants to reinvest
all of the cash flow that they're generating from this asset and
mM

signing new artists and growing the asset, and then you have
Michael who is $300 million in debt and needs distributions to
service it and repay it. So you know, Sony wanted to grow.
Michael wanted cash flow. No fraud. In my opinion, there's not
really much pressure you can exert on them because they have the
right under the operating agreement and, you know, ultimately if
a

you read the operating agreement, there were multiple areas in

1995 where it says the mission is to grow, and it cites specific
Te

assets that they were going to acquire. So if you're going to go

acquiring businesses, there may be some incremental head count
involved with, you know, with doing that. Additionally, if you
want to sign a lot of writers and you're a relatively new
w.

publisher, your artisan repertoire group, which are the ...

you know, that's the group that identifies new writers and
talent, may be little larger relative to your scale at that time.
ww

So my conclusion was it would be ... it would be nice if they

 om
distributed more cash flow, but at the end of the day it really
is an issue of the incongruence between Sony, who wants to
invest, and Michael, who really needed the cash flow.

n.c
Q. Do you know on this ... in looking at Mr. Barrack and Mr.
Anula looking into this, did they have any of their lawyers look
at the expense issue you're talking about here?

so
A. Yeah. So over the course of 2008, there were a number of

ck
various discussions, and you know, while Colony said they weren't
interested in pursuing the buy/sell at the time, they were still
there. Moving into early 2009, there was sort of a re- elevation
of the expense issue. There were some expenses that appeared in

lJa
the budget and some of the financials that, you know, that there
were some questions about, and I think Michael also ... you
know, Marty Bandier had taken over as the CEO and Michael wanted
to be sure that he was spending money effectively. So in the
ae
context of reviewing the budget and other things, I had a
conversation with ... I believe his name was Dan Petrocelli. I
can't remember specifically. He was at Melanie (ph), about the
ich
same topic. We had, you know, the same topic. I also suggested to
Michael and to Dr. Tohme Tohme that, you know, if you had
concerns on whether they were complying with the operating
agreement, you know, certainly we can have a firm look at that.
mM

If you look at the Sony/ATV operating agreement it's interesting,

because it's not really an audit right. He's go the right to look
at cash flows and sort of track them through. But it's ... you
can probably squeeze a lot in there, but you know, Sony's like
it's limited, it's limited and I'm like it's not that limited. So
you know, I had suggested that they that that was a path we could
a

go down it. Additionally, when I asked Sony about what these

various expenses were, you know, it's like Michael was concerned
Te

that there were a lot of private jets being used, which turned
out not to be the case. Additionally, there was incremental PAP-X
(ph) associated with renovating the offices in the fifth floor of
the Sony Building. The third expense, which sort of flowed
w.

through in a couple of areas, but it was really in Services and

Others, Sony had to redevelop the new royalty system. As the
music industry was evolving and they're collecting all this money
ww

abroad, you know, all of a sudden you have all this digital money
 om
coming in from downloads, which are substantially more
transactions. You know, they needed a new royalty system to
really process an increasing amount of data. They ultimately

n.c
decided that they would, you know, deal with that internally. So
you had some direct expense. Then you had some capitalized
software expense that was also factored in over A couple of
years. And then obviously there'd be ongoing maintenance. But the

so
heart of that was occurring in that 2007-2008 time frame.

Q. Okay so, but just so we're clear, Mr. Petrocelli the lawyer

ck
represented Mr. Barrack?

A. He did, he did and I ...

lJa
Q. He had you consult with Mr. Petrocelli regarding this expense
issue?
ae
A. Regarding the expense issue and, you know, the same view that
ich
it really is an incongruence, because I think Colony was asking
well, can you look at this and what can we do, and I think that,
you know, if I recall correctly the consensus was largely the
same as it was, you know, by Richard Anula and Paul Fuhrman
earlier in 2000 and ... earlier in the 2000 ... earlier the
mM

past summer. And you know, I also met with Sony to go through it.
You know, Marty Bandier, who runs Sony/ATV is a very passionate
guy, and I think he was a little offended that we were pushing.
So he called me up and you know, basically was a little pushy
that, you know, there's nothing there. We'll give you everything,
but you know, knock it off. He said that. He gave me the lecture,
a

which we probably already knew, that Dr. Tohme Tohme was moving
Te

at his own self interest and things like that. I just, you know,
frankly I think I just sort of summarized it all and talked to
Michael about it and let Dr. Tohme Tohme know, and suggested and
talked to a couple of accounting firms who I thought they may
w.

want to talk to.

ww
 om
Mr. Toscher: Your Honor, may we take a short break now? What
time do you think we want to have lunch?

n.c
RECESS

so
Court Clerk: All rise.

ck
Judge Holmes: Please be seated. Back to you, Mr. Toscher.

Mr. Toscher:

lJa
Q. Thank you, Your Honor. Mr. Dunn, when we took a break, I guess
we're in 2008. You were describing your dealings with Mr. Barrack
and Mr. Anula regarding their potential interest in buying or
ae
getting involved in Sony/ATV. Were there discussions or comments
regarding the effect of the buy/sell arrangement in the Sony/ATV
operating agreement during those discussions?
ich

A. Yes.
mM

Q. Would you describe generally what those discussions were?

A. The discussions were fairly limited. I think they had concerns

about, you know, the structure where essentially just given the
construction after the 2006 amendment, essentially you would not
be able to trigger the buy/sell as a buyer. Like if Sony
a

triggered it, fine. But Michael could not trigger as a buyer

Te

until Sony was relieved from the guaranty, which would

effectively require that someone step up to guarantee his
indebtedness or preferably pay off Barclays, because you know,
you have bondholders. So essentially it's sort of difficult to go
w.

to the bondholders and get approval for them to amend and

exchange the guarantor. Additionally, Colony Capital was not an
investment grade company like Sony, so essentially your only
choice would be to repay the debt before you started the process.
ww
 om
Q. And when you say "repay the debt"?

n.c
A. The New Horizon Trust debt, which was secured by the interest
in Sony/ATV.

so
Q. Right, which was the $300 million?

ck
A. Yes.

Q. Okay, go ahead.

lJa
A. So you have to repay the debt and then the process is
extremely long. It takes about eight months to complete, and
ae
there are a number of intervening steps. Just it essentially
involves first the discussion between the parties. Once it's
triggered a discussion between the parties, to see if they can
ich
reach an agreement on whether one party wants to buy or sell. If
they can't agree, it moves to a phase where each side chooses an
investment banker, who will do a valuation of the asset or of the
enterprise. If the valuations are within ten percent of each
other, you move to the next phase, where everybody gets in a room
mM

and says they're a buyer or a seller. If they're farther than ten

percent away from each other, you hire a third party valuation
expert who comes in and establishes the valuation. At that point,
everybody meets and you go into ... and you say I'm a buyer or
a seller, and if both parties are buyers, then you start an
auction process. If both parties say we're sellers, then you
a

know, you start a sale process and if one's a buyer and one's a
Te

seller you conclude. There are a couple of issues that Colony and
in subsequent seller discussions over the years, others have had
issues with. The first is you've got to take a big risk and sort
of pay to play right up front.
w.

Q. Elaborate. You mean big risk. Tell me what you have to do.
ww
 om
A. You have to pay the $300 million in order to allow the
participant to be a buyer or a seller. If the Sony guaranty is
still outstanding, you have to commit to be a buyer on Day 1,

n.c
irrespective of the value established, which is very difficult
for any financing partner to do, I think impossible to sort of do
that prior to doing any due diligence, and also knowing that Sony
has a purchase option, which will allow them to buy the entity at

so
less than fair market value potentially.

Q. Okay. Were these ... and Mr. Anula voiced concern regarding

ck
the buy/sell provision?

A. The complexity and the duration, yes.

lJa
Q. So you said pay to play. They would have to put up $300
million, but what if they weren't successful in the buy/sell
arrangement?
ae
ich
A. Then they would have ... well, if Sony acquired it, then
obviously there's the potential that they would get repaid. If
for whatever reason they went to the market and there was no
buyer at the established value, then Colony or whoever it was
would be holding $300 million of debt, which would be subordinate
mM

to all the Sony advances in Sony/ATV.

Q. So in other words, somebody who paid the $300 million to pay

to play might be stuck with a $300 million investment which was
subordinated to all of Sony debt?
a
Te

Ms. Herbert: Objection, leading.

Mr. Toscher: I'm summarizing.

w.

Judge Holmes: Summarizing. It's okay. Go ahead.

ww
 om
Mr. Toscher:
Q. Explain that, in your own words.

n.c
A. Yes. They would have $300 million behind all of the debt
within Sony/ATV, and on top of that Sony/ATV, as the managing
member, could effectively leave the existing waterfall in place

so
for the duration. But the way the operating agreement worked
and, you know, Sony was pretty careful about it, the
distributions only lasted a finite period of time, which was

ck
typically a short period of time after each loan matured. And
that created another opportunity to negotiate and to the extent
that something like that were to occur, and the distributions
just stopped, there wasn't necessarily any obligation for

lJa
Sony/ATV to continue distributing money to the holder of the debt
secured by Sony/ATV.
ae
Q. And to your understanding or your understanding of the
reputation, was Mr. Barrack a financially sophisticated
individual?
ich

A. Yes.
mM

Q. And what about Mr. Anula?

A. Yes.

Q. And do you know Mr. Anula's background at all?

a
Te

A. Yes. He was the former CFO of the Walt Disney Company.

Q. Okay. So we're still in 2008, Mr. Dunn?

w.

A. Yes.
ww
 om
Q. Okay. Let me ... we talked about your dealings with Colony
on Michael's behalf, both concerning Neverland and Sony/ATV. Were

n.c
you involved on any other activities with Michael regarding
assisting in his financial situation?

so
A. I talked to Michael a lot and ...

Q. What is a lot? 2008.

ck
A. During 2008 at the beginning of the year probably weekly, and

lJa
you know, he borrowed a lot of money. He knew he had financial
issues. He was going from living in Bahrain to living in Ireland
to living in a rented house in Vegas to living in a different
rented house in Vegas. You know, we had some real personal
ae
conversations, because he knew the situation he was in. He talked
about, you know, his sadness is knowing he was never going to
live in Neverland again. You know, he just was looking for a way
to solve his financial problems.
ich

Q. Okay. Let me go back a second here. I may have missed that

before. You said he was concerned that he never wanted ...
mM

could never live in Neverland again. Did he ... as part of the

Colony transaction, did he lose his rights to Neverland?

A. He lost his economic rights to Neverland. I think the effect

of the transaction was Colony took majority ownership and still
has ownership of Neverland today.
a
Te

Q. But he wasn't able to live there after that point?

A. He didn't believe he was going to ever live there again.

w.

Q. Okay, and was there ... do you know of a reason why he

ww

didn't want to live there again or go there again?

 om
A. I think it was the ... it was the culmination of the
molestation allegations, it was a culmination of I think

n.c
recognizing the financial situation that he was in. I think it
was both of those things, and you know, I do want to say we're
talking about all this stuff in harsh tones financially, because
he was on the edge. But you know, there was also history. I mean

so
he knew where he was, and you know, he talked a lot about his
young career and being at the peak, and you know, he knew he was
in a different spot. He was struggling with trying to figure out

ck
how to deal with all this debt, and how to make a living and how
to still balance wanting to be with his children, which were of
paramount importance. You know, I think there are a couple of
things. Like every time you would go see him, it was always a mix

lJa
of all these people sort of lined up to wait, you know, to meet
with him on various potential projects and other things, because
I think the last thing he wanted to do was tour. So he was
looking for other things he could do to generate income, which
ae
would have avoid him having to do what he wound up agreeing to
do. And you know, so it was that interspersed with his kids, who
were always there and, you know, I recall one meeting where, you
ich
know, it was a fairly intense discussion about his personal
finances and one his children was sick. There was no help in the
house. He left and he went to take care of his kid and he comes
back in with all this popcorn and sodas and just puts them on the
mM

table, and you know, some random bag of candy corn. You know, he
was ... as clients go, they come in, you know, they come in
all types. He was I get frustrated because you would want him to
do things he wouldn't. But he was kind of a, you know, he was a
very nice person who I think generally understood where he was,
and was desperately trying to figure out what he could do to
a

solve his financial crisis, because he did understand that if he

didn't do something ...
Te

And I told him constantly if he didn't do something with Mijac,

he was going to lose it to Plainfield. On the ATV front, he was
w.

fully cognizant of the fact that that was secured by a Sony

guaranty, and there really wasn't any borrowing capacity left. So
he understood it, and we had some tough conversations and he did
open up. And he was ... you know, you hear all these stories
ww
 om
about him, but he was the kind of guy who like called my house
Christmas Eve when I was working with him to say Merry Christmas
to my family. You know, so I think he did appreciate it. Did he

n.c
like hearing the bad news? No. Did we argue sometimes about where
he was and what he could do and what he needed to do? Absolutely.
And you know, I can give you one example where early in 2008, I
thought it was important that we all, and as did Greg Cross, the

so
bankruptcy lawyer, that we just sit down with Michael to take
stock of it. So we invited Jesse Jackson, who was you know
actually very helpful in the refinancing process in terms of
getting Michael to understand what was going on and, you know,

ck
that the Barclays was the right deal despite who was whispering
in his ear. So we had this ...

lJa
Q. When you said Jesse Jackson, you're talking about the
Reverend Jesse Jackson?
ae
A. The Reverend Jesse Jackson.
ich
Q. Okay.

A. Correct, and we had a meeting in Las Vegas where we sat down

and, you know, Reverend Jackson basically gave him a lecture
mM

about spending, which was, you know, frankly I give it to my kids

periodically. But you know he just said Michael, you know, this
is you and you've got a bucket, and this tap here is your cash
flow. But if it's your bucket, there's no hole in your bucket.
We've got to, you know, we've got to put a bottom on your bucket
Michael. You've got to stop spending. We've got to deal with your
a

long-term finances. So we talked about some of the things that,

Te

you know, we might be able to do to deal with the Plainfield

debt, which sort of all involved signing up for projects and
potentially going back to touring and working to create the cash
flow and reduce the spending to try and deal with the debt. But
w.

you know at that point, you know, you're looking at indebtedness

on the assets of 300 and some ... I mean music assets of 370
million and growing, plus this mortgage to Fortress plus
Havenhurst, plus you know what seemed to be rebuilding third
ww
 om
party creditors. So it was ... it seemed to be that things
were continuing. He did offer support and you know, it was
helpful.

n.c
Q. Okay. So you mentioned that you wanted to do other things
rather than tour. In your, when you were involved with him, now
we're in '08 and we're going to move into '09 in a second, were

so
you aware of any things that he was ... other things that he
was doing to generate money, activities?

ck
A. Again, I was primarily focused on the music assets and
managing the letters at that point. But certainly there were
opportunities. So I know there were some discussions with Simon

lJa
and Fuller about suing something which he thought, you know, he
wouldn't need to tour. But he was afraid that they wanted too
many of his assets. There were other opportunities that came
along that were all, you know, nothing significant like personal
ae
appearances, you do a personal. But nothing of significance, and
in Michael, I think any observer realizes he liked to do things
big. So there weren't a lot of big opportunities available to him
ich
as far as I can tell, other than performing again.

Q. Okay, and during this period of time, to your knowledge

mM

nothing, none of these other opportunities ever panned out to

anything?

A. No, not that I saw.

a

Q. To your knowledge?
Te

A. No, and I was, you know, in his grill fairly regularly about
coming up with some cash flow, to get rid of this Plainfield
debt. I mean I made him sign a waiver basically telling him how
w.

horrible it was, and I felt.

ww

Q. Telling him how horrible what was?

 om
A. Taking the Plainfield debt, because the Plainfield debt was
basically, in my opinion, signing Mijac away to a hedge fund. It

n.c
was no different than Fortress, and I personally felt guilty
about it. I warned him. I told him not to do it. He could have
borrowed less money at more favorable terms, but you know, he
really needed the cash to live.

so
Q. Okay. Let's move into 2009, okay. I know did there come a

ck
point in 2009 where you resigned from representing him?

A. I resigned in May of 2009.

lJa
Q. Okay. So walk me back from May 2009 to the beginning of 2009.
Any significant activities that were you involved in during that
period of time?
ae
A. Well, I was involved in the ongoing sort of management of the
ich
lenders, making sure that there were no defaults of any kind,
making sure that the audits got done and basically just, you
know, making sure the professional colleagues that I got into
these loans were ... their loans were continuing to be
mM

maintained, and they didn't have anything to worry about. It was

... the situation was devolving in my opinion, from what I
observed, really starting in the beginning of 2009. There was a
cycle of advisors coming and going, you know. He announced the 02
concerts, but he was not very excited to do it.
Then he called and said Tohme Tohme's out, and then I started
a

getting calls from various people in the industry, some of whom

were reputable, some of whom weren't so reputable, and you know,
Te

it was which way is up, which way is down. You really couldn't
tell. My conversations with Michael were less frequent and, you
know, I sort of chalked it up to him focusing on doing the
w.

performances and preparing for it. But you know, I was ... I
got uncomfortable, because there were some folks who came back to
the table who were reputable, but you know, one gentleman who he
wanted to take over for Tohme who he recommended was a gentleman
ww
 om
by the name of Arfaq Hussein, who had made two bottles of
perfume, this $100,000 perfume and sold them both to Michael. You
know, I just ... I did a little research. I found out that he

n.c
had been convicted of, you know, bank fraud or credit card fraud
and I called Michael and I'm like I just don't feel comfortable
doing this anymore. He said no, no, no, he's okay and Arfaq was
promising that a prince would come to the rescue, like so many

so
other princes I heard about in the prior 12 months or two years.
I had Tohme Tohme calling me, swearing up and down about Michael
and how it's all going off the rails and it was ... Dr. Tohme
Tohme can use some pretty amusing language and references. So and

ck
then I'm getting the opposite from Michael, and then you know,
Michael called and said ... this is I believe after I
resigned, and said he wanted to bring John Branca back in. He

lJa
asked me what I thought and, you know, I ...

Q. Before you get on that ...

ae
Ms. Herbert: Objection, hearsay.
ich

Judge Holmes: Hold on. Question withdrawn.

Mr. Toscher:
mM

Q. Yes. Okay. So before we get to the Michael question, you said

it was after you resigned. You said you resigned in May of 2009?

A. Yes.
a
Te

Q. Were you owed money at that point?

A. I was.
w.

Q. Do you recall how much money that was?

ww
 om
A. Maybe 300,000, somewhere in that range. I hadn't been paid
anything since the refinancing a few years ago.

n.c
Q. The refinancing at the end of 2007?

A. Yes.

so
Q. Okay, okay. So you're already ... I think you testified the

ck
calls were getting less frequent. You've resigned. Were you still
in contact with Michael after you resigned? Were there any
contacts?

lJa
A. There was the phone call I just mentioned, and he also had
someone who was working with him by the name of Michael Amir who
reached out a couple of times.
ae
Q. Okay, and what was ... let's talk. What was the purpose of
ich
the Amir call?

A. Just saying Michael wanted to talk to me, because he wanted to

figure out a way to take more control of his own life.
mM

Q. Okay, and did Michael finally reach out to you?

A. He did.
a

Q. Okay, and did you talk to him on the phone or in person?

Te

A. On the phone.
w.

Q. And when was this approximately?

ww
 om
A. Some time in late May, maybe ... yeah, it was late May.

n.c
Q. Okay and ...

A. Mid- to late May.

so
Q. Tell us about that discussion.

ck
A. It was Michael saying that he wanted to take control of his
own life, and my sort of off the cuff advice, because at this
point I was pretty tired of a lot of the gyrations and drama, was

lJa
you should stop signing powers of attorney to everyone who asks,
because he would sign powers of attorney. He asked me a couple of
times if I could sign ... if he could sign and give me a power
of attorney. I'm like no, you shouldn't do that. You know, so I
ae
told him he should stop signing powers of attorney. He talked
about his current advisor status and thinking about, you know, I
think at that point he may have had Joel Katz involved again,
ich
who's another reputable entertainment lawyer, and he said he was
thinking about, you know, inviting John Branca back. I said you
really should work with people who are competent and who you
trust. It wasn't a large discussion, you know. Like I'm happy to
talk to you about helping out in any way I can, but from my
mM

perspective you need to save some of the monies from these shows.
You're going to need about ten million bucks at least to pay down
part of the Plainfield loan in order to refinance it.

Q. And the Plainfield loan is the one related to the ...

a
Te

A. Secured by Mijac.

Q. What you called the PIK?

w.

A. The PIK, sort of opportunistic hedge fund.

ww
 om
Q. Right, that runs about 16 percent interest, that one?

n.c
A. Yes.

Q. Okay, and so you resigned in May. Mr. Jackson passed away, I

think, June 25th. Can you give us an estimate time frame of where

so
that phone call came in between May and when Michael passed away?

ck
A. It was ... I think it was at least a month before May. It
was probably a month before, and then I had one more set of
dealings, which was ... the folks from Barclays called and
told me that the loan was in technical default after I resigned,

lJa
because there was a piece of paper that hadn't been signed, you
know, pretty minor. So you know, I talked to Randy Phillips, who
was in pretty regular contact and got him to get Michael to sign
it and, you know, we got it cleared. Then that, I would say after
ae
early June, I had no more ... after that phone call, I really
didn't have any more dealings with Michael until he passed away.
ich

Q. So after Michael passed, was there a point that you were

retained by the Estate?
mM

A. I actually, you know, it's interesting. Sony called and

actually tried to retain me, I think to conflict me and I
declined. And then I talked to John and ...

Q. John?
a
Te

A. John Branca.

Q. Okay.
w.

A. And Joel Katz and offered my advice about what needed to be

done on Mijac, which you know, we can ... it was pretty
ww
 om
focused on that, because it was so critical and how we might be
able to refinance it.

n.c
Q. Before you go on, tell us a little bit of what was ... you
talked about Barclays. The Barclays loan related to the $300
million securing Sony/ATV, but let's talk about the Mijac one.
What was going on with the Mijac one, and what was the

so
possibility of default. What was going on?

ck
A. Well, the Mijac loan at that point you had the HSBC debt,
which was a little under seven percent interest, was being paid
down, because all the cash flow was going to pay the interest and
servicing that 30 million of debt. So I believe that had been

lJa
paid down to around 15 million at the time of death, and the
other loan, the accreting PIK loan, had the interest ... the
principal had accreted from 40 million to about 55. And you know,
if you think about the compounding of that 16-1/2 percent on the
ae
growing balance, you know, you're looking at a blended cost to
capital that was probably close to 12 or 14 percent at that
point. I think it's important to remember, you know, I think we
ich
had a talk about the impact of Michael's death on those loans.
Because they had been ... the assets and the interests had to
be transferred to a bankruptcy remote trust, it was as if Michael
didn't own them. So when he died, they continued to be owned by
mM

the trust and the Estate basically just took over. So there was
no triggering of or any acceleration of the debt as a result of
Michael's passing.

Q. All right. So when was the ... focusing on the Mijac debt,
was it coming due soon?
a
Te

A. No. It had a ... we were just about three years into a four
or five year term. So it was not, but my perspective was we
should take advantage of the posthumous spike, see if there is
w.

any cash flow, you know. Measure the magnitude of the cash flow
and see if it would allow us to have enough capital to, you know,
refinance the loan.
ww
 om
Q. Okay. Let's ... that's fine. We're focusing now on the
Mijac debt, high interest rates. You mentioned you wanted to take
advantage of the posthumous spike?

n.c
A. Uh-huh.

so
Q. I'm not a music guy. Tell me what that is.

ck
A. When ... there's a pretty ... there's actually a very
long history. When someone dies, you know, and the ... you've
got the media cycle surrounding death, you can go out and buy the
music. It gets played on the radio, and when you look at the time

lJa
Michael died, it wasn't just driven by album sales. It was also
driven by digital downloads. There weren't streaming services at
the time, so if you were thinking about Michael Jackson, oh he
died. Let me listen to his music, let me expose my children to
ae
his music, you could go to the iTune store and download albums.
So you're expecting an uptick relative to what the normal sales
level would be for Michael Jackson at the time. You know, you did
ich
have the re-release of Thriller 25 in 2008, which resulted in
sort of an elevation above normalized levels, just given the
subtle nature of that release.
mM

Q. Wait, stop.

A. Okay.
a

Q. There's a lot of ... I want to go back. Tell me the

Thriller release in 2008, Thriller 25 and what that does to the
Te

thought process here on the spike.

Ms. Herbert: Objection. I think this is starting to turn into

w.

the territory of expert testimony.

ww
 om
Mr. Toscher: He's talking about his refinancing, trying to get
out of that 16 percent debt, Your Honor.

n.c
Judge Holmes: Right. Are you familiar, personally familiar with
the income stream from Thriller 25 and its relationship to the
refinancing?

so
A. Yes.

ck
Judge Holmes: Go ahead, Mr. Toscher.

lJa
Mr. Toscher:
Q. Okay. So what did you mean by the Thriller 25 release and how
did that affect the income stream?
ae
A. There were two things. So first of all, we're talking about in
Thriller 25 there are compositions and then there are master
ich
recordings. So if they both comprise a song, the compositions of
the songs where Michael received an interest as a songwriter.

Q. And that's in Mijac?

mM

A. That's Mijac.

Q. Okay.
a
Te

A. The master recordings are the income streams that Michael

receives as a performing artist.
w.

Q. Okay.
ww
 om
A. And those monies were going to Michael to live on. That's how
he was sustaining his existence, and then the balance was going
to finance the interest and the principal repayment in Mijac.

n.c
Q. Okay. So to the extent he had compositions in the Mijac
catalogue, his compositions?

so
A. Right, and there were four compositions on Thriller where
Michael was a writer.

ck
Q. Okay. I'm going to test you. What were the four? I know two of
them.

lJa
A. Billie Jean, Beat It, Wanna Be Starting Something and the Girl
is Mine.
ae
Q. All right. I think you passed.
ich

A. Okay.
mM

Q. So okay. Tell us what your knowledge of the Thriller 25

release is? What did that do to album sales or digital download
or the music revenue? And you can focus on the compositions just
in Mijac?

A. Well, you have to focus on the album sales, because Mijac

a

receives a royalty on those four compositions. So if the album

Te

sales go up, the mechanical royalty comes through. There's also,

we see a lot of times a tangential benefit, you know. There's a
marketing campaign by Sony promoting the release. So it raises
consumer awareness again, and you have an elevation both from the
w.

album sales and to a certain degree other streams associated with

the compositions as a result of that album being top of mind
again because of the anniversary.
ww
 om
Q. Okay, and because of that, there were increased revenue
flowing to Mijac?

n.c
A. There were, yes.

Q. So now going back, you said you were focusing on, even though

so
the Mijac debt wasn't due, you were focusing on the possibility
of refinancing it after Michael passed away?

ck
A. Yes.

lJa
Q. And you were focusing on refinancing because it had a very
high interest rate; correct?

A. Yes.
ae
Q. Okay. So tell us what you were trying to do there.
ich

A. After talking to John and Joel ...

mM

Q. John Branca?

A. Yes. I just started working, and John and John, John Branca
and John McClain had a million things on their plate, and I
wanted to be helpful and thought the best way to do that was just
a

to focus on what I know and keep going, and I assume that if we

were successful in doing this, we'd figure the economic things
Te

out. Plus as I said before, you know, I did feel, you know, I was
not a fan of the Plainfield loan, even as the agent getting paid
on it. I was not, you know, it had to go. So I started working
w.

and really in mid-August started looking at some of the sales

data on the spike, both Soundscan but also talking to Warner-
Chappell, who was the administrative agent on what they were
seeing in the pipeline, so we could try and quantify the amount
ww
 om
of cash flow that we could expect. So we began having
conversations with HSBC Private Bank who held the loan, and they
expressed a willingness to do it to the extent that the economics

n.c
made sense, but said the Estate might have to contribute cash
flow to pay down the amount of the debt to have it work. So we
continued to monitor progress in September-October-November. We
closed the loan December 31st of that year.

so
Q. December 31st of 2009?

ck
A. Of 2009, yeah.

lJa
Q. The refinance of Mijac?

A. Yeah. So we were in constant ... HSBC was going to be the

ae
natural entity to do it, because they had already done diligence
on chain of title. They were familiar with the assets. So we just
kept tracking cash flow and coming through the pipe and, you
ich
know, monitoring sales, the posthumous sales and were fortunate
enough that the Estate had to pay some money in, but we were able
to do that with an advance from EMI that came in at the very end
of 2009. So we were able to complete a refinancing of Plainfield
and a refinancing of the HSBC piece and another five year
mM

facility.

Q. Okay, for the Mijac?

a

A. Yes.
Te

Q. Okay. So it started where you made the comment you wanted to

take advantage of the spike, and you talked about there's a
history and things had changed with the market. Tell us about
w.

what a spike is and what spike happened after Michael died, if

you have personal knowledge?
ww
 om
A. Sure. The spike is, as I said, it's in all over the media, and
for Michael it was everywhere. Entertainment Tonight, you are
hearing the music. The radio you were hearing the music, XM

n.c
Sirius, people downloading, people buying albums. So you have an
increase in sales over the normal level. You know, we tracked it
two ways. So there's an entity called Nielsen, which everyone's
familiar with those TV ratings and everything else. They also

so
have a product called Soundscan, which is a sample of retail
stores, and they, you know, they do a sample and then they
project U.S. album sales. So we looked at that, and then we
looked at Michael's historical royalty collections and we made

ck
an estimate as to the potential for Worldwide Collections. And
then we backtracked, you know. We just monitored, because
Soundscan's fine.

lJa
Q. Why are we monitoring it?
ae
A. Because we wanted to refinance the Mijac loan, and we needed
to prove out that there was sufficient cash flow to the lender to
actually realize that they were going to get paid back, even
ich
though they were going on a first lien from 30 million to 70
million.
mM

Q. Okay. So you were monitoring it and tell us, and you

eventually were able to refinance at the end of '09?

A. Yes.
a

Mr. Toscher:
Te

Q. Tell us, was the spike that eventually came through at the
time of refinancing, was that higher than you expected initially?
w.

A. It was, but I can tell you why. So the spike related to the
Soundscan numbers that we originally received. It showed
something that was very high. When the actual royalties starting
tracking through, it was lower. We talked to Nielsen at the time.
ww
 om
We worked with Warner-Chappell and their group on the
administration front, and discovered that there were some
anomalies in the weekly Soundscan data, which were

n.c
underestimating the pre-death sales. Nielsen said you've got to
rely on the artist's record for the full year. So you guys should
be looking at the '08 sales and yes, there are some issues with
our weekly data but we're working on it. So it was helpful,

so
because you could see the trajectory of the spike. We just
couldn't necessarily quantity exactly week to week exactly what
the album sales were, because it was clear that the pre-death ...
the pre-death numbers were underestimated. They weren't really

ck
capturing Thriller on a weekly basis in the first half of 2009,
because it's all based on UPC codes and you know, if there's some
different UPC code, it looked like some of the data got dropped.

lJa
So we worked pretty hard with Warner- Chappell to come up with a
proxy on the Soundscan data that, you know, we shared with the
lenders. But more importantly, we were actually starting to see
real money flow into the pipe, and then obviously in November you
ae
had the success of the "This Is It" album and the film, which
sort of sealed the deal on our ability to get the refinancing
done without the Estate putting any incremental capital in, other
ich
than about $4-1/2 million, which was an advance from EMI, which
we used to pay it down to refi.

Q. Right. So up to the time of when "This Is It" came out, the

mM

deal hadn't been sealed yet in terms with the lenders?

A. I still think we could have gotten it done. I'm sure we could

have gotten it done. But it may have meant sources of income
coming from some place else to reduce the amount of the debt.
a
Te

Q. The Estate may have had to come up with money?

A. Yes.
w.

Q. Okay, okay. Let's ...

ww
 om
A. We also, I don't know if it's helpful, we also changed the
structure in '09.

n.c
Q. Okay. I don't know if ... I'm okay. I don't want to do that
unless you think it's relevant to what we're talking about?

so
A. Well, we made the Estate the borrower and we made NHT III the
guarantor, just to sort of give HSBC a little comfort level. We
made it non-recourse in the guaranty, but you know, as a little

ck
window dressing they wanted to be a lender directly to the
Estate. So we altered the structure a little bit.

lJa
Q. Okay. So okay. End of '09, let's move into 2010, okay. What
was the status of the Sony/ATV loan, okay. Let's just start with
the status of the Sony/ATV.ae
A. The Sony/ATV loan was going to mature in December of 2010.
ich
Q. Okay. So by this time, you're working for the Estate for six
months already or a few months. What actions did you take on
behalf of the Estate regarding that loan and the Estate's
interest in Sony/ATV?
mM

A. Talked to the executors first and foremost. Gave them my

opinion that we were not going to be able to refinance the loan,
the New Horizon Trust loans secured by Sony/ATV without a Sony
guaranty, just given the amount of the debt, you know, the amount
a

of the distributions and the same issues we had in '07. They

still existed, and you know, we had just been through the Great
Te

Recession. So one thing that happened during the intervening

period is the number of potential lenders contracted massively.
You had, you know, you had firms being acquired by other firms,
people buying deposits. We all know what it was, you know. If you
w.

look, we had called Bear Stearns in 2007. They weren't around. We

had called Lehman. They weren't around. You look at CSFB,
Barclays.
ww
 om
Q. Just so we're clear. You called them in 2007, they were still
there. But if you called them later, they were not there in 2009.

n.c
That's what you meant?

A. Yes, yes. They were gone.

so
Q. Okay. They were answering the phone in 2007?

ck
A. Yes.

lJa
Q. And they were probably willing to loan you a lot of money?

A. In 2007, they were.

ae
Q. In general. Just want to make sure we have the picture right.
ich

A. So you had a much smaller market, and if you recall I talked

about 2007, you know, the bond structure and the ability to sell
bonds on a very, very broad basis to a huge number of potential
mM

buyers. They were all gone. So we were left with Barclays, who
said that they were interested in doing it, but their internal
risk adjusted cost of capital. So this is ... you had Dodd-
Frank coming in, and essentially the banks had certain capital
requirements because the government felt that they didn't have
sufficient assets. So rather than having capital available to
a

lend, they had to bolster their balance sheets, which increased

their cost of lending.
Te

So they were highly selective on who they were going to lend to,
structures they were going to lend to and you know, my concern
and communicated to the executors was we're not going to get this
w.

done without a Sony guaranty. We have no idea whether Sony's

going to extend the guaranty. So we've got a sort of ... we
have to pursue a course of action that is based on all possible
scenarios. We should explore how to maximize value in the
ww
 om
buy/sell. We should explore alternative structures where maybe we
sell a portion of our equity or try and commit Sony to taking a
third party partner to reduce our position and pay down some of

n.c
our debt. It was all about what do we do if. There was the ...
the film had happened, but a lot of that money was spoken for,
because there was a fair amount of outstanding to AEG. We had
Mijac's stabilized and Sony/ATV is what sort of kept me awake at

so
night, in terms of worry about our ability to refinance it.

Q. Why did it keep you awake at night because

ck
A. Because we had 300 million of debt, 11 million of cash flow,
far fewer lenders, an incredibly weak financial environment and a

lJa
very complicated piece of paper. A buy/sell provision, that
really didn't help the Estate out in terms of maximizing a value
given its complexities with having to eliminate the guaranty to
make a pitch to sell and you know, we also had a private equity
ae
environment at the time, which was also weak because the amount
of leverage available to finance an LBO to make the return, and
let me take a step back. So ...
ich

Q. Slow down.
mM

A. If you're looking at a music asset, a music company like

Sony/ATV and you look at its growth rate, its growth rate is very
low, revenue growth and cash flow growth. Even with all the
investment Sony/ATV was doing, they were projecting themselves to
grow at about three, top line about three and a half percent a
year, versus the industry at about one percent.
a
Te

Ms. Herbert: Objection, Your Honor. I think that the witness is

now attempting to give expert testimony, and it's sort of a blur
at this point.
w.

Judge Holmes: I'm understanding these are his perceptions of the

refinancing that he was involved in, the background of that. I'm
ww

not accepting them as Sony's projections ...

 om
A. So when you look at it, if you look at Sony management's
projections, which you can see they were projecting slightly

n.c
higher growth because they were also projecting a fair amount of
investment. But if you're going through a third party buyer or a
buyer who is looking at music assets, and I can give an example
of the 2007 investment by Terra Firma in EMI recorded music, they

so
borrowed a lot of money. If you borrow a lot of money and you
reduce the amount of equity you're committing, as the debt repays
it increases the amount of the return on your capital. So with a

ck
lot ...

Judge Holmes: It's leverage.

lJa
A. Yeah. It's leverage, exactly.
ae
Judge Holmes: It's a problem in all industries.
ich
A. Yeah, yeah, yeah. So as we looked at it in 2010, the amount of
leverage that you could put on any one transaction was limited.
So I was worried, because we're highly dependent on the Sony
guaranty. The leverage markets had changed and the number of
mM

available lenders was very small. So I talked to the executors

and worked with John, and we approached five private equity
partners to really explore a range of options from, you know,
could we get you to buy the entire thing. Would you partner with
us? Could we get you involved with Sony, and concurrently we
started the negotiation with Sony to see if they would extend the
a

guaranty. In fact, I had discussions with Sony about whether they

would be interested in buying the Estate's share.
Te

Mr. Toscher:
w.

Q. Stop there.
ww
 om
A. Okay.

n.c
Q. Tell us about the discussions you had with Sony about buying
the Estate's share?

A. Sony was not interested in buying the Estate's share. That was

so
... they said they weren't in a position to do it.

ck
Q. Okay, and what about the guaranty?

A. They said they would consider the guaranty, but they would

lJa
have to ... and this is with Steve Kober (ph), the CFO at the
time. I guess he was VP of Finance for Sony Corporation of
America, but they would need to take something back to Japan. So
it was the repetition of what we saw in 2007, and what you can
ae
garner from the operating agreement. They wanted more concessions
on the operating agreement.
ich
Q. Okay. Just so we're clear, you made you, David Dunn, made it
clear to Sony that the Estate might be interested in selling
their interest to Sony?
mM

A. Potentially, yeah. It was a discussion that we were willing to

have, if they were willing to have it.

Q. And they said to you?

a
Te

A. They were not interested.

Q. Okay. I stopped you where I wanted to, but let's talk about
w.

... you said you talked with five other or five other people
regarding potentially partnering with the Estate, leaving off
Sony. Do you recall who else you might have spoken with?
ww
 om
A. We talked to Apex Partners, BC Partners, TPG, Oak Hill and
Colony. We talked to five, and then we also had some discussions
if I recall tangential with Macquarie out of Australia.

n.c
Q. Macquarie's a bank in Australia?

so
A. Yes.

ck
Q. I've heard of Macquarie. So what were the results of those
discussions with those third parties?

lJa
A. Well, we put some diligence materials together. We had
discussions. A number of them, you know, it was John and I on the
phone with the principals. ae
Q. So when you say "John," you're talking about ...
ich
A. John Branca.

Q. So let the record reflect when you say John, it's John Branca?
mM

A. John Branca, yes.

Q. Okay. No, that's fine. I just want to make sure, okay.

a

A. So we had these discussions starting in April of 2010, really

Te

extending to June, and ultimately none of the participants were

interested, and one participant was interested and on the phone
call said we were prepared to do a deal on the enterprise side
for Sony/ATV of 1.2 billion. But they didn't think we'd be
w.

interested.
ww

Q. And which participant was that?

 om
A. Apex Partners.

n.c
Q. Okay. None of the other ones put any number on the table at
all, to even start discussions?

so
A. No, they didn't. I think if you ... if you do look at where
they were coming from, if Sony wasn't a willing seller they
weren't well-positioned to prevail, because Sony controlled the

ck
diligence materials. Sony had the purchase option which, you
know, at the values we're talking about the point, at that time
wouldn't have come into play anyway. But it was a repeat,

lJa
including with Colony. We figured we'd try them again. They
looked once before, but it was sort of the same answer. I think
there were macro concerns about the music industry, because the
sales of albums continued to decrease and if you look at the RIA
data ...
ae
Q. What is the RIA data?
ich

A. Recording Industry of America. They put out a tremendous

amount of data on sales, and if you look at it, downloads weren't
mM

offsetting the physical declines.

Q. Slow down a little bit.

A. Okay, I'm sorry.

a
Te

Q. It's important to me. I'm learning.

A. I'm sorry.
w.

Q. Go ahead.
ww
 om
A. Physical declines, being physical album declines were not
being offset by an increase in music downloads. So you had a

n.c
decline of album sales, and if you look at the composition of the
music publisher, approximately 30 to 40 percent of their revenue
is coming from recorded music.

so
Ms. Herbert: Objection again, Your Honor. I renew my objection
that he's testifying as an expert witness.

ck
Judge Holmes: Okay. That one will be stricken.

lJa
Mr. Toscher:
Q. Okay. So let's ... we'll go ... you mentioned you talked
to Colony again. Do you remember who you talked to at Colony at
ae
that point regarding the potential sale?
ich
A. It was either Richard Anula or Paul Fuhrman or both.

Q. Okay, and they weren't interested in doing the transaction?

mM

A. No.

Q. Okay. Did you contact Goldman Sachs?

a

A. Oh, I'm sorry. We did talk to Goldman, and John Branca and I
both had the call with Goldman.
Te

Q. And what was their response?

w.

A. Their response is they didn't want to do the equity, but they

might be interested in seeing if they could do something on the
ww

debt side. But they were not interested in the buy/sell.

 om
Q. Okay. You mentioned before, this is I guess mid-2010. Were you
running into difficulties because of problems in the financial

n.c
markets in getting financing?

Ms. Herbert: Objection, leading.

so
Mr. Toscher: Wordy.

ck
Judge Holmes: There you go.

lJa
A. Yes, and including with Barclays, who had done the bond deal.
So Barclays did this bond deal with the hopes of selling all
these bonds to these various investors. They didn't sell one
bond.
ae
Mr. Toscher:
ich
Q. You're talking about the 2007?

A. The 2007. In 2000, I'm just trying to think if I ... in

mM

2009, they actually approached Sony to see if Sony would be

willing ... in April of 2009, they actually approached Sony to
see if Sony would be willing to buy the debt at a discount,
because Barclays wanted to get out of it and Sony declined. So in
2010, we talked to Barclays and of course, you know, the line
guys and the bankers are like oh yeah, we can do this. We're good
a

to go, but they really bumped into the risk-adjusted cost of

capital. Because their balance sheet was weakened, they did not
Te

have the ability to do the loan. They couldn't do it. They

couldn't make it work internally in any, you know, really at any
price. So we wound up doing the refinancing with UBS, and we'll
go through it. We had our negotiations with Sony. Sony agreed to
w.

increase the cash flow. They asked for a number of concessions

and one of which was around Mijac. So one of the historic
legacies between Sony/ATV and Mijac is Sony/ATV and Sony always
ww
 om
had an interest in Mijac being administered by Sony/ATV as
opposed to Warner-Chappell.

n.c
Q. Okay, can we ... stop there for a second.

A. I'm sorry, okay.

so
Q. No, because I'm learning a lot. What do you mean by administer

ck
as it relates to the Mijac capital line? Explain that and where
would these entities, Sony or Warner-Chappell, okay, and then you
can go on to say, so we all understand.

lJa
A. Sure. Michael owned 100 percent of his interest in his
copyrights, which is relatively unusual.
ae
Q. In Mijac?
ich
A. Yes, the compositions he wrote.

Q. Okay, very good. Go ahead.

mM

A. So the compositions he wrote he owned 100 percent of. In most

cases, when a writer signs with the publisher, in exchange for
the publisher promoting the work they'll give the publisher an
interest of say 25 to 50 percent of the right that they'll own
until it reverts under the Copyright Act.
a
Te

Q. So writer, Michael, gives publisher, Mijac or somebody else an

interest to administer his composition?
w.

A. No. So Michael, writer, doesn't give the publisher a right in

this interest, but he says to the publisher I'm going to pay you
ww
 om
on a fee for service basis to collect and exploit these works on
my behalf.

n.c
Q. Okay. That's the percentage you're talking about?

A. That's the admin percentage that I'm talking about.

so
Q. Okay. I was stuck.

ck
A. But a typical writer, not Michael, would have ceded a portion
of ownership to the publisher in exchange for exploiting the

lJa
works.

Q. Got it, okay. So the ... and what does it mean to

administer a catalogue?
ae
A. You collect royalties on a global basis. So you have offices
ich
on a worldwide basis. You have relationships with certain
entities in various territories ...
mM

Ms. Herbert: Objection, expert testimony.

Judge Holmes: I'll allow it in that it's an industry term

explanation.
a

A. So you have relationships with PROs like performance rights

organizations and MROs, mechanical rights organizations, where
Te

you collect all this income on behalf of the owner of the

composition. You also may work with various labels to get the
compositions recorded or rerecorded to increase mechanical
w.

royalties, and you will also promote the compositions to

advertising firms and film makers to include those compositions
in a film, to drive synchronization royalties.
ww
 om
Mr. Toscher:
Q. Okay. So this is the entity who's administering ...

n.c
A. They're managing the asset.

so
Q. Okay, managing the asset. Okay. You've said before there was
some sort of legacy relationship regarding the administration of
the Mijac catalogue owned by Michael?

ck
A. Warner had ...

lJa
Q. Warner?

A. Warner-Chappell or Warner Brothers.

ae
Q. What is Warner-Chappell?
ich

A. They are a music publishing company.

mM

Q. How long have they been around?

A. They've been around for in excess of 100 years.

Q. Okay, go ahead.
a
Te

A. And Sony/ATV really was desirous of, for a host of reasons, of

administering the Mijac catalogue, you know. Part of it we have a
co-owner. Why do they have a third party? Why do they have a
w.

third party administering these works, and I also think at

different points if you look at some of the operating agreement
amendments in 2006-2007, I think there may have been part of them
that hoped to wind up with ownership at some point.
ww
 om
Q. Okay. So at this point we're talking, who was administering
the Mijac catalogue?

n.c
A. Warner-Chappell.

so
Q. Okay, all right.

ck
Judge Holmes: Just a second Mr. Toscher. Now for the Sony/ATV,
the manager of the copyrights held in that entity was another
ability of Sony, right?

lJa
A. Sony/ATV is an operating company.
ae
Judge Holmes: So it was doing it own?
ich
A. It was doing its own administration.

Judge Holmes: But some of its administrative overhead was subject

to a chargeback agreement, so they could get cash out of
mM

Sony/ATV, right?

A. Well, it was subject. So there are a couple of components. If

you look at it, it's kind of a complicated structure. Some of it
was tax reasons, some of it was I think maybe Sony in '95 trying
a

to maintain more control. So you've got this LLC which is Sony

ATV, which is the operating company. The asset is set down below
Te

it. The CEO is there, and then there's an agreement with Sony
Music Publishing, where Sony said for practical purposes we've
got all the infrastructure for the employees. So they'll be full-
time employees of Sony/ATV, but we'll do all the payroll for Sony
w.

Music Publishing. And so all that stuff came through. Then there
were incremental chargebacks for certain costs under the services
agreement. But operations, the music publishing operations, just
ww

from a practical perspective, if you think about it were being

 om
out of Sony/ATV. So that would be the writer and artisan ...
the artisan repertoire function of signing writers, the
collections. The staff who was responsible for getting re-

n.c
recordings of deals. The staff was responsible for promoting
songs to advertisers.

Judge Holmes: Okay. So moving the publishing rights from Mijac to

so
Sony/ATV might bring economies of scale but probably not much
chargeback income to the writers?

ck
A. It wouldn't have any impact on Sony really, because Michael
would be required to pay them an admin fee just like they would a
Warner- Chappell, but I think they perceived it as being a little

lJa
bit of market snub, that Michael had his rights with a competitor
and not the company that he owned.
ae
Judge Holmes: All right, Mr. Toscher.
ich
Mr. Toscher: Okay. Thank you, Your Honor. Your Honor, I don't
have very long left, but I'd like to look at my notes. I could do
that over lunch.
mM

Judge Holmes: Okay, and then wrap up quickly after that and we
can move on to cross.

Mr. Toscher: Yes.

a

Judge Holmes: So it's like applying ... . Okay. We'll resume at

Te

quarter of two then.

RECESS.
w.

Court Clerk: All rise. The Court is now in session.

Judge Holmes: Please be seated. Back to you Mr. Toscher.

ww
 om
DAVID DUNN . CONTINUED DIRECT EXAMINATION

n.c
Mr. Toscher:
Q. May it please the Court, good afternoon Mr. Dunn. Mr. Dunn,
focusing back on the 2007 refinancing of Mr. Jackson's interest

so
in Sony/ATV that you testified about, do the lenders you go to to
seek refinancing look at the operating agreement in assessing
whether they can make the loan?

ck
A. Yes, they do, but the primary collateral in the case of the
2007 financing was the Sony guaranty, but they did review the

lJa
operating agreement. If the guaranty wasn't sufficient, that
would be their recourse.
ae
Q. Okay, and how do the terms of the operating agreement impact
or are relevant to the lender?
ich
A. Well, I think there are a number of things. I mean I think the
most directly relevant item in the 2007 refinancing was the
impact of the purchase option, and what would happen to the debt
to the extent there was a default and Sony exercised the purchase
mM

option.

Q. Okay. Can you ... be a little more descriptive of what you

mean by the purchase option, what document it's in?
a

A. Sure, and maybe it would be helpful if I just give a, you

Te

know, just a quick history of it. So this was not something ...
so the 1995, the original joint venture operating agreement
between Michael Jackson and Sony had ... Sony was the managing
member. There were major decisions that Michael had approval
w.

over, and there was an exit procedure that was in there, which
you know, was much simpler and really related primarily to when
Michael died or something like that. As time went on, starting in
ww

'97-'99 time frame, Michael's debts started to increase, and you

 om
know, moving through really there weren't ... there were
concessions and moves, and the debt was building. But in the 2006
refinancing, which was the refinancing by Fortress that Citi

n.c
tried to get, I'm sorry, Sony tried to get Citigroup to do it,
but Fortress had the ability to match and did. But in that
amendment to the operating agreement in 2006, there were a lot of
significant changes that impacted Michael's rights under the

so
agreement.
The two primary ones were the introduction of the buy/sell
provision in Section 7.8, which was still in effect through 2016,

ck
and the other provision is Section 7.9, which is called the
purchase option. What the purchase option did is it capped any
upside that Mr. Jackson had in 50 percent of his interest in
Sony/ATV. So it had a formula that basically said, you know,

lJa
we're going to assume an enterprise value of $1 billion for 50
percent of his interest, less debt to drive equity value. So to
the extent the enterprise value of Sony/ATV increased above a
billion dollars, only half of his interest would continue to
ae
increase with the value of the company, and the other half would
be capped based on that enterprise value of one billion dollars.
So ...
ich

Q. So it sounds like that impaired that interest?

mM

A. Yes.

Q. Michael's interest.
a

A. Michael was no longer entitled to the appreciation on 50

percent of his interest.
Te

Q. Okay.
w.

A. Moving to 2007 ...

ww
 om
Q. Okay, go ahead sir.

n.c
A. ... we renegotiated that to get a slightly higher cap of
1.15 billion, and in 2007 Sony also wanted to try and buy Famous
Music, and it was the negotiation on the refi, and they needed
... given the size, they needed his approval to acquire it. So
we ...

so
Q. To acquire Famous ...

ck
A. Famous Music.

lJa
Q. What was Famous Music?
ae
A. Famous Music was a music publishing company that Sony wanted
to acquire, contained rights from Paramount Films. It also had a
production music business called Extreme Music and production
ich
music is like almost creating fake art, like so people can use
lower cost music in films and other things without using more
expensive copyright compositions. And you know, so we were able
to renegotiate the purchase option, make it a little more
favorable, because there was no incentive for him to approve the
mM

acquisition of Famous Music, which Sony was going to advance

money into Sony/ATV to purchase, if he was going to be
responsible for 50 percent of the incremental debt, but his
upside was going to be capped with respect to half his interest.
So you know, if you look at the 2007 amendment, you can see how
that rolls through, and essentially that incremental debt to buy
a

Famous is not a reduction from the 1.15 billion. But in essence

you still had this cap on half of this interest, which would
Te

transfer economic value to Sony upon the windup and termination

of the venture. So to the extent that the company grew, he would
be receiving less than 50 percent of the proceeds upon eventual
w.

sale.
So when you look at it from a lender perspective, you know, the
lenders obviously need to think about that to the extent that if
there were ultimately a sale of the asset and the interest. That
ww
 om
has an impact. But more directly, the way that the loan was
structured, if Sony exercised the purchase option or if there was
an event of default, Sony could exercise the purchase option and

n.c
they would have to repay half the debt, right. So if there ...
even though they were ... would have the ability to
effectively acquire that interest on a capped value, it'll
underscore like we need to have our debt repaid. So that's really

so
how it came into play.

Q. Okay. How does the ... you mentioned the second, you talked

ck
about the purchase option. What about the buy/sell arrangement
was introduced in 2006?

lJa
A. Yes, and the buy/sell arrangement with respect to the lenders,
I mean clearly the way that the provision, the exit provisions
changed in 2006 is it's really where everything we've talked
about earlier was introduced. To the extent there was a guaranty
ae
outstanding, Michael would have to be, commit to be a buyer from
the onset, which in all practicality required that he find a new
guarantor, repay the debt, you know. Additionally, it introduced
ich
the various hurdles in valuations and sort of the, you know, the
stand off on the end, and you know, that when you look at it
combined with the purchase option, you create a scenario that
when you go into the room with the established value established
mM

by a third party, to the extent there's been appreciation, Sony

gets to pay a price that's lower because, you know, Michael
effectively is transferring some of his economic benefit to Sony
through the purchase option.

Q. If you could talk a little slower, stop me if the court

a

reporter.
Te

A. I know.
w.

Q. Have you talked to the court reporter?

ww

A. I know. I promised her I would slow down.

 om
Q. No, it's okay.

n.c
A. I'll try.

so
Q. Let's go back to the ... stay in the same year, the 2007
refinancing of the Mijac catalogue. How do lenders view any
unreleased compositions that might ... how would they affect?

ck
Ms. Herbert: Objection, calls for speculation.

lJa
Judge Holmes: Sustained, unless there's ... you might need to
lay a foundation there.

Mr. Toscher: Yeah, okay.

ae
ich
Judge Holmes: Go ahead.

Mr. Toscher:
Q. When lenders, when the lender loans money for security of ...
mM

on Mijac, could you describe what security they get and where do
any unreleased compositions fit into that?

A. Sure. You know, it's pretty standard, because there are loans
against music assets all the time, in some cases to folks who
a

have catalogues who are active writers. So and you can go to the
definition in the ... either the Plainfield or the HSBC's loan
Te

document and you can read it, and you can see it's fairly
encompassing. It basically covers everything, everything, you
know. I don't need to repeat it here. You can see it. It's meant
w.

... no surprise, it's a lender. So they're trying to capture

as much collateral as they possibly can, released, unreleased,
you know, future release in the future, written in the future,
everything.
ww
 om
Q. Right. Is it a fair characterization of your testimony that
during this period of time, '07 and '08, you were doing

n.c
everything that you could to get the most possible collateral to
get these loans?

so
A. Yes, yes.

Q. Okay, and you talked to Michael about this, the need to get

ck
collateral?

lJa
A. Yes, yes.

Q. And Michael never told you that there was hundreds of

unreleased compositions that could be used for collateral did he?
ae
Ms. Herbert: Objection, leading.
ich

Judge Holmes: Sustained.

mM

Mr. Toscher: Okay. Did ... okay. Let me try it this way.
Mr. Jackson knew it would enhance his financial position if he
could come up with ...

Ms. Herbert: Objection again, leading.

a
Te

Judge Holmes: Sustained.

Mr. Toscher:
w.

Q. Okay. Was Mr. Jackson aware that if he had increased

collateral, he would be able to borrow more money?
ww
 om
A. Yes. He was aware, and he was also aware after we concluded
the Plainfield transaction that he should do anything to try and
get rid of that as fast as possible. If he viewed that as a stop

n.c
... I've got to slow down.

Q. Yes.

so
A. If he viewed that as a stopgap measure to get himself some
incremental cash flow, you know, he was going to act very

ck
quickly. He needed to act very quickly to refinance that loan.

Q. Okay. Did he ever suggest to you that he had additional

lJa
unreleased compositions?

A. No. But I do know ...

ae
Ms. Herbert: Hearsay.
ich

Judge Holmes: Wait, wait, wait. Did he ever tell you that he had
the unreleased compositions?
mM

A. No.

Judge Holmes: Go ahead, Mr. Toscher.

a

Mr. Toscher:
Te

Q. Okay. All right. You said no, but then you said "but"?
w.

A. He did not want to tour and I, you know, he was exploring a

lot of things, and the last thing he really wanted to do was tour
so ...
ww
 om
Q. Okay, all right. Now we touched upon before you had actually
been working doing some advisory service regarding the Sony/ATV

n.c
interest from as early as 2007, and I think you testified that
you were involved in the 2016 sale of Michael's or the Estate's
interest in Sony/ATV to Sony; is that correct?

so
A. Yes.

ck
Q. Your Honor, just for the record, we've objected to the
evidence of the sale transaction and really I don't think it's
been resolved yet. All I want to do is ask Mr. Dunn as an

lJa
observer in financing these assets from '09 to '06, I'm just
going to ask him can you describe in your perspective what the
changes from Sony/ATV were from 2009 to 2016, the major changes?
I'm also laying as a factual predicate to our expert's opinion
ae
that the 2016 transaction really cannot be considered. Mr. Dunn.

A. Multiple transactions occurred between 2009 and 2016.

ich

Q. Slow.
mM

A. Okay, and they included additional purchases of catalogue.

They included an increase in Sony's desire to attract and pay
writers to develop songs. So in ...

Ms. Herbert: Objection. I don't know if the witness has personal

a

knowledge.
Te

Judge Holmes: That's a good point. How were you keeping track of
what was going with Sony after Mr. Jackson's death?
w.

A. I assisted the executor. I actually attended ... I began

working with the executors. I attended the Sony/ATV meetings as
ww

an observer.
 om
Judge Holmes: Through '16?

n.c
A. Through '16.

so
Judge Holmes: Overruled. Go ahead, Mr. Toscher.

A. So they continued to engage in acquisitions. They also

ck
increased their investment in new writers, and those are done
through increased advances. So when you want to sign a new writer
or you want to resign a legacy writer who's had success, you give

lJa
them a cash payment up front, which is then the future royalties
repay that advance. So they increased the amount that they were
investing in advances every year to sign new writers.

Mr. Toscher:
ae
Q. You mentioned before some additional purchases Sony/ATV made.
ich
You mentioned before, I think when you were doing the
refinancing, the Famous purchase. Tell us just a little bit about
that and then any other significant purchases.
mM

A. Sure. Famous occurred while Michael was still alive in 2007.

That was the most material acquisition that Sony/ATV had ever
done to date, and that increased their ... you know, in 2007
and the fiscal year end of 2007, the NPS of the company was about
120 million and the EBITDA. was roughly 55 to 60 million. And you
know, so that ... Famous added about 40 to 45 million of
a

incremental NPS, and ultimately roughly about 28 to 30 million of

EBITDA. by the time synergies were realized. So it was a very
Te

material transformative acquisition. It also added a lot of head

count between 2007 and 2009. The other material ... the other
material transaction which occurred was an arrangement to
administer the EMI Music Publishing agreement.
w.

Q. When was that?

ww
 om
A. In 2011, a group of investors called the Sony Consortium in
which Sony was a participant, Mobato (ph) was a participant, the

n.c
Estate was able to participate, acquired EMI Music Publishing,
and as part of that transaction, Sony/ATV took over the
administration of EMI, which meant that a lot of the EMI
employees actually left EMI and came over to Sony/ATV. So the

so
number of employees in 2009 were approximately 400, and post the
EMI merger and realization of restructuring there were
approximately 700 employees, which is where it was at the time of

ck
the buy/sell. So a very, very large organization and on a
combined basis, you know, while Sony/ATV was just administering
or responsible for managing it, Sony/ATV, with its own assets and
the administration of EMI, became the world's largest music

lJa
publisher.

Q. In what year did it become the largest?

ae
A. After the transaction closed in 2012. The transaction closed
ich
the end of June 2012.

Q. The number one?

mM

A. The number one. They went from roughly 750,000 to a million

copyrights to at ATV in excess of three million rights, and you
know, a market ... a global market share of a hair over 30
percent.
a

Q. Okay. Do you recall any significant writers that they signed

Te

during the period of time after 2009 to 2016?

A. Well, they resigned Taylor Swift, they resigned Lady Gaga.

w.

They did a new administration agreement which was fairly sizeable

with Bob Dillon. They signed a writer by the name of John Shanks.
They entered into a JV for production music which we talked about
before, which you know ...
ww
 om
Q. A. JV?

n.c
A. A joint venture for film scores with it's called Bleeding
Fingers. It was with this gentleman Hans Zimmer, who people have
heard of. So it was very, you know, and the financial metrics

so
between 2009 and 2016, you had an NPS in 2009 of about 190
million, if you exclude this one-time Napster payment, which
increased to about 260 million, you know, for the fiscal year in

ck
2016, right around when the sale was concluding. EBITDA. went on
an adjusted basis because of add back, a fee that Sony took. But
EBITDA. went from about 88 million to approximately 120 million.
between those two time frames, and the other piece is the

lJa
indebtedness. The Sony advances were, I believe the balance was
approximately ... well, I don't even have to talk about what
they were. But if you go through the free cash flow statement to
the audit, Sony repaid about 335 million of ... Sony/ATV
ae
repaid to Sony about 335 million of the acquisition advances.
ich
Q. Right. That was internal then?

A. Yes.
mM

Mr. Toscher: Okay. Your Honor, if you can give me one moment?

Judge Holmes: Sure.

a

Mr. Toscher: Your Honor, I have no further questions.

Te

Judge Holmes: All right. Who will be doing cross?

w.

Ms. Herbert: I will, Your Honor.

Judge Holmes: Go ahead, Ms. Herbert.

ww
 om
CROSS EXAMINATION

n.c
Ms. Herbert:

so
Q. Good afternoon, Mr. Dunn.

A. I'm going to try and talk slowly. I'm doing a bad job of it.

ck
Q. Okay. Why did Sony guarantee Michael Jackson's debt?

lJa
A. I think there were two reasons in my opinion. The first is
that each time they extended the guaranty starting in 2006, they
were able to get concessions. If you look at the 2006 amendment,
ae
they obviously got the purchase option. They got the amendment to
the buy/sell provisions and they got some other things that were
favorable for them. I think my personal opinion is if you look at
ich
it, you know, Sony had sort of gone up and down in the
electronics business at various points, and they had control of
the venture as the managing member and Michael had a very limited
set of rights. So they had free operating control. So they could
actually continue to maintain control of the company without
mM

actually having to buy Michael's interest. So I think that, you

know, is probably the practical financial reason. But the second
part is just my opinion.

Q. So their incentive was to ...

a
Te

A. They could continue to own and grow the asset, and then you
introduce the purchase option where they get 50 percent of the
upside on Michael's interest anyway. So you know, to a certain
degree why buy it when they continue to operate the company and
w.

grow, and they don't have to put out the outflow to purchase the
asset. Eventually they did when they triggered the buy/sell in
2015, but you know, they had control over the asset for a long
ww
 om
time without having to buy Michael out, and when they were ready
to, they did.

n.c
Q. And when they first guaranteed the debt, did they hope to
acquire all of Michael Jackson's equity?

so
A. You know, I really don't know. I mean, you know, I've been
involved since 2007. I think they started guaranteeing the debt
in the late 90's-2000's but I wasn't involved. So I don't even

ck
know if it was ... I always believed ultimately they planned
to execute the buy/sell, or otherwise acquire Michael's interest.
But I think there was, you know, if you track Sony in terms of
when we started this they were an investment grade company but

lJa
weakening. Then they lost their investment grade rating. So there
were a lot of things that were going on with Sony, you know,
their focus on electronics, you know. They seem to be very
focused on electronics and more recently they've been focused on
the entertainment assets.
ae
So I think there were people internally who really liked the
ich
music and entertainment assets, but they probably could never get
the commitment to actually go buy it. So just guarantee the debt.
It cost Sony nothing. They charged Michael a $600,000 annual
guarantee fee. Sony's borrowing money in Japan at zero percent,
so issuing a guarantee through Global Treasury Services or so let
mM

me explain how it worked.

So basically you have the financing, and then Sony would issue a
guaranty, which had a benefit to Michael of reducing the
borrowing cost, because Sony was guaranteeing it. So he's getting
a rate that's much, much cheaper than he could get if he borrowed
directly, and in fact he talked about he had so much debt he
a

couldn't borrow directly. Sony was providing credit support

Te

really at very little cost. And so they were maintaining the

status quo with almost no cost to Sony, but they could continue
to operate the company under the terms of the operating
agreement, because they were the managing member. They had broad
w.

rights, and you know, they could continue to ... you know,
they'd go to Michael when they wanted to do acquisitions and he'd
always say yes, and they could grow the asset without having to
buy him out. And again, like I said ...
ww
 om
Q. But he could have said no, right?

n.c
A. After ... what's that?

so
Q. He could have said no, right? He had a 50 percent vote?

A. He didn't have a 50 percent vote. I mean you have to remember,

ck
there's a whole section in the operating agreement that deals
with major decisions, and if you track it from 1995, it was
pretty parallel, right. There was a still a managing member but

lJa
you go through, you can actually see the rights get removed, and
then in 2000 ...

Q. But wasn't there still, even as late as 2007, the right to

ae
veto certain expenditures over a certain amount?
ich
A. So it's interesting. I really think if you spend time with the
2006 amendment, you know, that's really the one that's worth
spending time with, because you can see a lot of the rights. So
he could block acquisitions over a $10 million threshold, and/or
those approved by the budget. In 2007 it increased to 50 million,
mM

but you know with respect to Michael, there was a little bit of a
dynamic. It was hard for me to sort of say no, right. I mean he
did want to grow the asset too, but he really needed the cash
flow and Sony had all operating rights. I mean I think the major
decisions, when you look at it, are really pretty limited and its
only hitch was, okay, he could say no to acquisitions. But with
a

Sony ...
Te

Q. Or other major expenses?

w.

A. Such as?
ww

Q. Anything over a certain dollar amount, right?

 om
A. Well no, no. I think if you go look at it, you can see that he
has to approve the budget. But the budget continues year-in/year-

n.c
out. Sony has a fair amount of flexibility on what they can do
under the services agreement, and in order to dispute payment
under the services agreement, Michael would actually have to get
a third party bid and demonstrate to Sony that they were

so
overpaying.

ck
Q. For expenses?

A. Yeah, which he never did, and then if you actually look at it,

lJa
you know, Sony was in growth mode. So they were operating with
overhead that was a little different than Warner-Chappell, which
is in excess of 100 years old, and EMI which, you know, was
founded in 1930-something, because they were focused on starting
ae
from a starting position in 1995 of growing into the world's
largest music publishers. So you know, it's kind of like going to
Amazon and saying hey, stop spending money, you know. We want you
ich
to look more like K-Mart. I mean they wanted to grow and they
really wanted to build a big business and they did.

Q. Okay, thank you. Now earlier in your testimony this morning,

mM

you mentioned that during the refinancing of New Horizon Trust

III, again Mijac, you made the Estate the borrower and New
Horizon Trust III the guarantor. Why did you make the Estate the
borrower?
a

A. I think the lenders kind of liked it. It didn't really change

the collateral package at all, but you know, I think there were
Te

some advantages for the lender. There may have been some tax
advantages for the Estate.
w.

Q. Was any other collateral provided by the Estate?

ww
 om
A. No, no. It was ... the only collateral provided was they
guaranteed collateral on HT III.

n.c
Q. Okay, thank you. Now with all the debt and burden, turning
back to Sony/ATV, with all the debt and burden of refinancing
Sony/ATV, along with the costs of refinancing, and given that the
value ...

so
Mr. Toscher: Objection, compound.

ck
Judge Holmes: Sustained.

lJa
Ms. Herbert:
Q. Can I ... okay. Why did the Estate choose to maintain
possession of the asset during these refinancing deals rather
ae
than let it go, if there was no equity?
ich
A. Well, I think there are a couple of things. I mean there's
always the promise and option for equity. So I think you really
can't ... you would never just walk away and let it foreclose,
particularly when the Estate and the executors were able to
negotiate refinancings without the onerous terms that happened in
mM

2006, for example. And you know, on top of that you started to
see the ability to participate in the EMI transaction, and you
know, the debt started to get repaid. So you know, you did start
to see an increasing amount of equity value. So there's no reason
to let it go into foreclosure and let Sony buy it for, you know,
they would be able to subrogate the loan and effectively
a

foreclose after the 2010 financing. But I don't know why you
Te

would do that. I mean we were hopeful that there would be

incremental value. We were hopeful that Sony's growth strategy
would ultimately result in cash flow being generated and value
created in the asset. But it was also, you know, a little bit of
w.

a different situation. I think a few years after, when we started

doing the 2010 refinancing, there was cash flow starting to come
in from other projects and, you know, it was an option in a lot
of ways. I think it was something that wound up paying off in
ww
 om
terms of the appreciation of equity and increase in value with
the EMI merger acquisition.

n.c
Q. So there was an expectation that it might go up?

A. Yes, yeah.

so
Q. That the equity might go up?

ck
A. There was an expectation that the equity value of Sony/ATV
might go up, yes.

lJa
Q. Okay. Now what was your role in the Estate's 2016 sale of its
interest in Sony/ATV?
ae
A. I was investment banker.
ich

Q. Were you an advisor?

A. Yes.
mM

Q. Were you involved in the February 22nd, 2016 valuation?

A. I was.
a
Te

Q. ... performed by Shot Tower?

A. I was, yes.
w.

Q. I would like to ask Mr. Camp to bring up Exhibit 598-R onto

the screen.
ww
 om
Mr. Toscher: Your Honor before ... well, we can publish it.
We don't have a jury. But that's not in the stipulation, right?

n.c
Mr Camp: That's correct. This is a document that we have marked
in the third stipulation which the parties have not finalized

so
yet. That is, we haven't labeled it. As I believe I mentioned
yesterday, we've already numbered some of these things.

ck
Mr. Toscher: Your Honor, I think this is I think Ms. Herbert
mischaracterized it as a valuation. It's actually part of the bid
process, and there's other parts. This was what the Estate did as

lJa
a part of the bid. We provided this to the government. We argued
strenuously that it's not relevant for all of the reasons you've
heard today and we do not believe it's relevant.
ae
A. 2016 sale is just too far in the distance, and it opens up so
many other things that our objection is it should not come in.
It's irrelevant and a 2016 sale with a changed company and the
ich
2009 valuation, even under the most liberal views, I don't think
the Court would ... unless they would somehow lay a foundation
that somehow that it's relevant and that can't be.
mM

Ms. Herbert: Your Honor, may I be ... ,,,,,,,,,,,,,,,,,

Judge Holmes: First off, what exhibit has this tentatively been
numbered as?
a
Te

Ms. Herbert: It is labeled as Exhibit 598- R.

Judge Holmes: Okay.

w.

Ms. Herbert: It's marked for identification 598-R.

ww
 om
Mr. Toscher: And Your Honor just for the record, this is one
that we would be asking the Court if it was to be admitted, to
put under seal, because it is under the terms of the transaction

n.c
as confidential.

Judge Holmes: I see that in the first paragraph, yes.

so
Mr. Toscher: Yes.

ck
Judge Holmes: So the normal rule, Ms. Herbert, as the 9th Circuit
tells me is that I shouldn't consider transactions that occurred
after the valuation date, which here is back in 2009. Why should

lJa
I even look at this?

Ms. Herbert: Your Honor, Petitioner asked many questions to this

ae
witness about the 2016 sale thus ... and purchase, thus making
it ... I believe they've waived any relevancy objection, and
in addition it's a question of the ... to be argued on brief
ich
as to what extent it has any relevance, or whether there's a
reasonable foreseeability of this event and these are matters
that could be argued on brief.
mM

Mr. Toscher: Your Honor, might I respond?

Judge Holmes: Yeah, sure.

a

Mr. Toscher: I don't think we waived it. I think we preserved

it expressly and all I asked Mr. Dunn was his observation of the
Te

changes in the company, not to get into the whole valuation

situation.
w.

Judge Holmes: And his personal knowledge of events at Sony/ATV at

around the time of Mr. Jackson's death in 2009, to overcome a
competency objection about the composition of and operation of
ww
 om
Sony/ATV at that time. All right. Again, this gets back to the
are you trying to admit it, first of all?

n.c
Ms. Herbert: I will just at this time just ask the witness a few
questions about it, and not necessarily at the end can determine
whether Respondent would offer it into evidence.

so
Judge Holmes: With that understanding, go ahead Ms. Herbert.

ck
Mr. Toscher: Your Honor, over our objection.

lJa
Judge Holmes: I understand.

Ms. Herbert:
ae
Q. Okay. Now turning to page 24 of Exhibit 598-R, in your
February 22nd, 2016 report of valuation did you include a
comparison of Sony/ATV's margins relative to its peers?
ich

A. Yes.
mM

Q. Okay. Now looking at page ... can you bring up page 24? Is
that on the screen? Yes. So it's page 24 of the report, but it's
page 26 of Exhibit 598-R, because of the cover memo. All right.
If you could take a moment to look at that comparison, on that
page how did Sony/ATV's margins compare to the peer companies
shown?
a
Te

A. I'll give you a little context about this valuation and ...

Judge Holmes: Answer her question first.

w.

A. Okay, sure. So I think if you want to look at this

appropriately, and the context that this was prepared for was a
ww
 om
negotiation to try and get the highest price out of Sony/ATV,
because we had decided we're selling it. So this just relates to
the margin

n.c
Ms. Herbert: Is that in comparison to trying to get the lowest
price for the Estate tax return?

so
Mr. Toscher: Objection, argumentative.

ck
Judge Holmes: Sustained.

lJa
A. And I'm happy to go in all the detail you want. But basically
here, this is Sony/ATV with 700 employees, but it only includes
the revenue from Sony/ATV and not EMI. So if you wanted to get a
sense of the actual true margin of the entire thing, you'd
ae
probably have to include all the revenue that they were
administering.
ich
Ms. Herbert:
Q. Well can explain what does this chart show?
mM

A. This chart shows the margins of Sony/ATV on a stand-alone

basis, with all the overhead to administer EMI but without any of
the revenue from EMI included.

Q. Okay. So for example, looking at 2011, Warner is in blue and

a

Sony/ATV is in red; correct?

Te

A. You know, I think that's a good point, because that's before.

But going back to my earlier point, remember Warner Music is in
excess of 100 years old, and can I give you some details on the
w.

composition of the asset.

ww
 om
Q. No. If you could just answer my questions, I would appreciate
it.

n.c
Judge Holmes: Mr. Toscher is undoubtedly taking notes that he'll
use in redirect.

so
A. Oh okay, all right. No problem.

ck
Mr. Toscher: Your Honor ...

A. I'm new at this.

Ms. Herbert:

lJa
ae
Q. Okay. Now in your analysis, did you make all right. If the
buy/sell mechanism was triggered, could a hypothetical buyer
improve these margins by reducing operating expenses?
ich

A. Could a hypothetical buyer improve these margins by reducing

operating expenses? It would depend on the buyer.
mM

Q. Okay. Now in your analysis, did you make adjustments to

Sony/ATV's expenses, which would bring their margins in line with
their peers?
a

A. As part of the negotiating process, yes.

Te

Q. Okay, thank you. In fact, at the bottom of page 24, on the

left if you could read that statement that you made starting with
Sony/ATV's stand-alone?
w.

A. "Sony/ATV's stand-alone margin," again that's excluding EMI,

ww

"averages 19.1 percent."

 om
Q. Please just read.

n.c
A. "Based on our analysis including EBITDA, addbacks, Sony/ATV's
stand-alone margin would be average 24 percent. This is
consistent with Warner's and significantly lower than the EMI

so
margins under Terra Firma."

Q. All right, thank you.

ck
A. Sure.

lJa
Q. Please look at page 21 of this document 598-R.

Mr. Toscher:
ae
Your Honor, we'd just a continuing objection to
relevancy. We have not had Mr. Dunn testify as to the value of
Sony/ATV and the government is going way far afield.
ich

Judge Holmes: Response?

mM

Ms. Herbert: May I proceed, Your Honor?

Judge Holmes: No, response.

Ms. Herbert: Response to that?

a
Te

Judge Holmes: Yeah.

w.

Ms. Herbert: Well, the same thing I articulated earlier, which

is that this is a sale of the actual asset in question, albeit a
few years later.
ww
 om
Mr. Toscher: Six years later.

n.c
Ms. Herbert: Respondent is able to draw the connection that if
no extreme intervening events occurred, the court cases say that
this could be some evidence of the value as of the valuation
date.

so
Judge Holmes: I will allow it in for now, but this point of a
motion to exclude I imagine, which I will probably take CAP for

ck
post-trial briefing. But go ahead for now, Ms. Herbert.

Ms. Herbert:

lJa
Q. Okay, thank you. Now please look at page 21 and there's a
little chart there called "2017 Valuation EBITDA. Bridge/" ...
well actually it's called an EBITDA. bridge. Can you explain what
ae
this chart does and from the left to the right?

A. Sure, sure. This was actually comprised to do our valuation

ich
case, which you know, is included in this document for the
purpose of the negotiation, and we illustrated potential addbacks
to get to an adjusted EBITDA. figure of 139.8. So the Sony admin
fee is a fee that Sony takes every year, that doesn't necessarily
mM

have any justification. They don't really provide any services

for it, so you add it back. Task income is actually part of the
Sony Management's projections. So Sony/ATV, if you look at their
base EBITDA, this task would actually be included. So these first
two really aren't, you know, incremental addbacks. You'd always
add those back. Non-employee cash comp, that is non-cash comp to
a

executives under the option plan. So it's not a cash item, but
that was deducted from management's mid-range. They treat it as
Te

cash but it's not cash. D&A. addback, you know. When we looked at
it, there was some additional non-cash D&A of 2-1/2 million that
...
w.

Q. What is D&A, just for the record?

ww
 om
A. Depreciation and amortization.

n.c
Q. Thank you.

A. So it's a non-cash expense. So when you're looking at EBITDA,

which is for forward depreciation and amortization, you naturally

so
add it back. Legal rights. So there was a defense. Sony/ATV was
contesting a Department of Justice consent decree related to
their ability to negotiate with certain digital service

ck
providers. So the WD rights and the other legal, and they had ...
and the consulting fees, they had a major league lobbying effort
with the DOJ. So we added those back essentially because you
would hope that even though they're still ongoing, you would hope

lJa
they would become non-recurring to the extent you had success in
lobbying. And then the Support Services and ...
ae
Q. What about Other Legal and Consulting Fees?
ich
A. That's all the same. That's sort of like there was a lot of
legal associated with this, and we've got the little things here
so you can see exactly what they are.
mM

Q. Okay.

A. And then Support Services and Employee Cost. So Support

Services are IT and rent and things like that and, you know, we
were arguing that there might be the potential ability for some
a

strategic who had worldwide offices like Sony did, to save a

little money. And then finally Employee Costs, you know, we just
Te

took a portion. It's the 100 million of employee expense, and we

just assume that someone who was more aggressively operating it
for the purposes of our valuation case here for negotiating could
cut a few heads.
w.
ww
 om
Q. Okay. So if you would remove some of these expenses, would
that change the EBITDA. from, if I'm reading this right, 104.6
million to 139.8 million?

n.c
A. In terms of how it was presented in the mid-range plan, yes.
But in terms of how we always looked at EBITDA, no.

so
Q. Okay. Turning to page 24 of this document, okay. We read this
a little bit earlier, so it does indicate that the margin, the

ck
EBITDA, the stand-alone margin would increase to 24 from 19.1, is
that right? And is this consistent with Warner's EBITDA?

lJa
A. It is consistent with Warner's EBITDA. or would be, if you
were able to actually realize those expense cuts.
ae
Q. All right. Back to page 21 for a moment. On page 21, okay here
we are, you provide projections which are described as "the cash
flow which could be realized by a buyer in the absence of a
ich
contractual rights benefitting Sony under the current ownership
structure." Do you see that?

A. Where is that?
mM

Q. That is a description of the bridge to the left of the bridge.

It says "The bridge to the right shows the progression from MRP."
What does that stand for?
a

A. The management's mid-range plan EBITDA.

Te

Q. "EBITDA. to our valuation case. We believe it reflects cash

flow which would be realized by a buyer in the absence of
w.

contractual rights benefitting Sony under the current ownership

structure," is that correct?
ww
 om
A. Yes.

n.c
Mr. Toscher: Your Honor, can we take a short recess?

Ms. Herbert: I would prefer not to at this time. It would

disturb my flow of questioning.

so
Mr. Toscher: Yeah, but he's publishing a confidential document

ck
and ...

Judge Holmes: Do you want to sidebar by any chance?

lJa
Mr. Toscher: Yes, Your Honor.
ae
SIDE BAR..
ich
Judge Holmes: We're back on the record. Are you ready? We'll take
the exhibit off the screen and go into recess for a short time.
The witness is instructed not to speak to anybody for the time
being.
mM

Off the record now. (recess )

Judge Holmes: Are you all set Mr. Toscher. We've got to go back
a

on the record, unless you have something to say before we go back

Te

on the record?

Mr. Toscher: No, no.

w.
ww
 om
Judge Holmes: Okay, back on the record. We're back on the record.
We've taken off the screen the contested Exhibit 5 what was it,
something 58, 598?

n.c
Mr. Toscher: 587. 589-R, Your Honor.

so
Judge Holmes: 589-R.

ck
Ms. Herbert: Wait a minute. Is it 598?

Mr. Toscher: I'm sorry, 598.

lJa
Judge Holmes: 5 it was something 8. 598-R, which is how shall we
describe this, an exhibit prepared by you Mr. Dunn?
ae
A. It is, yes.
ich

Judge Holmes: Okay, an exhibit prepared by the witness in the

course of negotiations for the 2016 transaction between Sony/ATV,
Sony, Sony/ATV and the Jackson Estate. There are two things I
mM

need to discuss on the record now. One is the relevance objection

to the admissibility of this entire line of questioning and any
associated documents that would become part of the record through
this line of questioning. The second topic is whether these
should be lodged or filed under seal, and whether any testimony
relating to them should similarly be sealed and the Court receive
a

it in a non-public portion of the trial this afternoon. Did I

summarize that accurately Ms. Herbert?
Te

Ms. Herbert: Yes, Your Honor.

w.

Judge Holmes: Mr. Toscher?

ww
 om
Mr. Toscher: Yes, Your Honor.

n.c
Judge Holmes: Okay. Let's deal with relevance first. Mr. Toscher,
tell me why this line of questioning is not relevant?

Mr. Toscher: Your Honor, it's not relevant to any issue in

so
this case because the case law is pretty clear, that sales this
far out really have no relevance to the value seven years
earlier. Mr. Dunn did not give ... this is not his opinion,

ck
nor is he giving you an opinion here today on the value of
Sony/ATV. So it's simply ... the only possible basis might be
maybe cross-examination on a statement he made today. They
haven't said anything like that. We didn't get into any of those

lJa
issues, and that's the only possible basis. So there's no
relevance. It's clear. It's not as if he's giving an opinion.
This was half of a bidding transaction. One bid, Sony made their
bid and the government has that as well, and my suggestion is
ae
before the Court could really rule on the relevancy, that we have
the complete facts about what this is and the government be able
to demonstrate and respond how is this relevant to anything. It's
ich
not relevant as an opinion of value, and it's not relevant to
this witness' testimony. Now what I would ask the Court, this is
... you know, that we take argument, but Ms. Donna I assume
has other cross-examination of Mr. Dunn, and we ask the Court to
mM

make a preliminary ruling under I believe 104, the Rules of

Evidence, as to whether this comes in. Because if it does come
in, leaving aside the confidentiality issues, you've got other
information, you know, to go on the other side of the
transaction, you know, the other work Mr. Dunn has done on this.
He's not the valuation expert. So I fail to see the government
a

demonstrating any relevance whatsoever. On the confidentiality,

we think it's presumptively confidential. Late transaction ...
Te

Judge Holmes: No, I'll get to the sealing part next. I want to
have things in order.
w.

Mr. Toscher: Oh sorry.

ww
 om
Judge Holmes: Ms. Herbert, why is a transaction that occurred six
years, I'm sorry seven years after the valuation date relevant
under the 9th Circuit's precedents that tell me not to look at

n.c
subsequent events, subject to a few exceptions?

Ms. Herbert: Your Honor, this is ... the purpose for the line
of questioning and for the ... for us proffering the document

so
is not really about the value that they arrived at for the sale
or the offer that was made and the concluded value of over $2
billion for the enterprise value that was arrived at by Mr. Dunn

ck
for this purpose, but it's more about the cost and the
methodology that's used, because there's an issue, you'll see as
the case goes on, that there's an issue between the experts on

lJa
whether the most appropriate method to value Sony/ATV as of the
date of death is by using net publisher's share or EBITDA.

Judge Holmes: Okay, versus ... okay. But now you're in the
ae
position of saying that you agree with Mr. Toscher that the value
of the transaction and particularly the enterprise value that's
represented by the final terms of the transaction in 2016, is not
ich
relevant to the value of the property in the hands of the Estate
in 2009, but that it is relevant for me to look at how Mr. Dunn,
who was a participant in the transaction, valued particular costs
and the value of the overall deal, because the methodology that
mM

Mr. Dunn uses is similar to the valuation methodology of your

experts versus Mr. Toscher's experts. Do I understand that
correctly?

Ms. Herbert: That's partially correct, although the government

does not concede that the 2016 sale is irrelevant. It may have
a

relevance subject to us, you know, making our arguments as to

Te

whether ... because the Tax Court generally allows subsequent

events to confirm value if there are no drastic intervening
events. There's an opinion by Judge Laro in the Estate of Noble
perhaps.
w.

Judge Holmes: He even put it in his treatise. That's one of the

five exceptions confirming, not establishing valuation of the
ww
 om
subject properties, and this oddly enough would come in under
that part of the five exceptions to subsequent events. I'm
concerned as well, Mr. Toscher, about the government's use of

n.c
this witness to challenge the methodology of some expert witness
that I haven't heard of yet, when he's not in fact an expert for
either side. I take it that's part of your relevance objection,
Your Honor?

so
Mr. Toscher: Yes, Your Honor, that's correct.

ck
Judge Holmes: Okay.

lJa
Ms. Herbert: However Your Honor, may I be heard on that?

Judge Holmes: One last time, Ms. Herbert. Go ahead.

ae
Ms. Herbert: While not introducing him as an expert, the Court
ich
has a lot of leeway in this witness testifying as a quasi-expert
for industry practices, and therefore he almost is an expert or
the Court seems to be allowing that. So his methodology then in
looking at value from the standpoint of an investment banker are
relevant. In fact, they'd be very relevant in how in the real
mM

world somebody would look at these tax transactions. So if

someone in the real world would normalize the expenses. If a
company has exorbitant expenses, then maybe one looks to see
whether these can be normalized to become more in line with other
comparable companies in the industry.
a

Mr. Toscher: Your Honor?

Te

Judge Holmes: Go ahead.

w.

Mr. Toscher: I think the flaw in Ms. Herbert's position is Mr.

Dunn, this document is a bidding document. It is not a document
establishing a value. If Ms. Herbert would like Mr. Dunn, with
ww
 om
time, to give his opinion of value, I don't think, you know,
that's something separate. We haven't introduced him as an
expert. So I think you can't take what is a bidding document and

n.c
say well this is how valuation should be done. It's just a far,
far stretch. My suggestion is if the Court is going to allow it,
we don't want to disrupt Ms. Herbert, but I think the Court
should perhaps maybe look at both sides of these bidding

so
documents, and we can have argument on it in chambers under seal,
and you could make a decision and let Ms. Herbert go on with her
other lines of questioning.

ck
Judge Holmes: Well, let me ... I think this may be capable of
resolution here. Did you prepare this document yourself Mr. Dunn?

lJa
A. I did with my staff, yes.
ae
Judge Holmes: What were the sources of the data in the document?
We saw when I was allowing it to be shown to the public, lots of
tables with numbers in them.
ich

A. Yeah. There are a lot of tables. If I may, can I give you some
context in the process and how this fits in?
mM

Judge Holmes: I need it now.

A. Okay. So the buy/sell was triggered on September 3, 2015 and

within two weeks we gave the Estate our analysis of various
a

values under various scenarios, and that's not this document.

That's another document. Under the buy/sell procedures, there are
Te

these various benchmark time frames, and we tried to negotiate a

deal with Sony. We didn't get anywhere. So the next phase is Sony
prepares a valuation and the Estate prepares a valuation. Sony's
valuation was prepared by Allen and Company, and we did ours on
w.

behalf of the Estate.

We by that time had decided we effectively had to sell for a
number of reasons, including the value. When you go into the
ww
 om
buy/sell procedures, the way it works if you're, as I discussed
earlier, if the two valuations within ten percent of each other,
then you basically start the process. If they're far apart, then

n.c
you have to get a third party expert. We were working to get a
party up to speed to help us buy it and maximize price, so we did
not want to go in with a low value because we thought Sony
wouldn't. If we were within ten percent of Sony's value, we would

so
have had to trigger the, you know, we would have had a say
whether a buyer or seller at that point.
What we were trying to do is negotiate the highest price. So we

ck
went in with a high value, and Allen and Company came in at a low
value. After that point, we never went to the third stage,
because we started negotiating a transaction with Sony. Sony
finally said yes, we want to buy it, because we were sitting

lJa
there saying listen, we're going to have to do way more
diligence. We're going to have to sort of bring this all in. So
you know, if you guys are a buyer, which we know you are, and we
know we're going to have issues in bidding at a level you are,
ae
then we should just negotiate a deal and be done. So this
document represents a negotiation piece in our actual valuation.
ich

Judge Holmes: Specifically, this document was prepared in

conjunction with the exercise of the buy/sell clause of the
operating agreement; correct?
mM

A. Yes.

Judge Holmes: Was it shown to third parties who might have helped
you to finance the sell option?
a
Te

A. It was not.

Judge Holmes: And what was the source of the numbers in on that
w.

document again? Did you have access to Sony/ATV records?

ww
 om
A. We had access to Sony/ATV records. The projections and the
assumption on synergies were ours.

n.c
Judge Holmes: Mr. Toscher, do you happen to know if the numbers
involved here from Sony's records are elsewhere in the record?

so
Mr. Toscher: No, Your Honor. I don't think they would be.

ck
Judge Holmes: Ms. Herbert, the same question to you?

Ms. Herbert: We have some of the financial statements in

lJa
evidence. I'm not quite sure which years we have, the audited
Sony financials, and we have some Sony tax returns as well.

Mr. Toscher:
ae
Your Honor, just to be clear, there are some
post-debt financial statements that the government has put in
there, but I don't know the extent of the data in there to be
ich
able to represent that it's already in the record. If the
government wants the raw data, I'm sure they can get that raw
data.
mM

Judge Holmes: One way or the other. Much of it did in fact look
like what I saw in the expert witness reports anyway, so we'll be
getting to that later in the trial. So the reason now that you
... if I can summarize your position as stated, Ms. Herbert,
is that (a), you want to get the value of the deal into the
record, but it would sound to me, from Mr. Dunn's testimony,
a

correct me if I'm wrong when you get your argument into the
record, that this document does not show the value of the
Te

transaction. It was preliminary to that; am I correct?

Ms. Herbert: Well that's correct. I think that it's a matter of

w.

public record and we also have documents that show what the
actual sale price was.
ww
 om
Judge Holmes: Well there you go. Second, that the source material
for the document, Sony's records, may be elsewhere but you're not
interested in the underlying numbers for these later years. What

n.c
you're interested in is the methodology that Mr. Dunn used in
this advocacy document, to come up with a number in the
negotiations on behalf of the Estate in what would become the
sale by the Estate of its share to Sony. Am I right about that?

so
Ms. Herbert: That's correct, especially since he was essentially
representing the Estate in the transaction.

ck
Judge Holmes: Okay. With that in mind, I will rule in favor of
Mr. Toscher on the relevance objection, and my specific grounds

lJa
are that these numbers are not what you're trying to get in, and
that the government's argument, which is based on the methodology
that the fact witness, Mr. Dunn is using, can be dealt with
through expert witness testimony on both sides. Neither side, I
ae
note for the record, has offered Mr. Dunn as an expert, as well
as a fact witness. I do want to make sure that these arguments
are all in the record, however. So then the question of sealing
ich
comes up. Formally do you, Mr. Toscher, object to the sealing of
this, I'm sorry, request the sealing of it?
mM

Mr. Toscher: No, Your Honor. If it was going to be right now

the status is he's ...

Judge Holmes: But I need to preserve for argument for appeal, so

it won't be filed. It will be lodged under seal.
a

Mr. Toscher: Yes, yes, yes. We would request that it be lodged

Te

and under seal.

Judge Holmes: Okay. Do you object to that Ms. Herbert?

w.

Ms. Herbert: I cannot make representations on behalf of the

ww

government as to whether we object to the sealing order.

 om
Judge Holmes: Okay.

n.c
Ms. Herbert: Well, we would ... our preliminary position
would be that we object, subject to my consultations with the
National Office.

so
Judge Holmes: I understand it's tentative and you'd need to
object. Why do you want it sealed, Mr. Toscher?

ck
Mr. Toscher: Your Honor, it's subject to confidentiality

lJa
agreements with Sony.

Judge Holmes: Sony and who, the Estate?

ae
Mr. Toscher: I think as part ... we can ask Mr. Dunn.
ich
Judge Holmes: Oh Mr. Dunn, was it subject to a confidentiality
agreement?
mM

A. Yes.

Judge Holmes: Between whom?

A. It's subject to a confidentiality agreement between Sony and

a

the Estate.
Te

Judge Holmes: Very well.

w.

Mr. Toscher: And right, okay.

ww
 om
Judge Holmes: The age of the data appears to be fairly recent.
Judge Lauber used five and ten year windows for data and assets.
Is that correct?

n.c
A. This is very recent data.

so
Judge Holmes: Under those circumstances, I will lodge this so
that Ms. Herbert has her record preserved, but it will be lodged
under seal in recognition of the confidentiality agreement that

ck
was reached between the Estate and Sony/ATV, as well as the
recency of the data, which is quite similar to that in the
analogous situation of Amazon that Judge Lauber handled, and for
which we have a published decision. T.C. Memo 2016-131, which is

lJa
112 T.C.N. (2016). This is rapidly developing area of law. We
will deal with it that way Ms. Herbert. Get a copy of 598-R and
put it in a sealed envelope and we hope that you will guard with
your life until you get a sealed envelope.
ae
Ms. Herbert: May we approach with printed copies?
ich

Judge Holmes: You certainly may. Are there any other similar
documents that you have that you'd like to have lodged under seal
at this time, Ms. Herbert?
mM

Ms. Herbert: No, I don't think so, Your Honor.

Judge Holmes: Very good. .

a
Te

Judge Holmes: And Mr. Toscher, do you have any similar documents
that you would like put under seal, keeping in mind that the
relevance objection that you made was sustained, so you don't
have to worry about other negotiating documents.
w.

Mr. Toscher: Yes. No Your Honor, I do not. But Ms. Cohen, can
you come ... she had one other thing regarding the ...
ww
 om
Ms. Cohen: I just wanted for the record to reflect also that the
other reason this should be sealed is not just a confidentiality

n.c
agreement, but this is ... this relates to the right to
financial privacy of a third party who is not in this courtroom
or a party to this proceeding, Sony.

so
Judge Holmes: Okay. That's probably why they wanted it
confidential too.

ck
Ms. Cohen: Yes.

lJa
Judge Holmes: One way or the other, your additional statement is
moot for the record.

Ms. Cohen: Thank you.

ae
ich
Mr. Toscher: Thank you, Ms. Cohen.

Judge Holmes: That's fine. So we will lodge this and then the
floor goes back to you, Ms. Herbert. I expect Mr. Toscher to
mM

start objecting shortly. Do what you need to do.

Ms. Herbert: Your Honor, has the Court ruled that I may not ask
any more questions about this document?
a

Judge Holmes: About the methodology used by Mr. Dunn in creating

Te

the document and maybe EBITDA versus NPS. That has now been ruled
by me to veer over to the battle of the experts, which lies ahead
of us still.
w.

Ms. Herbert:
ww
 om
Q. Okay. I just have a little bit more. Mr. Dunn, earlier turning
to the Year 2011, now you ... I believe you said you assisted
in the EMI acquisition in 2011; is that right?

n.c
A. Yes.

so
Q. As a ... and you also mentioned you're a certified
valuation analyst; is that correct?

ck
A. I am. My primary profession is in investment banking.

lJa
Q. Okay. Would you say is EMI a reasonably comparable company or
entity to Sony?

Mr. Toscher:
ae
Objection, relevance. He's not here as an expert.

Judge Holmes: Yeah. Are you using him as an expert again?

ich

Ms. Herbert: He has testified in an expert, sort of quasi-

industry expert manner. So this just follows up on what he was
mM

testifying about.

Judge Holmes: I'll let him answer this question.

A. Could you repeat the question please?

a
Te

Ms. Herbert:
Q. Is EMI a reasonably comparable entity to Sony?
w.

A. In some respects.
ww

Q. Can you explain?

 om
A. Sure. I think as we discussed earlier, EMI is a very, very old
music publishing enterprise. So and Sony/ATV was formed in 1995.

n.c
So that the assets that they contained were somewhat different,
and also the nature of some of the copyrights. Should I keep
explaining?

so
Q. Go ahead.

ck
A. So if you were to look at the composition of EMI versus ATV,
Sony/ATV had a significant amount of copyrights which were ...
had been under administration agreement, where they managed as a

lJa
service provider on behalf of third parties. For EMI, that was a
smaller percentage. Additionally, if we look at EMI, EMI was so
old. So there's a concept in music called front list versus
catalogue. I don't know if you're familiar with that, or if you'd
like me to explain.
ae
Q. A little bit, yes.
ich

A. So if you look at it, so basically new compositions that are

recorded by artists are, you know, really generating NPS that's
mM

less than two years old effectively. They were published in the
last two years, and there's as tendency with those rights to
contribute a lot in Year 1 and then deteriorate. Which means you
have to be constantly ... you're constantly signing new
writers in order to replace that. And then there's catalogue,
which is all the stuff older than two years and the legacy stuff,
a

which is really very much reoccurring cash flow. So when you look
at Sony/ATV versus EMI and you think about the different time
Te

frames in which they were built, EMI was primarily catalogue,

right. It wasn't necessarily reliant on front list, which is the
strong reoccurring stuff, which is past the decay curve. That's
some of it, and again it didn't have a lot of administration
w.

agreements, which generate a lot of revenue but not a lot of

profitability. Then when you move to Sony/ATV, Sony/ATV just
given its age, had more front mix versus catalogue as a mix, and
ww

also a higher percentage of fee for service agreements.

 om
Q. Do you know what that percentage of fee for service agreements
was let's say in 2009?

n.c
A. For Sony/ATV?

so
Q. Yes.

ck
A. Sure, and I can give you a front list/back list approximate
too if it helps.

lJa
Q. No, just the fee for service.

A. It was approximately ... in terms of NPS, it was

ae
approximately 12 to 15 percent of all NPS. So we'll call it 30
million bucks.
ich
Q. Were a lot of the expenses associated with of Sony associated
with the administration of that 12 to 15 percent catalogue?
mM

A. Remember ...

Mr. Toscher: Objection, vague.

A. lot?
a
Te

Judge Holmes: Sustained.

w.

Ms. Herbert:
Q. Okay. I withdraw the question. Was EMI a distressed company in
2011?
ww
 om
A. Can I give you the whole context, because it might be helpful
to understanding. A lot of this is publicly available. So
basically Terra Firma, a private equity shop, acquired it. We

n.c
talked about it earlier in a leveraged buyout with a lot of debt,
and they had trouble meeting the debt obligations. You know, they
had 2007 levels, 2006 levels of indebtedness. We went through the
Great Recession and they were struggling to pay it. Citigroup,

so
who was their lender took ownership of EMI as a whole, and then
they ran a pretty robust auction.

ck
Q. Why did they do that? Why did they take possession?

A. Because the ... they took possession because essentially

lJa
the purchase price that was paid for it in '06 was pretty
significant, and it declined to such a level that the value was
less than the debt. ae
Q. What declined?
ich

Mr. Toscher: Excuse me, objection. Let the ... Your Honor,
could we have the witness answer completely?
mM

Judge Holmes: Sustained. You can answer completely, Mr. Dunn.

A. So you know, basically the value of the asset had declined to

such a degree that the debt was now worth more than the
enterprise value. So the equity had no value. So Citigroup
a

essentially took it over, you know.

Te
w.

Ms. Herbert:
Q. So would you call that a distressed asset?
ww
 om
A. No. You know, it's hard to call that a distressed asset,
because the company continued to operate. I'd say it was a
capital structure in need of restructuring. But it wasn't like

n.c
EMI operated any differently in 2010 than it was earlier, right?
I mean it was ... the capital structure was screwed up but the
operations were ongoing. The business generating tons of cash. It
wasn't mentioned earlier, it's catalogue, which generates a lot

so
of recurring cash flow, as opposed to front list, which is a
little more fleeting. So I mean it's sort of a steamship, so it
was really continuing to operate well. They didn't have ...
it's not like they lost employees or even had massive rounds of

ck
layoffs on the publishing side, they didn't. It was their capital
structure was messed up and, you know, the value decreased to
such a degree that there was no ... Terra Firma no longer had

lJa
any equity value so Citigroup took it, and then they ... if I
recall correctly, you know, they took some time and, you know,
they put together a pretty comprehensive process and, you know,
there were a lot of ... You can read the press. There were a
ae
lot of market participants, so it was a very robust auction sale.
I mean it was a very robust auction process.
ich
Q. And then Sony acquired it, Sony/ATV acquired it?

A. And then Sony/ATV or Sony/ATV didn't. A consortium of

mM

investors acquired it, yes.

Q. Okay, I'm sorry.

A. The Sony Consortium.

a
Te

Q. Okay. Now you had said that they are dissimilar in certain
respects, Sony versus EMI?
w.

A. Uh-huh.
ww

Q. In what ways are they similar?

 om
A. Well, I would say they're similar in that they're both in the
music publishing business, right, but you know, if you look at

n.c
it. So for example, if we look at what happened with EMI, where
it essentially ATV took over the operating infrastructure and
ATV's employees went from 400 to 700, and they started
administering the copyright assets, you know, you are able to do

so
that with EMI without losing a significant amount of NPS, because
they didn't have a lot of administration agreements or front list
to begin with. So if you were to take the same approach with ATV,

ck
for example, and you lost the admin, you lost the front list
business. If you were to take the same approach in having someone
else admin. The other piece that Sony/ATV has is a production
music business, which they make new music, which is approximately

lJa
10 million of NPS. You know, we're quickly in a position where if
EMI they started with 300 million of NPS, you know, Sony/ATV
could administer 300 million of NPS. With ATV if you start with
190 million of NPS, if you shut down operations to have someone
ae
else administer it, you might be at 130, because there's, you
know, it's a going concern in an operating company, and EMI, just
by nature of its sheer scale, had this massive catalogue and age.
ich
I mean age helps in these things.

Q. Apart from the ... both being music publishers, are they
similar in size, in what other ways might they have similarities?
mM

A. Now so EMI, and do you want me to talk at the time of the

acquisition? I mean that's public so ...
a

Q. Let's look at 2011.

Te

A. Yeah. So they had about ... they had roughly we'll call it
360 million of NPS. At the time, Sony probably had 210 million,
so EMI was substantially larger. If you looked at EBITDA, EMI had
w.

about 200 million of EBITDA, versus Sony/ATV probably had

adjusted, adding back the 7-1/2 million, maybe 110.
ww
 om
Q. Now you said you worked with the Estate between 2009 and 2016?

n.c
A. Uh-huh.

Judge Holmes: You have to say yes or no.

so
A. Yes.

ck
Ms. Herbert: And you were familiar with the earnings during that
time period?

lJa
Mr. Toscher: Objection, vague. Earnings of what?

Judge Holmes: Sustained.

ae
Ms. Herbert:
ich
Q. Were you familiar with the net publisher's share of Sony/ATV
during that time period?
mM

A. All the financials.

Q. Okay. So during that time period from 2009 to 2016, did the
percentage of net publisher's share or NPS as we sometimes refer
to it, derive from the owned catalogue versus their administered
catalogue change during that time?
a
Te

Mr. Toscher: Objection, vague. The witness can follow it. I

couldn't follow it, Your Honor.
w.

Judge Holmes: Well, it's overruled. Go ahead, Mr. Dunn.

ww

A. Do you want to just repeat it so I'm

 om
Ms. Herbert:

n.c
Q. Okay. Did the percentage of NPS or net publisher's share
derived from the owned catalogue versus the administered
catalogue change between ... for Sony/ATV change between 2009
and 2016?

so
A. The percentage of administered went up as a result of the EMI
transaction.

ck
Ms. Herbert: All right. I have no further questions.

lJa
Judge Holmes: Redirect.

Mr. Toscher:
ae
One moment, Your Honor. .

REDIRECT EXAMINATION
ich

Mr. Toscher:
Q. Mr. Dunn can you explain again, or if you did, what front line
mM

is and the way you used the terminology?

A. So front list is ...

Q. Front list?
a
Te

A. Yeah.
w.

Q. So if we're using the example in 2009, you know, there was a

pretty substantial amount of NPS that was generated from
compositions underlying new releases, for example Lady Gaga and
Taylor Swift. So those are, you know, really a function of the
ww
 om
artist and repertoire function, where Sony was investing in new
writers. New songs would be published and they have a pretty
significant impact on Year 1 and then decay. So there's a

n.c
constant investment of securing new writers and new rights that
is just part of the ongoing creation of music, which is separate
and distinct from really a catalogue, which are all these aged
works which have already been established and are generating

so
income through exploitation, from synchronization and other
things. But you know, a disproportionate amount of mechanical
income is coming from, not surprisingly, compositions underlying
new releases.

ck
Mr. Toscher: No further questions, Your Honor.

lJa
Judge Holmes: Okay. Let's see if I have any. Oh, I do have some
for you. You spoke about the Barclays bond. Was it 30 million or
300 million?
ae
A. 300 million.
ich

Judge Holmes: 300 million. Were those registered securities?

mM

A. They were what would be called sort of 144(a) for life, so

they weren't registered.

Judge Holmes: In the course of ... do you happen to know if

there was a circular under 144 to qualified investors?
a
Te

A. There is no circular to qualified investors, but there was an

offering memorandum that Barclays had as initial purchaser, and I
believe they did make efforts to market the bonds to certain
Japanese investors without success.
w.

Judge Holmes: Did you see the offering memorandum?

ww
 om
A. Yes.

n.c
Judge Holmes: Did the offering memorandum include any
representations as to the value of the assets secured by the
bond?

so
A. It did not.

ck
Judge Holmes: Did it evidence any due diligence on the part of
Barclays or any other person associated with the potential sale
of the bonds?

lJa
A. It has full risk factors. So I don't know if that would be
evidence of due diligence but
ae
Judge Holmes: Did the full risk factors include any
representations as to the value of the underlying asset secured
ich
by the bonds?

A. You know, I am ... because they were marketed against a

guaranty, I don't think it got into the underlying value of Sony.
mM

It talked a lot about expenses and the risks to the business and
the A/R function, but I don't believe it got into value
specifically.

Judge Holmes: Were the bonds amortizing?

a
Te

A. They were not.

Judge Holmes: When did they become due?

w.

A. They became due in December of 2010.

ww
 om
Judge Holmes: Not doing the subtraction, how long a period was
that?

n.c
A. Three years.

Judge Holmes: Oh, three years. You also testified that you had

so
engaged in helping Michael Jackson and his trust engage in other
forms of secured financing. Think back to the Mijac secured
financings that you described. Was any valuation made of the

ck
assets of Mijac in connection with those security financing
transactions?

lJa
A. The lender would have ... the lender would have had a
valuation done. I do remember that their, you know, they had
concerns that to the extent that their additional allegations of
molestation, that they might have to get out of the position
ae
quickly. So they wanted to understand the impact that that could
have on the value.
ich

Judge Holmes: Was that HSBC?

A. That was HSBC Private Bank.

mM

Judge Holmes: Did HSBC prepare any appraisal in the value of the
assets in ... which are New Horizon? New Horizon III, I guess,
was the Mijac.
a

A. I'm sure they did.

Te

Judge Holmes: Did you have access to it?

w.

A. I may have access to the 2007. I don't have the 2009.

ww
 om
Judge Holmes: Did you ... have you looked at the 2007
valuation?

n.c
A. We were involved in pretty indepth discussions around
valuation on a loan to value basis.

so
Judge Holmes: What was the value in 2007 according to the
appraisal?

ck
A. If I recall correctly, the value on a distressed basis was
approximately 60 million, and on an non-distressed basis I
believe it was probably in the $80 million range.

lJa
Judge Holmes: Now we talked about Mijac, we talked about
Sony/ATV. Help me with any other secured financing transactions.
ae
A. It would have been Plainfield.
ich

Judge Holmes: Plainfield. Did Plainfield prepare an appraisal?

mM

A. You know, I don't believe Plainfield did. I mean I think, as

we discussed, I'm sure they did their own internal valuation,
because I believe they were playing for the asset ultimately.

Judge Holmes: Did you have access to that information?

a

A. I did not, no.

Te

Judge Holmes: Who were some of your other clients during this
period of time from 2005-ish to 2009?
w.

A. There are media, like all media clients?

ww
 om
Judge Holmes: No. Are we talking about people whose images would
be worth something in the world?

n.c
A. No.

so
Judge Holmes: Artists?

ck
A. No. We typically don't do artists. I mean I think we are
normally doing corporate or catalogue businesses. I mean we've
done a couple more recently, but in '09, you know, this was

lJa
interesting because of just the sheer quantity of music assets.
It was more like an enterprise.

Judge Holmes: In your experience, your personal experience, have

ae
you ever sought financing securitized or collateralized by the
name and likeness of an individual?
ich

A. No.

Judge Holmes: Are you familiar with any such transactions?

mM

A. I have never ... I mean I have never seen a loan against

image and likeness. There have been some transactions, you know.
So Authentic Brands Group, and these would be post-death
acquired, you know, the Marilyn Monroe image. But they ...
a

there aren't, you know, I'm not ... there are companies like
Sequential Brands like that you see a lot of sort of brands
Te

changing hands, like Juicy Couture and there's a company called

Iconix, which was public. You know, so you see a lot of
commercial brands trade. I've certainly had discussions with
folks over, at least in the last couple of years.
w.

Judge Holmes: Yeah. That's related, but a different time period.

ww

Any follow-up questions, Mr. Toscher?

 om
Mr. Toscher: No, Your Honor.

n.c
Judge Holmes: Any follow-up questions, Ms. Herbert?

so
Ms. Herbert: No. No, Your Honor.

Judge Holmes: Can we let this one go?

ck
Ms. Herbert: Yes.

lJa
Mr. Toscher: Yes, Your Honor.
ae
Judge Holmes: We have a witness who can be released. Thank you,
Mr. Dunn.
ich
A. Thank you.
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