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Advanced Marketing Services in Chapter 11 Shortly After 3rd Exec Is Convicted in Fraud Case

Grinchbrand Just before the end of the year, Advanced Marketing Services (Pink Sheets: MKTS), a major book distributor (and owner of Publishers Group West), went into Chapter 11 bankruptcy, taking with it a big chunk of US publishing's Christmas receipts. This household has been watching it closely, and this was something I didn't blog because I didn't want to spook anyone with half-baked info.

The New York Times finally got round to running a story on January 5th. Our Year's Best SF series is published by HarperCollins, so I pay particular attention to the line in the NYT piece:

“We’re exploring ways to keep working with them,” a spokeswoman for HarperCollins, Erin Crum, said.

Uuummm. Ooohhkaayy.

Of course everyone caught in this has one big question: Are we going to get paid?

But my bigger question, once I looked into the situation was not whether HarperCollins and a whole laundry list of publishers were going to be able to find a way to continue working with AMS, but rather why they were working with them in the first place.

The New York Times remarks, a little too tactfully:

Advanced Marketing Services’ financial difficulties were widely known in the industry, after an accounting scandal in 2003 resulted in the ouster of several senior managers.

Ouster? Ouster? Try criminal conviction! From the San Diego Union Tribune, dateline December 12, 2006: Former AMS exec sentenced to 3 years for role in fraud case

A federal judge yesterday sentenced the former vice president of advertising at Advanced Marketing Services to 36 months in prison for her role in falsifying earnings at the San Diego company.

Sandra Miller Christie pleaded guilty in 2005 to charges that she conspired with other former employees to defraud AMS clients and inflate the profitability of the company's advertising department. The scheme occurred from 1999 through 2003. . . . Two other former AMS employees were sentenced by Burns earlier this year.

So WHY OH WHY were so many publishers caught short using a company that has just had three employees criminally convicted of cooking the books? The NYT article suggests a possible reason:

The distributor has near-exclusive access to the discount retailers known as price clubs, including Costco and Sam’s Club.

In other words, the problem here is Monopoly Capitalism: there has been so much consolidation of the once-diverse distribution system that publishers are forced to use a distributor known to have major issues with cooking the books in order to reach significant portions of the market.

Hello? Department of Justice? Can we get some anti-trust litigation going here? (Well, at least the FBI is still interested!)

AMS has been in turmoil since 2003, when agents from the FBI raided its Sorrento Mesa headquarters.

Three former AMS executives were sentenced last year to prison after pleading guilty to fraud charges. The executives defrauded publishers of funds that were intended to market books, but retained to boost company revenues, according to federal indictments.

An investigation into the company’s operations remains open, federal prosecutors said.

In addition to the criminal probe, AMS hasn’t reported financial results for more than three years, and has yet to restate its financial results dating back to its 2003 fiscal year.

Publishers Weekly reports:

Several of the largest publishers feel betrayed by AMS—just days before the Chapter 11 filing, AMS had assured the major New York houses that everything was fine.

HypnotizePublishers Weekly relays Costco's advice on the current situation:

A Costco spokesperson said that until further notice, publishers should operate "on a business as usual basis."

Pay no attention to those men behind the curtain. You are growing sleepy, very sleepy. These are not the accountants you are looking for . . .

Meanwhile, Costco's profits are up:

Costco, the nation's largest wholesale club operator, said Thursday its first-quarter profit rose 10 percent and said it would take a second-quarter charge related to stock option grants.

For the quarter ending Nov. 26, net income totaled $236.9 million, or 51 cents per share, compared with $215.8 million, or 45 cents per share, a year ago. Revenue climbed 9 percent to $14.15 billion from $12.93 billion last year. . . . In October, Costco said an internal committee and independent experts reviewing the company's stock option grant practices found no evidence of fraud, but did find "imprecisions" related to certain grants.

The distributors are much bigger businesses than the publishers and the big box club stores are in turn much bigger businesses than the distributors.

Does ANYONE at Costco or Sam's Club care that they are and have been forcing the entire publishing industry to do business with crooks? It would appear that the answer is no: that's how Costco keeps its prices down.  Business as usual is business with crooks.

Meanwhile, perhaps the best we can hope for the Christmas publishing revenues is that they are having a nice holiday in the Cayman Islands.