Jonathan Klein and Getty Images, a history of questionable business practices?

[Greg Troy (KeepFighting)]

Before getting into the meat of this article I wanted to state that wherever possible I have linked to articles where I have obtained my information and that statements not directly reporting on the facts of the article are my own personal opinions.

I wanted to share a few nuggets that I found while continuing my online research into Getty Images. The first is a very interesting article I found from back in March 2007 when Getty was still a publicly traded company on the New York Stock Exchange. The article was about two separate stockholder lawsuits against Jonathan Klein and the top officers at Getty Images and alleged that “a majority of the company's directors and top officers engaged in a secret scheme to illegally line their own pockets”. The original article may be found here:
http://seattletimes.com/html/businesstechnology/2003610937_getty10.html

The lawsuits allege that Jonathan Klein in the top officers that Getty were involved in a practice known as backdating stock options. What this means in layman’s terms for those who do not know is simply this, stock options are company stock issued to employees issued on a specific date and a specific number of shares which the employee may hold onto and keep or sell as they choose. If the company does well and the price of the stock goes up then they can make money on the increase over and above when the stock was issued. The more the stock goes up the more the potential profit can be. Backdating a stock option is when you go back and change the records of the date when the stock was issued to a time when the stock was very low which will allow maximum profit when your options are cashed in.

One of the lawsuits brought by Richard Edmonds who became suspicious when as he alleges  21 of the 25 stock options cashed in by Jonathan Klein and his buddies just happened to coincide with his historic lows in Getty’s stock prices. There is a lot of information here but if you wish to read Richard Edmonds lawsuit it may be found here:
Edmonds v Getty complaint:
http://www.scribd.com/doc/109044444/Edmonds-v-Getty-Shareholder-Complaint

Apparently there was enough damning information for the SEC to initiate its own investigation into Getty’s stock option backdating practices.
http://www.photomediaonline.com/blogs/industry-news/item/584-sec-investigates-getty-images-stock.html

While I have looked all over the net I have not as yet been able to find the results of the investigation. A little over a week ago I filled out an online form on the SEC website requesting information as to the result of this investigation. While I have not heard back from them yet I am going to be sending a formal letter through the postal service via certified mail requesting this information. I will post the results of the investigation if I am able to obtain it or if any of the other ELI members can find it and share it or send it to me.

Getty also launched its own internal investigation into the matter and they released a statement saying that yes there was backdating of stock options however Getty claims there was no intentional wrongdoing and that it was more of an error caused by when the stock options were decided to be issued and when the paperwork was actually filled out issuing it. If Mr. Edmonds is right then like him I find it an amazing coincidence that 21 out of 25 times that clerical error or whatever you want to call it (wink wink) just happened result in the issue date coinciding with historic lows in Getty stock prices. Getty also announced as a result of this investigation it would go back and restate its financial results in the amounts of between “$28MM to $32MM” correcting for the error. The article on this may be found here:
http://www.abouttheimage.com/2737/getty_investigation_finds_no_intentional_wrong_doing_in_backdating_of_stock/author3/

@SG I could use a picture here of Johanthan Klein getting caught with his hand in the corporate stock option cookie jar


What I find very interesting about this whole thing is the lawsuits continued until 2009 when they were abruptly ended by Getty going private. Getty had to get both parties to drop their lawsuit before they could proceed with the company’s privatization so unfortunately we will never know how it would have turned out. I do know in the case of Edmonds his legal fees were paid by Getty to the tune of $900,000 and I am not sure what agreement was reached with the other party. The stipulation and order on the Edmonds case may be read here:

Edmonds v Getty stipulation:
http://www.scribd.com/doc/109044445/Edmonds-v-Getty-Stipulation

Edmonds v Getty order:
http://www.scribd.com/doc/109044443/Edmonds-v-Getty-Order


Another thing that I am trying to find out now and would not be surprised to discover that the current Getty business model of sending out mass amounts of extortion settlement demand letters coincided with Getty going private. Besides the fact of the privatization of Getty getting Jonathan Klein and his buddies off the hook of the lawsuits hanging over their heads and the ramifications of that, it also would allow their current business model to be operated without having to worry about publicly reporting what they are doing or how much they are making from it. We only have a slight glimmer into the amount of money Jonathan Klein and Getty images reaps from this business model thanks to a 2009 Los Angeles times article in which Lisa Wilmer states at that time Getty finds approximately 42,000 cases per year of what they consider infringement. The article may be found here:

http://articles.latimes.com/2009/sep/13/business/fi-lazarus13

This is the first of articles I intend to post showing that Getty’s current business model is nothing new and that Jonathan Klein and his company have a long history of questionable practices resulting in lawsuits from stockholders, their own photographer clients and their current settlement demand letter business model.

Stay tuned more to come....

[Mulligan]

Terrific stuff, Greg. Thanks.

[Greg Troy (KeepFighting)]

Thanks Mulligan, lots more to come

Terrific stuff, Greg. Thanks.

[Matthew Chan]

This is some intense findings you have dug up.

For what its worth, I found evidence in Google that Getty's extortion letter program was operating in 2006 time-frame.  However, the program may go back even further. I cannot recall exactly since it has been 4+ years since I tried to trace the beginnings of the first complaints of Getty extortion letters.

My impression is that the Getty's Extortion Letter program was well under way before Getty went private again.

However, I would tend to agree Getty being a private company vs. a public company makes them a bit less vulnerable to public scrutiny.  There is more freedom in how you can operate a business by going private however sleazy the business tactics might be.

[Greg Troy (KeepFighting)]

Thanks Matthew, that is interesting to hear how long Getty has been sending out these extortion settlement demand letters.  There are financials available from when Getty was publicly traded, I will see if I can find them again and look to see if it's listed and how much they were collecting back then. Then again by the article above we have seen Getty is not always accurate on their financial statements

[Greg Troy (KeepFighting)]

I found another little nugget here that took place right around the same time as the backdating of the stock options and thought was fairly interesting. From January 1, 2002 through December 31, 2006 Getty was found not to have paid the proper amount of business and operating taxes, this resulted from a 2001 foreign audit in which the Getty affiliates were required to enter into a formal written agreement for administrative and management services with its parent company Getty Images. Without this agreement Getty could not deduct the cost of administrative services that Getty images provided the foreign affiliates, so Getty formed a limited liability corporation under the laws of California called Getty Management. Under the written agreement created called the General and Administrative Services Agreement (GASA) Getty images agreed to pay itself $1 million a year for handling the administrative issues and only pay taxes on the $1 million a year, yet an auditor found that Getty management incurred costs ranging between $25 million and  $98 million per year for total of approximately $307 million during the audit period. The auditor concluded that Getty owed back taxes on the difference of the money and must start paying on the total amount here forward rather than the $1 million written into the agreement.

Getty immediately paid the back taxes but sued the city of Seattle saying that they did not owe the money. During the case in the Court of Appeals for the state of Washington Division I the chief financial officer of Getty Jeffrey Dunn testified, when asked what the primary reason was that this was set up this way he replied and I quote

I think, again, the primary reason was to -- to affect the management charges to the foreign affiliates, with a secondary reason being to avoid an increase in tax in the state of Washington.

Q. Getty of Seattle could not continue to perform its management services under its contract with Getty management unless it received these payments to the cash management system to pay its expenses?

Dunn: that's correct

Dunn also testified later in a pertinent part:

so it was critical to -- critical for us to implement the process of -- of charging these management fees and getting the deductions in the foreign countries. In doing so, we would have increased our exposure to B&O tax both in the state of Washington in the city of Seattle, and so the management company structure was -- was used to shield that increase in tax.

Getty cited several different cases as precedents which they believed prove that they did not owe the tax and the court ruled that none of them applied and they did owe the tax. Getty also appealed the court's decision to the Washington state Supreme Court who refuse to hear the case.

As I said all this took place about the same time as the stock option backdating and in my opinion just as another example of how Getty images chooses not to play by the rules and operate in an unethical manner weather it is with innocent infringers they send their demand letters to, their own contributors, their stockholders and even the local and state governments. There is a lot of information contained in this case and to truly grasp it you'll need to read the documents which I am providing below:

http://www.scribd.com/doc/111396110/Getty-v-City-of-Seattle

http://www.scribd.com/doc/111396108/Getty-v-City-of-Seattle-Ruling

Request for review by Washington Supreme Court Denied Entry #8
http://www.courts.wa.gov/appellate_trial_courts/supreme/?fa=atc_supreme.display&year=2012&petition=pr120207#A1

[stinger]

Nice work, Greg!

[April Brown (AuctionApril)]

I am impressed with this research. Greg, you should consider submitting this post (and others) to tech mags and business media. This is juicy stuff and everyone loves David vs. Goliath stories. Dare I say, you might just have a good book brewing on this subject. (I know a good publisher - "Thew"). A book might be the missing link to media coverage. Add to that the video and this issue might finally get the press it needs to warn others and expose extortion schemes and victims. Imagine how many people will come out against Getty once mainstream media starts reporting.

[Moe Hacken]

Excellent work, Greg! Your diligence is paying off. That Getty closet just keeps giving skeletons at every turn!

Thanks for exposing their institutional chicanery. It appears to be ingrained in their corporate culture. I agree with April that this and many of your posts are worthy of being published by major outlets as a series of articles about the stock photo industry's dark underbelly.

You've got Getty NAILED, man!

[Greg Troy (KeepFighting)]

Adding this to the archive

#gettyflubs

[Greg Troy (KeepFighting)]

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