David Dunn-transcripts. Michael Jackson Ex. Branca V Irs

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UNITED STATES TAX COURT - TRIAL

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 Presiding Judge Mark V. Holmes

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Jackson’s 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 en and Laura Mullin. --------------------------------------------

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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 ... Judge Holmes: I did, too.

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Mr. Toscher: ... I beg The Court's indulgence to ... 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 the title of a paralegal.

That understates ...

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Mr. Toscher:

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

Judge Holmes: Her significance.

Yeah. I don't want to ...

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Mr. Toscher:

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Judge Holmes: I do remember her now. What other witnesses will we have tomorrow? Mr. Toscher: David Dunn, who's the investment banker Mr. Branca referred to, and there may be ... we're not quite sure. We think that'll take the day.

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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.

Judge Holmes: It's Grammy week?

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

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

it's a huge

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Judge Holmes: I've heard of Grammys.

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Judge Holmes: Okay.

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

Mr. Weitzman:

So if you can just inquire of the Government ...

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

Thank you, Your Honor.

Mr. Toscher:

Yes, Your Honor.

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

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

Thank you, Your Honor.

Good morning, Your Honor.

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Mr. Toscher:

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Judge Holmes: Good morning. The hearing is starting late this morning. The floor is yours, Mr. Toscher.

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Mr Camp: Good morning.

Judge Holmes: Please be seated.

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Mr. Toscher: Your Honor, can we make our appearances first or are we okay with that? 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 subpoena to Mr. Branca? Judge Holmes: You're a man of honor, aren't you?

Mr. Toscher: There's no need for that, Your Honor. We object to the government's procedure, but Mr. Branca will be here.

Okay, thank you. Just wanted to clarify that.

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Ms. Herbert:

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Judge Holmes: Yeah, that's fine.

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Judge Holmes: I understand.

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

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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 Mr. Toscher:

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Q. Good morning, Mr. Dunn. Could you tell us your occupation for the record please? A. Sure. I'm an investment banker.

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Q. Are you married? A. I am, two kids. 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. Q. Do you hold any certifications or licenses?

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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 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 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 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 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 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.

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Q. And how long did you do that for?

A. I did that for approximately three years.

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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 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 little career change early on.

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Q. So you wanted to leave the practice of law? Okay. Sorry for ... so did you go to Alex Brown?

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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 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 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.

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Q. Okay. So we're about in the 2000 area right now, just starting with Alex Brown?

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A. Yeah. I started a little earlier than that. Q. Okay, and how long were you with Alex Brown and Sons?

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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 actually with Deutsche Bank until 2004.

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Q. And what were your areas in Deutsche Bank? 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?

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 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 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 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 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 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 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 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 place to look. So my first music deal was in 2005. Q. So when was Shot Tower Securities ...

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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 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. Q. How many employees at Shot Tower?

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A. We have normally seven to eight. I think we are right now at 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 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 company has. Q. Would you say a specialty of Shot Tower is the music sector?

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A. Yes.

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

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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? 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 after Michael passed to the present day?

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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 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, 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.

A. Okay.

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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.

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Q. All right. You said you were working on a refinancing for the Sony/ATV? 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 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 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 end of 2015.

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

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

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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 name of Pinnacle Towers, which was a sell in a prepackaged 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 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.

that's what I was going to ask. What year

the discussions with Greg started in

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A. So this was in ... February of 2007.

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Q. Okay. So what ... are we talking about?

Q. And did he tell you at first this issue was for a client Michael Jackson or did he tell you later? 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 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. Q. Okay. So what was the purpose of ... eventually retained?

I assume you were

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A. I was eventually retained. Q. And why did they need your services?

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A. So the way in the history of the various loans is Michael 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 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 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 Michael's debt. When the trial was going on in 2005, they wanted to remove themselves ...

I'll

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Q. Wait one second please. I'm sorry. Bank of America ... 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 ... A. In 2005.

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Q. 2005. What trial are you referring to? 249 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 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. Q. Okay. Do you know why Bank of America sold their position to Fortress?

Objection, hearsay.

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Ms. Herbert:

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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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Judge Holmes: Overruled. Not admitted for the truth of the matters.

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A. And I can ... and in 2007, I had representatives of Bank of America who and they basically were concerned that reputational damage to the extent that was different than it actually was.

discussions with the 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? A. Prior to the refinancing or after?

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Q. After the refinancing.

A. Okay. So that the entity that after the refinancing that held the interest was a bankruptcy remote entity called New Horizon Trust III. Q. Okay. So New Horizon Trust III owns the Mijac music?

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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?

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A. The structure is there because the lenders against the asset had concerns that claims against Michael could ultimately creep 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? A. The Mijac.

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

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A. Yeah. III is Mijac.

A. Is the interest in Sony/ATV.

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Q. New Horizon Trust II?

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

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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 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 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 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.

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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 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 interests were part of that 2006 loan.

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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 approximately $15 million a year in interest.

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Q. And what's your recollection of what the annual distributions were? A. They were 6-1/2 million per year under the operating agreement.

Objection, asked and answered.

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Ms. Herbert:

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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?

Judge Holmes: Overruled.

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A. That's correct. Mr. Toscher:

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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 refinancing of the Mijac capital, okay. We may ask you some 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?

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A. Well, it was ... it was to refinance the existing indebtedness, which was coming due in December, but there were

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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.

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Q. April of 2000 ...

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 August. Q. Slow down, okay. So you say the ... interest reserve?

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A. Right.

you're talking about an

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

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A. Into maturity, that's right.

Q. So we're talking about August of 2007. Weren't these loans put in place in 2006?

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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?

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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?

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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 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 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.

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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. A. Oh, I'm sorry, yes. I'm sorry about that. Mr. Toscher:

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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 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 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

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

A. Approximately $20 million.

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

Q. At that time when you got involved with Michael in 2007, what was his source of money to live on, if you know?

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

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A. Sony/ATV was not a source of income because all of the distributions from that were required to go to service the interest on the New Horizon debt.

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Q. Okay. So as you started working with Michael, was he aware of his financial circumstance?

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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 who were basically telling him we can do this or we can do that, it's all going to be great.

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Q. Cheerleaders in other words?

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

A. He understood ...

Objection, leading.

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Ms. Herbert:

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

Judge Holmes: Sustained. Mr. Toscher:

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Q. Did he understand the extent of his financial circumstances?

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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.

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Q. But your communications with him, you communicated to him what you described as dire financial circumstances?

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A. Yes. The loan was going into default and, you know, we were going to have to do some pretty significant restructuring to get 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. 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 about some of the documents. What would happen if you weren't able to achieve the refinancing? Ms. Herbert:

Objection, calls for speculation.

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Judge Holmes: Sustained.

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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 think that is speculation.

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Judge Holmes: Specify the particular refinancing. Mr. Toscher:

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

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

n.c 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.

lJa ck so

Q. Both Sony/ATV and Mijac?

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. Q. You refer to the credit facility with Fortress as to the fact, but you also referred to an operating agreement before. Was that ... which operating agreement are you talking about?

ich

ae

A. I'm sorry. You know, it would be the credit facility with 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 each refinancing that was amended to cover some of the terms associated with the various financings.

mM

Q. Okay. I just want to be clear for the record. So let me ... 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? Objection, asked and answered.

Te a

Ms. Herbert:

w.

Judge Holmes: He can pitch from the wind up on this one. Go ahead, Mr. Toscher.

ww

Mr. Toscher:

n.c om

Q. Thank you, Your Honor, was secured by the interest in Sony/ATV and the Michael's interest in the Mijac catalogue? A. Yes.

lJa ck so

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

understanding of what the

ae

Q. Would you tell the Court what your Mijac catalogue was at that time?

ich

A. The Mijac catalogue was comprised of compositions composed by Michael Jackson, as well as compositions composed by a number of third party writers that Michael had acquired or obtain over the years.

mM

Q. Okay. Tell us what you did, what actions you took to go about 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? Objection, compound.

Te a

Ms. Herbert:

Judge Holmes: Sustained on that one.

w.

Mr. Toscher:

ww

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?

n.c om

Q. Okay. Let's stop important point. So this debt which was little of what your that time?

lJa ck so

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, 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.

for a second, because I think this is an historically when you got involved in 2007, secured, there was a Sony guaranty. Tell us a understanding of that Sony guaranty was at

ae

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.

mM

ich

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 to Fortress and collateralized by Mijac, Sony guaranteed a portion of that debt or all of that debt? A. All of that debt.

Te a

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

how that Sony

ww

w.

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

n.c om

Q. Okay. Who would have required that it first came about, the lender?

guaranty at that time when

A. The lender.

lJa ck so

Q. Okay. I just wanted to make sure that was clear. So I sort of interrupted you. So tell us how you went about trying to obtain refinancing in 2007? What did you do?

ich

Q. Okay. Slow down please.

ae

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 issued a guaranty, they removed rights from the operating agreement and transferred them to the Sony partner. So the major decisions were eroding.

Te a

mM

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 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 that was our first step.

w.

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

ww

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

n.c om

Q. And what was that conclusion? A. That we needed the guaranty.

lJa ck so

Q. Why?

mM

ich

ae

A. Sony as the ... essentially Michael was not in a position to control anything at Sony/ATV. He couldn't say reduce your 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 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 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 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 ... Judge Holmes: I'm sorry, waterfall?

Te a

A. So basically what the waterfall outlines is it outlines the priority of cash distributions to the members. Mr. Toscher:

w.

Q. Members of?

ww

A. The Sony member and the Michael Jackson member. Q. Okay, and you're referring now to the operating agreement ...

n.c om

A. The operating agreement.

A. Yes, sorry.

lJa ck so

Q. Of Sony/ATV?

Q. Okay. So just for the record, if we refer to operating agreement ... A. That's the Sony ...

ich

ae

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

mM

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

Te a

Q. Do you think we should state that first before ... For clearness, please go ahead.

yeah.

w.

A. I do, because there are ... there are ultimately three different groups of lenders we contacted, and ...

ww

Q. As long as you go slow.

n.c om

ae

lJa ck so

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 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, 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 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 fairly sizeable list. It was in excess of 50 potential financing sources.

ich

Q. Okay. We all know what a bank is. What do you mean by an alternative financing source?

mM

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 ... Judge Holmes: BDC.

w.

Te a

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 time, and there were also hedge funds. You know, we have to 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 ... Mr. Toscher:

ww

Q. Which asset are we talking about?

n.c om

A. Sony/ATV, I'm sorry.

A. I'll go Sony/ATV. Q. No, no, let's do ...

lJa ck so

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

either one is fine.

Te a

mM

ich

ae

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

ww

w.

A. Just in terms of the number of unsecured creditors 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

n.c om

certain that we could show up on the refinancing date and close the transaction. So that ... Q. We're talking about Sony, his interest in Sony/ATV?

lJa ck so

A. Sony/ATV, yes. Q. Stay on that one.

ae

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 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.

ich

Q. And did they give you non-financial reasons for that?

Q. Okay.

mM

A. Yes, reputational risk is the classic response, you know, headline risk.

ww

w.

Te a

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 Investment Banking. So those were the two who offered us 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 distress lender.

n.c om

Judge Holmes: They named themselves that through the three dog ... A. Yes.

lJa ck so

Judge Holmes: Three-headed dog act.

Te a

mM

ich

ae

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

w.

A. Cerberus.

ww

Q. Cerberus.

you mentioned Deutsche, Barclays, Cerberus.

n.c om

A. There were a lot of other lenders we talked to as well.

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

lJa ck so

A. Well, and it might make sense, because we ultimately then narrowed it down to Barclays, and basically for ATV, which was an operating company and again ... Q. That's Sony/ATV?

mM

ich

ae

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 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, 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 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.

Te a

Q. Okay. So when you say "the operating company," you mean Sony/ATV?

w.

A. Yes.

ww

Q. Okay, all right. So the ... refinancing with Barclays?

did you eventually consummate a

n.c om

A. Yes. We closed a $300 million bond deal on December 7th of 2007.

Ms. Strachan: Mr. Toscher:

lJa ck so

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. Which one do you want?

The $300 million offering.

A. That's the Mijac one.

ae

Mr. Toscher:

ich

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?

ww

w.

Te a

mM

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

n.c om

lJa ck so

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 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.

Q. That's good. I wanted that clarification. So the proceeds were how much of the bond offering? A. The bond offering was $300 million.

ae

Q. And do you have a recollection as approximately where that money went to, what it was used for?

mM

ich

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

Te a

A. Sorry.

w.

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?

ww

A. 17-1/2 million.

n.c om

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

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.

lJa ck so

Q. Okay, okay. So we were talking ... thank you. So we were talking about the proceeds. You told us what went off to pay Fortress. How much went into the interest reserve?

ich

ae

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. 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.

mM

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? A. He did not.

Te a

Q. And in fact I think you just testified before that there wasn't enough to even pay all of the creditors? A. That's correct.

w.

Q. Answer?

ww

A. That's correct.

n.c 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 catalogue?

lJa ck so

A. Our approach was to reach out to folks who had specific experience in music, and who had made prior loans against 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 represented another royalty stream that was paid directly to Michael for his writer's share of performance income.

ae

Q. Okay. So the Mijac catalogue, I think you testified before, what were the assets of the Mijac catalogue, just so we're clear?

ich

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 well.

A. Yes.

Te a

Q. Okay.

mM

Q. Okay. These were all compositions?

A. Music publishing compositions.

ww

w.

Q. Music publishing, okay. The possible lenders you approach, are they a different pool than those which you would approach to finance Michael's interest, refinance Michael's interest in Sony/ATV?

n.c om

A. There was some overlap but very little. So essentially it was a different pool of lenders.

lJa ck so

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

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 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.

ich

ae

Q. Okay. So the ... what do ... you talked a little before of what the lenders looked at concerning the Sony/ATV refinance. What do they look at regarding refinancing the Mijac catalogue?

ww

w.

Te a

mM

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

n.c om

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

maybe describe, since you've done them both at what the lenders look at for the Mijac what they look at when they're financing, interest in Sony/ATV?

lJa ck so

Q. How to ... just now, how does looking catalogue differ from refinancing Michael's

ich

ae

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 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 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.

mM

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

Te a

Q. And could you describe that briefly for us?

ww

w.

A. Sure. So as we progressed, the number of claims increased, and originally my hope was to just do a facility with the HSBC 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. 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, at conclusion it was $70 million of debt. We had 30 million which

n.c om

Q. PIK, a PIK? A. PIK, paid in kind. Q. Paid in kind.

lJa ck so

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 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 ...

mM

ich

ae

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

w.

Te a

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 subordinated in the overall value of the asset, you know, they were getting effectively equity-like returns because if you're at the back end of that 70 million piece you're taking some risk, and they charge for it.

ww

Q. And how was Michael going to be able to service the interest on that debt?

n.c om

lJa ck so

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 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 contributing a substantial amount of money to do a refinancing of Mijac. Q. Okay. So we're at the end of 2007 now? A. Yes.

ae

Q. Okay, and do you recall how long the Plainfield debt, the 161/2 percent interest debt was going to run for?

mM

ich

A. Yeah. So it was HSBC, if I recall correctly, was about five 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 was effectively made whole and then, you know, they could move for the collateral.

Te a

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

w.

A. Yes.

ww

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

n.c 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.

lJa ck so

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

ae

Mr. Toscher:

mM

A. No.

ich

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 Michael's name and likeness?

w.

Te a

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

ww

Ms. Strachan:

The actual stipulation?

Ms. Strachan:

n.c om

Mr. Toscher:

Yeah, the stipulation and then I can Sure.

lJa ck so

Mr. Toscher:

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 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.

ich

ae

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 a very precarious situation that he had to work his way out of. So that was early in 2008.

mM

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 financing that was in the works to have Plainfield refinance Neverland debt as part of the overall package.

Te a

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 involved in the refinancing of the debt on Neverland?

ww

w.

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 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

n.c om

might do something to at least prevent the asset from going into foreclosure.

lJa ck so

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? A. That it was going into foreclosure. It was in default and Fortress could foreclose on the asset. Q. And do you recall how much that loan was?

ae

A. You know, again I was tangentially involved. But I think it was in the 20 to 25 million range if I recall correctly.

ich

Q. Okay. So you said that you're not a real estate mortgage broker, but you would call the Plainfield people regarding this, because the other people were not having success financing. What did you do with respect to the Plainfield people?

Te a

mM

A. I talked to the gentlemen at Plainfield and said okay, you 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 going to add any value there.

w.

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

ww

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

n.c om

a weekend, Colony Capital purchased the mortgage directly from Fortress.

lJa ck so

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

A. This was all happening in, you know, really April-early May of 2008. Q. Okay. So what is Colony Capital? It's a new name that you're introducing here.

ae

A. Colony Capital is a real estate investment fund based in California, run by a gentleman by the name of Tom Barrack.

ich

Q. And do you know how Colony came about to buy the Fortress note on Neverland?

mM

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 concurrent process that was moving forward. Tohme Tohme got involved and, you know, I guess convinced Michael to sell to Colony.

Te a

Q. Okay, and what was your understanding of that transaction with Colony? This is in 2008; correct?

ww

w.

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 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.

n.c om

Q. Okay. So Colony ends up buying the note on Neverland. Was there a subsequent transaction with Colony that Michael entered into regarding Neverland?

lJa ck so

A. My understanding is he entered into a transaction which involved conveyance of a portion of ownership to Neverland, and then some residual stake basically in consideration of Colony purchasing the mortgage. Q. Were you involved in that transaction at all? A. I was not, no.

ich

ae

Q. Okay. So did you, since we're focused in 2008 here, did you have any other dealings with Colony regarding Michael's finances?

mM

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 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.

Te a

Q. Could you say that last name again or ... A. Richard Anula. I'm not ...

w.

Q. All right with an N?

ww

A. With an N, yes.

n.c om

Q. Okay, thank you.

lJa ck so

A. Yes, yes.

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

ae

A. Yes.

ich

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?

w.

Te a

mM

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 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 think this was a lot of ... obviously Michael conveyed this, that he felt that they weren't spending money appropriately. So we talked about that. We reviewed the audit and I shared my opinions, and you know, then that was sort of meeting one.

ww

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

n.c om

lJa ck so

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

ae

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?

ww

w.

Te a

mM

ich

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 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 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 you read the operating agreement, there were multiple areas in 1995 where it says the mission is to grow, and it cites specific 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 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. So my conclusion was it would be ... it would be nice if they

n.c 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.

lJa ck so

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?

ww

w.

Te a

mM

ich

ae

A. Yeah. So over the course of 2008, there were a number of 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 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 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 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. 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 go down it. Additionally, when I asked Sony about what these various expenses were, you know, it's like Michael was concerned 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 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 abroad, you know, all of a sudden you have all this digital money

n.c om

lJa ck so

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 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 heart of that was occurring in that 2007-2008 time frame. Q. Okay so, but just so we're clear, Mr. Petrocelli the lawyer represented Mr. Barrack? A. He did, he did and I ...

ae

Q. He had you consult with Mr. Petrocelli regarding this expense issue?

ww

w.

Te a

mM

ich

A. Regarding the expense issue and, you know, the same view that 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 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, which we probably already knew, that Dr. Tohme Tohme was moving 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 want to talk to.

n.c om

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

Court Clerk:

All rise.

lJa ck so

RECESS

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

ich

ae

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 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?

mM

A. Yes.

Q. Would you describe generally what those discussions were?

ww

w.

Te a

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

n.c om

Q. And when you say "repay the debt"?

lJa ck so

A. The New Horizon Trust debt, which was secured by the interest in Sony/ATV. Q. Right, which was the $300 million? A. Yes. Q. Okay, go ahead.

w.

Te a

mM

ich

ae

A. So you have to repay the debt and then the process is extremely long. It takes about eight months to complete, and 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 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 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 know, you start a sale process and if one's a buyer and one's a 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.

ww

Q. Elaborate. You mean big risk. Tell me what you have to do.

n.c om

Q. Okay. Were these ... the buy/sell provision?

lJa ck so

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, 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 less than fair market value potentially.

and Mr. Anula voiced concern regarding

A. The complexity and the duration, yes.

ich

ae

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?

mM

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 to all the Sony advances in Sony/ATV.

Te a

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? Ms. Herbert:

w.

Mr. Toscher:

Objection, leading. I'm summarizing.

ww

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

Q. Explain that, in your own words.

n.c om

Mr. Toscher:

ae

lJa ck so

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 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 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 Sony/ATV to continue distributing money to the holder of the debt secured by Sony/ATV.

ich

Q. And to your understanding or your understanding of the reputation, was Mr. Barrack a financially sophisticated individual?

mM

A. Yes.

Q. And what about Mr. Anula? A. Yes.

Te a

Q. And do you know Mr. Anula's background at all? A. Yes. He was the former CFO of the Walt Disney Company.

w.

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

ww

A. Yes.

n.c om

lJa ck so

Q. Okay. Let me ... we talked about your dealings with Colony on Michael's behalf, both concerning Neverland and Sony/ATV. Were you involved on any other activities with Michael regarding assisting in his financial situation? A. I talked to Michael a lot and ... Q. What is a lot? 2008.

ich

ae

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

mM

Q. Okay. Let me go back a second here. I may have missed that before. You said he was concerned that he never wanted ... could never live in Neverland again. Did he ... as part of the Colony transaction, did he lose his rights to Neverland?

Te a

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

w.

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

ww

Q. Okay, and was there ... do you know of a reason why he didn't want to live there again or go there again?

n.c om

Te a

mM

ich

ae

lJa ck so

A. I think it was the ... it was the culmination of the molestation allegations, it was a culmination of I think 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 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 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 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 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 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 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 solve his financial crisis, because he did understand that if he didn't do something ...

ww

w.

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 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

n.c om

lJa ck so

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

ae

Q. When you said Jesse Jackson, you're talking Reverend Jesse Jackson?

ich

A. The Reverend Jesse Jackson. Q. Okay.

ww

w.

Te a

mM

A. Correct, and we had a meeting in Las Vegas where we sat down and, you know, Reverend Jackson basically gave him a lecture 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 long-term finances. So we talked about some of the things that, 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 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

n.c om

party creditors. So it was ... it seemed to be that things were continuing. He did offer support and you know, it was helpful.

lJa ck so

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

ich

ae

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 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 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 as far as I can tell, other than performing again.

mM

Q. Okay, and during this period of time, to your knowledge nothing, none of these other opportunities ever panned out to anything?

Te a

A. No, not that I saw. Q. To your knowledge?

ww

w.

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 horrible it was, and I felt. Q. Telling him how horrible what was?

n.c om

lJa ck so

A. Taking the Plainfield debt, because the Plainfield debt was basically, in my opinion, signing Mijac away to a hedge fund. It 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. Q. Okay. Let's move into 2009, okay. I know did there come a point in 2009 where you resigned from representing him? A. I resigned in May of 2009.

ae

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?

mM

ich

A. Well, I was involved in the ongoing sort of management of the 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 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.

ww

w.

Te a

Then he called and said Tohme Tohme's out, and then I started getting calls from various people in the industry, some of whom were reputable, some of whom weren't so reputable, and you know, 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 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

n.c om

Objection, hearsay.

ich

Ms. Herbert:

ae

Q. Before you get on that ...

lJa ck so

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

Judge Holmes: Hold on. Question withdrawn.

mM

Mr. Toscher:

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?

Te a

A. Yes.

Q. Were you owed money at that point?

w.

A. I was.

ww

Q. Do you recall how much money that was?

n.c om

A. Maybe 300,000, somewhere in that range. I hadn't been paid anything since the refinancing a few years ago. Q. The refinancing at the end of 2007?

lJa ck so

A. Yes.

Q. Okay, okay. So you're already ... I think you testified the calls were getting less frequent. You've resigned. Were you still in contact with Michael after you resigned? Were there any contacts?

let's talk. What was the purpose of

ich

Q. Okay, and what was ... the Amir call?

ae

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.

mM

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

Te a

A. He did.

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

w.

A. On the phone.

ww

Q. And when was this approximately?

yeah, it was late May.

Q. Okay and ...

lJa ck so

A. Mid- to late May. Q. Tell us about that discussion.

n.c om

A. Some time in late May, maybe ...

mM

ich

ae

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 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 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, 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 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.

Te a

Q. And the Plainfield loan is the one related to the ... A. Secured by Mijac.

w.

Q. What you called the PIK?

ww

A. The PIK, sort of opportunistic hedge fund.

n.c om

Q. Right, that runs about 16 percent interest, that one? A. Yes.

lJa ck so

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

ich

ae

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, 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 early June, I had no more ... after that phone call, I really didn't have any more dealings with Michael until he passed away.

mM

Q. So after Michael passed, was there a point that you were retained by the Estate? 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 ...

Te a

Q. John?

A. John Branca.

w.

Q. Okay.

ww

A. And Joel Katz and offered my advice about what needed to be done on Mijac, which you know, we can ... it was pretty

n.c om

focused on that, because it was so critical and how we might be able to refinance it.

lJa ck so

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 possibility of default. What was going on?

mM

ich

ae

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 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 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 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 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.

Te a

Q. All right. So when was the ... was it coming due soon?

focusing on the Mijac debt,

ww

w.

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 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.

n.c 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?

lJa ck so

A. Uh-huh. Q. I'm not a music guy. Tell me what that is.

mM

ich

ae

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 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 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 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. Q. Wait, stop.

Te a

A. Okay.

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 thought process here on the spike.

ww

w.

Ms. Herbert: Objection. I think this is starting to turn into the territory of expert testimony.

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

lJa ck so

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

Judge Holmes: Go ahead, Mr. Toscher. Mr. Toscher:

ae

Q. Okay. So what did you mean by the Thriller 25 release and how did that affect the income stream?

ich

A. There were two things. So first of all, we're talking about in Thriller 25 there are compositions and then there are master recordings. So if they both comprise a song, the compositions of the songs where Michael received an interest as a songwriter.

mM

Q. And that's in Mijac? A. That's Mijac.

Te a

Q. Okay.

w.

A. The master recordings are the income streams that Michael receives as a performing artist.

ww

Q. Okay.

n.c 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.

lJa ck so

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

A. Right, and there were four compositions on Thriller where Michael was a writer. Q. Okay. I'm going to test you. What were the four? I know two of them.

ae

A. Billie Jean, Beat It, Wanna Be Starting Something and the Girl is Mine.

ich

Q. All right. I think you passed.

mM

A. Okay.

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?

ww

w.

Te a

A. Well, you have to focus on the album sales, because Mijac receives a royalty on those four compositions. So if the album 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 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.

n.c om

Q. Okay, and because of that, there were increased revenue flowing to Mijac? A. There were, yes.

lJa ck so

Q. So now going back, you said you were focusing on, even though the Mijac debt wasn't due, you were focusing on the possibility of refinancing it after Michael passed away? A. Yes.

ae

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

ich

Q. Okay. So tell us what you were trying to do there.

mM

A. After talking to John and Joel ... Q. John Branca?

ww

w.

Te a

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 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 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 and really in mid-August started looking at some of the sales data on the spike, both Soundscan but also talking to WarnerChappell, who was the administrative agent on what they were seeing in the pipeline, so we could try and quantify the amount

n.c om

Q. December 31st of 2009? A. Of 2009, yeah. Q. The refinance of Mijac?

lJa ck so

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 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.

mM

ich

ae

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

Te a

Q. Okay, for the Mijac? A. Yes.

ww

w.

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 what a spike is and what spike happened after Michael died, if you have personal knowledge?

n.c om

ae

Q. Why are we monitoring it?

lJa ck so

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

mM

ich

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 though they were going on a first lien from 30 million to 70 million. Q. Okay. So you were monitoring it and tell us, and you eventually were able to refinance at the end of '09?

Te a

A. Yes.

Mr. Toscher:

w.

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

ww

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.

n.c om

ich

ae

lJa ck so

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 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, 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 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. 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 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 than about $4-1/2 million, which was an advance from EMI, which we used to pay it down to refi.

mM

Q. Right. So up to the time of when "This Is It" came out, the deal hadn't been sealed yet in terms with the lenders?

Te a

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

w.

A. Yes.

ww

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

n.c om

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

lJa ck so

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

ae

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.

ich

A. The Sony/ATV loan was going to mature in December of 2010.

mM

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?

ww

w.

Te a

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 of the distributions and the same issues we had in '07. They still existed, and you know, we had just been through the Great 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 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.

n.c om

A. Yes, yes. They were gone.

lJa ck so

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. That's what you meant?

Q. Okay. They were answering the phone in 2007? A. Yes.

A. In 2007, they were.

ae

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

ich

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

Te a

mM

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 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 DoddFrank 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 lend, they had to bolster their balance sheets, which increased their cost of lending.

ww

w.

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 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

n.c om

lJa ck so

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 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 night, in terms of worry about our ability to refinance it. Q. Why did it keep you awake at night because

mM

Q. Slow down.

ich

ae

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

Te a

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.

w.

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.

ww

Judge Holmes: I'm understanding these are his perceptions of the refinancing that he was involved in, the background of that. I'm not accepting them as Sony's projections ...

n.c om

Judge Holmes: It's leverage.

ae

A. Yeah. It's leverage, exactly.

lJa ck so

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

ich

Judge Holmes: It's a problem in all industries.

Te a

mM

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 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 guaranty. In fact, I had discussions with Sony about whether they would be interested in buying the Estate's share.

w.

Mr. Toscher:

ww

Q. Stop there.

n.c om

A. Okay.

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

lJa ck so

A. Sony was not interested in buying the Estate's share. That was ... they said they weren't in a position to do it. Q. Okay, and what about the guaranty?

ich

ae

A. They said they would consider the guaranty, but they would 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 garner from the operating agreement. They wanted more concessions on the operating agreement.

mM

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? A. Potentially, yeah. It was a discussion that we were willing to have, if they were willing to have it.

Te a

Q. And they said to you?

A. They were not interested.

ww

w.

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

n.c 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.

lJa ck so

Q. Macquarie's a bank in Australia? A. Yes.

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

ae

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.

A. John Branca.

ich

Q. So when you say "John," you're talking about ...

mM

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

Te a

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

ww

w.

A. So we had these discussions starting in April of 2010, really 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 interested. Q. And which participant was that?

n.c om

A. Apex Partners.

lJa ck so

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

ich

Q. What is the RIA data?

ae

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 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, 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 ...

mM

A. Recording Industry of America. They put out a tremendous amount of data on sales, and if you look at it, downloads weren't offsetting the physical declines. Q. Slow down a little bit.

Te a

A. Okay, I'm sorry.

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

w.

A. I'm sorry.

ww

Q. Go ahead.

n.c om

lJa ck so

A. Physical declines, being physical album declines were not being offset by an increase in music downloads. So you had a 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. Ms. Herbert: Objection again, Your Honor. I renew my objection that he's testifying as an expert witness. Judge Holmes: Okay. That one will be stricken. Mr. Toscher:

ich

ae

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 that point regarding the potential sale? A. It was either Richard Anula or Paul Fuhrman or both.

A. No.

mM

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

Te a

Q. Okay. Did you contact Goldman Sachs? A. Oh, I'm sorry. We did talk to Goldman, and John Branca and I both had the call with Goldman.

w.

Q. And what was their response?

ww

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

n.c om

Ms. Herbert: Mr. Toscher:

Objection, leading. Wordy.

Judge Holmes: There you go.

lJa ck so

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

ich

Mr. Toscher:

ae

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.

Q. You're talking about the 2007?

ww

w.

Te a

mM

A. The 2007. In 2000, I'm just trying to think if I ... in 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 to go, but they really bumped into the risk-adjusted cost of capital. Because their balance sheet was weakened, they did not 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 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

n.c om

had an interest in Mijac being administered by Sony/ATV as opposed to Warner-Chappell. Q. Okay, can we ...

stop there for a second.

lJa ck so

A. I'm sorry, okay.

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

ae

A. Sure. Michael owned 100 percent of his interest in his copyrights, which is relatively unusual.

ich

Q. In Mijac?

A. Yes, the compositions he wrote.

mM

Q. Okay, very good. Go ahead.

Te a

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.

w.

Q. So writer, Michael, gives publisher, Mijac or somebody else an interest to administer his composition?

ww

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

n.c om

on a fee for service basis to collect and exploit these works on my behalf. Q. Okay. That's the percentage you're talking about?

Q. Okay. I was stuck.

lJa ck so

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

A. But a typical writer, not Michael, would have ceded a portion of ownership to the publisher in exchange for exploiting the works. and what does it mean to

ae

Q. Got it, okay. So the ... administer a catalogue?

mM

ich

A. You collect royalties on a global basis. So you have offices on a worldwide basis. You have relationships with certain entities in various territories ... Ms. Herbert:

Objection, expert testimony.

Te a

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

ww

w.

A. So you have relationships with PROs like performance rights organizations and MROs, mechanical rights organizations, where 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 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.

n.c om

Mr. Toscher:

Q. Okay. So this is the entity who's administering ...

lJa ck so

A. They're managing the asset.

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? A. Warner had ... Q. Warner?

ich

Q. What is Warner-Chappell?

ae

A. Warner-Chappell or Warner Brothers.

mM

A. They are a music publishing company. Q. How long have they been around? A. They've been around for in excess of 100 years.

Te a

Q. Okay, go ahead.

ww

w.

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 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.

n.c om

Q. Okay. So at this point we're talking, who was administering the Mijac catalogue?

lJa ck so

A. Warner-Chappell. Q. Okay, all right.

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?

ae

A. Sony/ATV is an operating company.

ich

Judge Holmes: So it was doing it own?

A. It was doing its own administration.

mM

Judge Holmes: But some of its administrative overhead was subject to a chargeback agreement, so they could get cash out of Sony/ATV, right?

ww

w.

Te a

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 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 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 fulltime employees of Sony/ATV, but we'll do all the payroll for Sony 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 from a practical perspective, if you think about it were being

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

lJa ck so

Judge Holmes: Okay. So moving the publishing rights from Mijac to Sony/ATV might bring economies of scale but probably not much chargeback income to the writers?

ae

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 bit of market snub, that Michael had his rights with a competitor and not the company that he owned.

ich

Judge Holmes: All right, Mr. Toscher.

mM

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

Te a

Mr. Toscher:

Judge Holmes: So it's like applying ... quarter of two then.

. Okay. We'll resume at

w.

RECESS……………………. Court Clerk:

All rise. The Court is now in session.

ww

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

Mr. Toscher:

the Court, good afternoon Mr. Dunn. Mr. Dunn, the 2007 refinancing of Mr. Jackson's interest you testified about, do the lenders you go to to look at the operating agreement in assessing make the loan?

lJa ck so

Q. May it please focusing back on in Sony/ATV that seek refinancing whether they can

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DAVID DUNN . CONTINUED DIRECT EXAMINATION

ae

A. Yes, they do, but the primary collateral in the case of the 2007 financing was the Sony guaranty, but they did review the operating agreement. If the guaranty wasn't sufficient, that would be their recourse.

ich

Q. Okay, and how do the terms of the operating agreement impact or are relevant to the lender?

mM

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 option.

Te a

Q. Okay. Can you ... be a little more descriptive of what you mean by the purchase option, what document it's in?

ww

w.

A. Sure, and maybe it would be helpful if I just give a, you 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 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 '97-'99 time frame, Michael's debts started to increase, and you

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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 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 agreement.

ich

ae

The two primary ones were the introduction of the buy/sell provision in Section 7.8, which was still in effect through 2016, 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, 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 increase with the value of the company, and the other half would be capped based on that enterprise value of one billion dollars. So ...

A. Yes.

mM

Q. So it sounds like that impaired that interest?

Te a

Q. Michael's interest.

A. Michael was no longer entitled to the appreciation on 50 percent of his interest.

w.

Q. Okay.

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A. Moving to 2007 ...

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Q. Okay, go ahead sir.

Q. To acquire Famous ... A. Famous Music.

ae

Q. What was Famous Music?

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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 ...

w.

Te a

mM

ich

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 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 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 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 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 sale.

ww

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

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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 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 how it came into play.

Q. Okay. How does the ... you mentioned the second, you talked about the purchase option. What about the buy/sell arrangement was introduced in 2006?

mM

ich

ae

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 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 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 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.

Te a

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

w.

A. I know.

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Q. Have you talked to the court reporter? A. I know. I promised her I would slow down.

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Q. No, it's okay.

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A. I'll try.

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? Ms. Herbert:

Objection, calls for speculation.

Yeah, okay.

ich

Mr. Toscher:

you might need to

ae

Judge Holmes: Sustained, unless there's ... lay a foundation there.

Judge Holmes: Go ahead. Mr. Toscher:

mM

Q. When lenders, when the lender loans money for security of ... on Mijac, could you describe what security they get and where do any unreleased compositions fit into that?

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Te a

A. Sure. You know, it's pretty standard, because there are loans against music assets all the time, in some cases to folks who have catalogues who are active writers. So and you can go to the definition in the ... either the Plainfield or the HSBC's loan 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 ... 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.

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Q. Right. Is it a fair characterization of your testimony that during this period of time, '07 and '08, you were doing everything that you could to get the most possible collateral to get these loans? A. Yes, yes.

Q. Okay, and you talked to Michael about this, the need to get collateral? A. Yes, yes.

Objection, leading.

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Ms. Herbert:

ae

Q. And Michael never told you that there was hundreds of unreleased compositions that could be used for collateral did he?

mM

Judge Holmes: Sustained.

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 ... Objection again, leading.

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Ms. Herbert:

Judge Holmes: Sustained.

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Mr. Toscher:

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Q. Okay. Was Mr. Jackson aware that if he had increased collateral, he would be able to borrow more money?

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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 ... I've got to slow down.

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Q. Yes.

A. If he viewed that as a stopgap measure to get himself some incremental cash flow, you know, he was going to act very quickly. He needed to act very quickly to refinance that loan.

A. No. But I do know ... Hearsay.

ich

Ms. Herbert:

ae

Q. Okay. Did he ever suggest to you that he had additional unreleased compositions?

A. No.

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Judge Holmes: Wait, wait, wait. Did he ever tell you that he had the unreleased compositions?

Te a

Judge Holmes: Go ahead, Mr. Toscher. Mr. Toscher:

w.

Q. Okay. All right. You said no, but then you said "but"?

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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 ...

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Q. Okay, all right. Now we touched upon before you had actually been working doing some advisory service regarding the Sony/ATV 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? A. Yes.

ae

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 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 that the 2016 transaction really cannot be considered. Mr. Dunn.

ich

A. Multiple transactions occurred between 2009 and 2016.

mM

Q. Slow.

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 ... Objection. I don't know if the witness has personal

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Ms. Herbert: knowledge.

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Judge Holmes: That's a good point. How were you keeping track of what was going with Sony after Mr. Jackson's death?

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A. I assisted the executor. I actually attended ... I began working with the executors. I attended the Sony/ATV meetings as an observer.

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Judge Holmes: Through '16?

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A. Through '16. Judge Holmes: Overruled. Go ahead, Mr. Toscher.

Mr. Toscher:

some additional purchases Sony/ATV made. think when you were doing the purchase. Tell us just a little bit about significant purchases.

mM

ich

Q. You mentioned before You mentioned before, I refinancing, the Famous that and then any other

ae

A. So they continued to engage in acquisitions. They also 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 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.

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Te a

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 incremental NPS, and ultimately roughly about 28 to 30 million of EBITDA. by the time synergies were realized. So it was a very 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.

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Q. When was that?

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A. In 2011, a group of investors called the Sony Consortium in which Sony was a participant, Mobato (ph) was a participant, the 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 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 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 publisher.

ae

Q. In what year did it become the largest?

mM

Q. The number one?

ich

A. After the transaction closed in 2012. The transaction closed the end of June 2012.

Te a

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. Q. Okay. Do you recall any significant writers that they signed during the period of time after 2009 to 2016?

ww

w.

A. Well, they resigned Taylor Swift, they resigned Lady Gaga. 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 ...

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Q. A. JV?

ich

ae

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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 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 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 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 repaid to Sony about 335 million of the acquisition advances. Q. Right. That was internal then?

mM

A. Yes. Mr. Toscher:

Okay. Your Honor, if you can give me one moment?

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Judge Holmes: Sure. ………………………… Mr. Toscher:

Your Honor, I have no further questions.

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Judge Holmes: All right. Who will be doing cross? Ms. Herbert:

I will, Your Honor.

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Judge Holmes: Go ahead, Ms. Herbert.

Q. Good afternoon, Mr. Dunn.

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Ms. Herbert:

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CROSS EXAMINATION

A. I'm going to try and talk slowly. I'm doing a bad job of it. Q. Okay. Why did Sony guarantee Michael Jackson's debt?

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ich

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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, 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 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 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.

Te a

Q. So their incentive was to ...

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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 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

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time without having to buy Michael out, and when they were ready to, they did.

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Q. And when they first guaranteed the debt, did they hope to acquire all of Michael Jackson's equity?

ae

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 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 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.

mM

ich

So I think there were people internally who really liked the 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 me explain how it worked.

ww

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Te a

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 couldn't borrow directly. Sony was providing credit support 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 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 ...

what's that?

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A. After ...

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Q. But he could have said no, right?

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, 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 you go through, you can actually see the rights get removed, and then in 2000 ...

ich

ae

Q. But wasn't there still, even as late as 2007, the right to veto certain expenditures over a certain amount?

Te a

mM

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, 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 Sony ...

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Q. Or other major expenses?

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A. Such as? Q. Anything over a certain dollar amount, right?

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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/yearout. 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 overpaying. Q. For expenses?

ich

ae

A. Yeah, which he never did, and then if you actually look at it, 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 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 to look more like K-Mart. I mean they wanted to grow and they really wanted to build a big business and they did.

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mM

Q. Okay, thank you. Now earlier in your testimony this morning, 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?

w.

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 some advantages for the lender. There may have been some tax advantages for the Estate.

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Q. Was any other collateral provided by the Estate?

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A. No, no. It was ... the only collateral provided was they guaranteed collateral on HT III.

Mr. Toscher:

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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 ... Objection, compound.

Judge Holmes: Sustained. Ms. Herbert:

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Q. Can I ... okay. Why did the Estate choose to maintain possession of the asset during these refinancing deals rather than let it go, if there was no equity?

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mM

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 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 foreclose after the 2010 financing. But I don't know why you 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 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

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terms of the appreciation of equity and increase in value with the EMI merger acquisition.

A. Yes, yeah. Q. That the equity might go up?

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Q. So there was an expectation that it might go up?

A. There was an expectation that the equity value of Sony/ATV might go up, yes.

ich

A. I was investment banker.

ae

Q. Okay. Now what was your role in the Estate's 2016 sale of its interest in Sony/ATV?

Q. Were you an advisor?

mM

A. Yes.

Q. Were you involved in the February 22nd, 2016 valuation?

Te a

A. I was. Q. ...

performed by Shot Tower?

w.

A. I was, yes.

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Q. I would like to ask Mr. Camp to bring up Exhibit 598-R onto the screen.

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Mr. Toscher: Your Honor before ... well, we can publish it. We don't have a jury. But that's not in the stipulation, right? This is a document that we have marked which the parties have not finalized labeled it. As I believe I mentioned numbered some of these things.

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Mr Camp: That's correct. in the third stipulation yet. That is, we haven't yesterday, we've already

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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 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.

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ich

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 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. Ms. Herbert:

Your Honor, may I be ... ,,,,,,,,,,,,,,,,,

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Judge Holmes: First off, what exhibit has this tentatively been numbered as? Ms. Herbert:

It is labeled as Exhibit 598- R.

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Judge Holmes: Okay.

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Ms. Herbert:

It's marked for identification 598-R.

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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 as confidential.

Mr. Toscher:

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Judge Holmes: I see that in the first paragraph, yes. Yes.

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 I even look at this?

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ich

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Ms. Herbert: Your Honor, Petitioner asked many questions to this 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 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. Mr. Toscher:

Your Honor, might I respond?

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Judge Holmes: Yeah, sure.

w.

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 changes in the company, not to get into the whole valuation situation.

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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

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Sony/ATV at that time. All right. Again, this gets back to the are you trying to admit it, first of all?

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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. Judge Holmes: With that understanding, go ahead Ms. Herbert. Mr. Toscher:

Your Honor, over our objection.

Judge Holmes: I understand.

ae

Ms. Herbert:

ich

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?

mM

A. Yes.

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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. I'll give you a little context about this valuation and ...

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Judge Holmes: Answer her question first.

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A. Okay, sure. So I think if you want to look at this appropriately, and the context that this was prepared for was a

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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

Mr. Toscher:

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Ms. Herbert: Is that in comparison to trying to get the lowest price for the Estate tax return? Objection, argumentative.

Judge Holmes: Sustained.

Ms. Herbert:

ich

ae

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 probably have to include all the revenue that they were administering.

mM

Q. Well can explain what does this chart show? 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.

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Q. Okay. So for example, looking at 2011, Warner is in blue and Sony/ATV is in red; correct?

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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 composition of the asset.

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Q. No. If you could just answer my questions, I would appreciate it.

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Judge Holmes: Mr. Toscher is undoubtedly taking notes that he'll use in redirect. A. Oh okay, all right. No problem. Mr. Toscher:

Your Honor ...

A. I'm new at this.

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Ms. Herbert:

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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?

mM

A. Could a hypothetical buyer improve these margins by reducing operating expenses? It would depend on the buyer.

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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. As part of the negotiating process, yes.

w.

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?

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A. "Sony/ATV's stand-alone margin," again that's excluding EMI, "averages 19.1 percent."

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Q. Please just read.

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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 margins under Terra Firma." Q. All right, thank you. A. Sure.

ae

Q. Please look at page 21 of this document 598-R.

ich

Mr. Toscher: 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.

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Judge Holmes: Response? Ms. Herbert:

May I proceed, Your Honor?

Judge Holmes: No, response. Response to that?

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Ms. Herbert:

w.

Judge Holmes: Yeah.

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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.

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Mr. Toscher:

Six years later.

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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. 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 post-trial briefing. But go ahead for now, Ms. Herbert. Ms. Herbert:

ae

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 this chart does and from the left to the right?

w.

Te a

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A. Sure, sure. This was actually comprised to do our valuation 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 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 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 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 ...

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Q. What is D&A, just for the record?

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A. Depreciation and amortization. Q. Thank you.

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A. So it's a non-cash expense. So when you're looking at EBITDA, which is for forward depreciation and amortization, you naturally 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 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 they would become non-recurring to the extent you had success in lobbying. And then the Support Services and ...

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Q. What about Other Legal and Consulting Fees?

Q. Okay.

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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.

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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 strategic who had worldwide offices like Sony did, to save a little money. And then finally Employee Costs, you know, we just 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.

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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?

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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.

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 EBITDA, the stand-alone margin would increase to 24 from 19.1, is that right? And is this consistent with Warner's EBITDA?

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A. It is consistent with Warner's EBITDA. or would be, if you were able to actually realize those expense cuts.

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A. Where is that?

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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 contractual rights benefitting Sony under the current ownership structure." Do you see that?

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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. The management's mid-range plan EBITDA.

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Q. "EBITDA. to our valuation case. We believe it reflects cash flow which would be realized by a buyer in the absence of contractual rights benefitting Sony under the current ownership structure," is that correct?

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A. Yes. Mr. Toscher:

Your Honor, can we take a short recess?

Mr. Toscher: and ...

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Ms. Herbert: I would prefer not to at this time. It would disturb my flow of questioning.

Yeah, but he's publishing a confidential document

Judge Holmes: Do you want to sidebar by any chance? Yes, Your Honor.

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Mr. Toscher:

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SIDE BAR………………..

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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. Off the record now. (recess )

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Judge Holmes: Are you all set Mr. Toscher. We've got to go back on the record, unless you have something to say before we go back on the record?

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Mr. Toscher:

No, no.

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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? 587. 589-R, Your Honor.

Judge Holmes: 589-R. Ms. Herbert: Mr. Toscher:

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Mr. Toscher:

Wait a minute. Is it 598? I'm sorry, 598.

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Judge Holmes: 5 it was something 8. 598-R, which is how shall we describe this, an exhibit prepared by you Mr. Dunn?

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A. It is, yes.

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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 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 it in a non-public portion of the trial this afternoon. Did I summarize that accurately Ms. Herbert?

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Ms. Herbert:

Yes, Your Honor.

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Judge Holmes: Mr. Toscher?

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Mr. Toscher:

Yes, Your Honor.

Judge Holmes: Okay. Let's deal with relevance first. Mr. Toscher, tell me why this line of questioning is not relevant?

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Mr. Toscher: Your Honor, it's not relevant to any issue in 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, 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 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 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 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 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 demonstrating any relevance whatsoever. On the confidentiality, we think it's presumptively confidential. Late transaction ...

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Judge Holmes: No, I'll get to the sealing part next. I want to have things in order.

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Mr. Toscher:

Oh sorry.

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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 subsequent events, subject to a few exceptions?

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Ms. Herbert: Your Honor, this is ... the purpose for the line of questioning and for the ... for us proffering the document 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 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 whether the most appropriate method to value Sony/ATV as of the date of death is by using net publisher's share or EBITDA.

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Judge Holmes: Okay, versus ... okay. But now you're in the 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 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 Mr. Dunn uses is similar to the valuation methodology of your experts versus Mr. Toscher's experts. Do I understand that correctly?

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Ms. Herbert: That's partially correct, although the government does not concede that the 2016 sale is irrelevant. It may have relevance subject to us, you know, making our arguments as to 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.

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Judge Holmes: He even put it in his treatise. That's one of the five exceptions confirming, not establishing valuation of the

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Mr. Toscher:

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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 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? Yes, Your Honor, that's correct.

Judge Holmes: Okay. Ms. Herbert:

However Your Honor, may I be heard on that?

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Judge Holmes: One last time, Ms. Herbert. Go ahead.

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Ms. Herbert: While not introducing him as an expert, the Court 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 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. Mr. Toscher:

Your Honor?

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Judge Holmes: Go ahead.

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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

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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 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 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. Judge Holmes: Well, let me ... I think this may be capable of resolution here. Did you prepare this document yourself Mr. Dunn?

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A. I did with my staff, yes.

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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.

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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? Judge Holmes: I need it now.

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A. Okay. So the buy/sell was triggered on September 3, 2015 and within two weeks we gave the Estate our analysis of various values under various scenarios, and that's not this document. That's another document. Under the buy/sell procedures, there are 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 behalf of the Estate.

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We by that time had decided we effectively had to sell for a number of reasons, including the value. When you go into the

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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 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 have had to trigger the, you know, we would have had a say whether a buyer or seller at that point.

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What we were trying to do is negotiate the highest price. So we 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 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, then we should just negotiate a deal and be done. So this document represents a negotiation piece in our actual valuation.

A. Yes.

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Judge Holmes: Specifically, this document was prepared in conjunction with the exercise of the buy/sell clause of the operating agreement; correct?

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Judge Holmes: Was it shown to third parties who might have helped you to finance the sell option? A. It was not.

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Judge Holmes: And what was the source of the numbers in on that document again? Did you have access to Sony/ATV records?

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A. We had access to Sony/ATV records. The projections and the assumption on synergies were ours.

Mr. Toscher:

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Judge Holmes: Mr. Toscher, do you happen to know if the numbers involved here from Sony's records are elsewhere in the record? No, Your Honor. I don't think they would be.

Judge Holmes: Ms. Herbert, the same question to you?

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Ms. Herbert: We have some of the financial statements in evidence. I'm not quite sure which years we have, the audited Sony financials, and we have some Sony tax returns as well.

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Mr. Toscher: 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 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.

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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, correct me if I'm wrong when you get your argument into the record, that this document does not show the value of the transaction. It was preliminary to that; am I correct?

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Ms. Herbert: Well that's correct. I think that it's a matter of public record and we also have documents that show what the actual sale price was.

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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 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? Ms. Herbert: That's correct, especially since he was essentially representing the Estate in the transaction.

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Judge Holmes: Okay. With that in mind, I will rule in favor of Mr. Toscher on the relevance objection, and my specific grounds 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 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 comes up. Formally do you, Mr. Toscher, object to the sealing of this, I'm sorry, request the sealing of it? Mr. Toscher: No, Your Honor. If it was going to be right now the status is he's ...

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Judge Holmes: But I need to preserve for argument for appeal, so it won't be filed. It will be lodged under seal. Mr. Toscher: Yes, yes, yes. We would request that it be lodged and under seal.

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Judge Holmes: Okay. Do you object to that Ms. Herbert?

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Ms. Herbert: I cannot make representations on behalf of the government as to whether we object to the sealing order.

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Judge Holmes: Okay.

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Ms. Herbert: Well, we would ... our preliminary position would be that we object, subject to my consultations with the National Office. Judge Holmes: I understand it's tentative and you'd need to object. Why do you want it sealed, Mr. Toscher? Mr. Toscher: Your Honor, it's subject to confidentiality agreements with Sony.

I think as part ...

we can ask Mr. Dunn.

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Mr. Toscher:

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Judge Holmes: Sony and who, the Estate?

A. Yes.

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Judge Holmes: Oh Mr. Dunn, was it subject to a confidentiality agreement?

Judge Holmes: Between whom?

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A. It's subject to a confidentiality agreement between Sony and the Estate.

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Judge Holmes: Very well.

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Mr. Toscher:

And right, okay.

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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?

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A. This is very recent data.

May we approach with printed copies?

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Ms. Herbert:

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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 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 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.

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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? Ms. Herbert:

No, I don't think so, Your Honor.

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Judge Holmes: Very good. …………………….

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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.

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Mr. Toscher: you come ...

Yes. No Your Honor, I do not. But Ms. Cohen, can she had one other thing regarding the ...

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Ms. Cohen: I just wanted for the record to reflect also that the other reason this should be sealed is not just a confidentiality 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. Judge Holmes: Okay. That's probably why they wanted it confidential too. Ms. Cohen:

Yes.

Thank you.

Mr. Toscher:

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Ms. Cohen:

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Judge Holmes: One way or the other, your additional statement is moot for the record.

Thank you, Ms. Cohen.

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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 start objecting shortly. Do what you need to do.

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Ms. Herbert: Your Honor, has the Court ruled that I may not ask any more questions about this document?

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Judge Holmes: About the methodology used by Mr. Dunn in creating 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.

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Ms. Herbert:

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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?

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A. Yes.

Q. As a ... and you also mentioned you're a certified valuation analyst; is that correct? A. I am. My primary profession is in investment banking.

Mr. Toscher:

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Q. Okay. Would you say is EMI a reasonably comparable company or entity to Sony? Objection, relevance. He's not here as an expert.

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Judge Holmes: Yeah. Are you using him as an expert again?

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Ms. Herbert: He has testified in an expert, sort of quasiindustry expert manner. So this just follows up on what he was testifying about. Judge Holmes: I'll let him answer this question.

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A. Could you repeat the question please? Ms. Herbert:

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Q. Is EMI a reasonably comparable entity to Sony?

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A. In some respects. Q. Can you explain?

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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. So that the assets that they contained were somewhat different, and also the nature of some of the copyrights. Should I keep explaining? Q. Go ahead.

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Q. A little bit, yes.

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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 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.

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A. So if you look at it, so basically new compositions that are recorded by artists are, you know, really generating NPS that's 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, which is really very much reoccurring cash flow. So when you look at Sony/ATV versus EMI and you think about the different time 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 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 also a higher percentage of fee for service agreements.

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Q. Do you know what that percentage of fee for service agreements was let's say in 2009?

Q. Yes.

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A. For Sony/ATV?

A. Sure, and I can give you a front list/back list approximate too if it helps. Q. No, just the fee for service.

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A. It was approximately ... in terms of NPS, it was approximately 12 to 15 percent of all NPS. So we'll call it 30 million bucks.

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Q. Were a lot of the expenses associated with of Sony associated with the administration of that 12 to 15 percent catalogue? A. Remember ... Mr. Toscher:

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A. lot?

Objection, vague.

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Judge Holmes: Sustained. Ms. Herbert:

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Q. Okay. I withdraw the question. Was EMI a distressed company in 2011?

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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 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, who was their lender took ownership of EMI as a whole, and then they ran a pretty robust auction. Q. Why did they do that? Why did they take possession?

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A. Because the ... they took possession because essentially 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.

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Q. What declined?

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Mr. Toscher: Excuse me, objection. Let the ... could we have the witness answer completely?

Your Honor,

Judge Holmes: Sustained. You can answer completely, Mr. Dunn.

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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 essentially took it over, you know.

Ms. Herbert:

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Q. So would you call that a distressed asset?

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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 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 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 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 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 lot of market participants, so it was a very robust auction sale. I mean it was a very robust auction process. Q. And then Sony acquired it, Sony/ATV acquired it?

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A. And then Sony/ATV or Sony/ATV didn't. A consortium of investors acquired it, yes. Q. Okay, I'm sorry.

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A. The Sony Consortium.

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Q. Okay. Now you had said that they are dissimilar in certain respects, Sony versus EMI?

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A. Uh-huh.

Q. In what ways are they similar?

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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 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 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, 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 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 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. I mean age helps in these things.

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Q. Apart from the ... both being music publishers, are they similar in size, in what other ways might they have similarities?

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A. Now so EMI, and do you want me to talk at the time of the acquisition? I mean that's public so ... Q. Let's look at 2011.

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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 about 200 million of EBITDA, versus Sony/ATV probably had adjusted, adding back the 7-1/2 million, maybe 110.

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Q. Now you said you worked with the Estate between 2009 and 2016? A. Uh-huh.

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Judge Holmes: You have to say yes or no. A. Yes.

Mr. Toscher:

And you were familiar with the earnings during that

Objection, vague. Earnings of what?

Ms. Herbert:

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Judge Holmes: Sustained.

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Ms. Herbert: time period?

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Q. Were you familiar with the net publisher's share of Sony/ATV during that time period? A. All the financials.

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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?

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Mr. Toscher: Objection, vague. The witness can follow it. I couldn't follow it, Your Honor.

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Judge Holmes: Well, it's overruled. Go ahead, Mr. Dunn. A. Do you want to just repeat it so I'm

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Ms. Herbert:

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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? A. The percentage of administered went up as a result of the EMI transaction. Ms. Herbert:

All right. I have no further questions.

Mr. Toscher:

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Judge Holmes: Redirect.

One moment, Your Honor. …………………….

Mr. Toscher:

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REDIRECT EXAMINATION

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Q. Mr. Dunn can you explain again, or if you did, what front line is and the way you used the terminology? A. So front list is ...

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Q. Front list?

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A. Yeah.

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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

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Mr. Toscher:

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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 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 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. No further questions, Your Honor.

ich

A. 300 million.

ae

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?

mM

Judge Holmes: 300 million. Were those registered securities? A. They were what would be called sort of 144(a) for life, so they weren't registered.

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Judge Holmes: In the course of ... do you happen to know if there was a circular under 144 to qualified investors?

w.

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.

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Judge Holmes: Did you see the offering memorandum?

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A. Yes.

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Judge Holmes: Did the offering memorandum include any representations as to the value of the assets secured by the bond? A. It did not.

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?

ae

A. It has full risk factors. So I don't know if that would be evidence of due diligence but

ich

Judge Holmes: Did the full risk factors include any representations as to the value of the underlying asset secured by the bonds?

mM

A. You know, I am ... because they were marketed against a guaranty, I don't think it got into the underlying value of Sony. 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.

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Judge Holmes: Were the bonds amortizing? A. They were not.

w.

Judge Holmes: When did they become due?

ww

A. They became due in December of 2010.

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Judge Holmes: Not doing the subtraction, how long a period was that? A. Three years.

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Judge Holmes: Oh, three years. You also testified that you had 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 assets of Mijac in connection with those security financing transactions?

ich

ae

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 quickly. So they wanted to understand the impact that that could have on the value. Judge Holmes: Was that HSBC?

mM

A. That was HSBC Private Bank.

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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. I'm sure they did.

w.

Judge Holmes: Did you have access to it?

ww

A. I may have access to the 2007. I don't have the 2009.

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Judge Holmes: Did you ... valuation?

have you looked at the 2007

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A. We were involved in pretty indepth discussions around valuation on a loan to value basis.

Judge Holmes: What was the value in 2007 according to the appraisal?

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.

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Judge Holmes: Now we talked about Mijac, we talked about Sony/ATV. Help me with any other secured financing transactions.

ich

A. It would have been Plainfield.

mM

Judge Holmes: Plainfield. Did Plainfield prepare an appraisal? 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.

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Judge Holmes: Did you have access to that information? A. I did not, no.

w.

Judge Holmes: Who were some of your other clients during this period of time from 2005-ish to 2009?

ww

A. There are media, like all media clients?

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Judge Holmes: No. Are we talking about people whose images would be worth something in the world?

Judge Holmes: Artists?

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A. No.

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 interesting because of just the sheer quantity of music assets. It was more like an enterprise.

ich

ae

Judge Holmes: In your experience, your personal experience, have you ever sought financing securitized or collateralized by the name and likeness of an individual? A. No.

mM

Judge Holmes: Are you familiar with any such transactions?

w.

Te a

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 ... there aren't, you know, I'm not ... there are companies like Sequential Brands like that you see a lot of sort of brands 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.

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Judge Holmes: Yeah. That's related, but a different time period. Any follow-up questions, Mr. Toscher?

No, Your Honor.

Ms. Herbert:

No. No, Your Honor.

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Judge Holmes: Any follow-up questions, Ms. Herbert?

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Mr. Toscher:

Judge Holmes: Can we let this one go? Ms. Herbert:

Yes, Your Honor.

ae

Mr. Toscher:

Yes.

ww

w.

Te a

mM

A. Thank you.

ich

Judge Holmes: We have a witness who can be released. Thank you, Mr. Dunn.