By Alexandra Berzon And Ben Fritz
The voluminous Sony Corp. documents leaked after the cyberattack
on the company's film studio in November are shedding light on a
U.S. government investigation into how Hollywood gets its movies
distributed in China and whether any bribery laws have been
violated.
Sony received a subpoena from the Securities and Exchange
Commission regarding possible violations of the U.S. Foreign
Corrupt Practices Act, which makes it a crime to bribe an overseas
government official, in June 2013, according to emails that have
been reviewed by The Wall Street Journal. As recently as October,
Sony was preparing a detailed response to the federal agency.
The SEC's questions to Sony dealt primarily with potential
bribery related to the release of "Resident Evil: Afterlife" in
China in 2010, according to email communication between Sony's
in-house and outside legal counsel.
A Sony-led investigation that followed the SEC subpoena examined
the company's distribution efforts more broadly, the emails
show.
The subpoena indicates an escalation of an inquiry that began in
2012 when the SEC requested that every major studio voluntarily
provide information about their movie-distribution practices in
China, a request that was publicly reported at the time. However
the SEC's specific concerns weren't disclosed nor was it previously
known that the agency had stepped up its probe with a subpoena.
Sony documents show that the SEC refers to its probe as "In the
Matter of Lions Gate Entertainment Corp," indicating that the rival
Hollywood studio behind "The Hunger Games" has been asked questions
as well.
China film industry experts say that other movie studios are
likely part of the probe, but it isn't known whether they are in
talks with the SEC. Spokesmen for Sony and Lions Gate declined to
comment.
The emails highlight Sony's work with a company called Dynamic
Marketing Group, a Beijing firm with a U.S.-born chief executive
that has helped American studios navigate China's quota and
censorship systems to secure distribution for their films in that
country. DMG helped distribute Sony Picture's "Resident Evil:
Afterlife," a horror film based on a popular videogame. It also
helped to release several Lions Gate movies in China, including
"Twilight" in 2009. Walt Disney Co. worked with DMG on the 2013
release of "Iron Man 3" in China.
A Disney representative wouldn't comment.
Bethany Hengsbach, a Los Angeles-based lawyer for DMG counsel
Sheppard, Mullin, Richter & Hampton LLP, said the law firm
investigated DMG's film industry practices and found "absolutely no
evidence of improper payments or other actions that would violate
the Foreign Corrupt Practices Act."
DMG began as a business focused on advertising Western products
in China before also becoming a film-distribution company now
listed on the Shenzhen stock exchange.
U.S. authorities, including both the SEC and the Justice
Department, have ramped up overseas bribery enforcement in recent
years, often investigating firms doing business in China.
In 2013, following its Sony subpoena, the SEC told the studio
that it knew of an email sent in 2011 from a Sony employee in
Beijing that said that DMG had used "special influence" to get
"Resident Evil: Afterlife" released in China, according to a leaked
document.
In response, investigators at the law firm Paul, Weiss, Rifkind,
Wharton & Garrison LLP, which had been hired by Sony, reviewed
570,000 documents and interviewed 39 employees, including that
employee's emails, a Paul Weiss lawyer said in a memo prepared last
fall for any talks with the SEC. The memo said the lawyers from the
firm found no such communication nor any evidence of bribery by
studio employees or outsiders, such as DMG, working on their
behalf.
"Although certain documents raise questions, such as questions
involving the claimed government connections to third-party film
distributors," attorney Mark Mendelsohn wrote, "our review to date
has not shown that [Sony Pictures] or any [Sony Pictures]
distributor improperly influenced, or attempted to improperly
influence, a Chinese official."
Attorneys at Paul Weiss involved in the Sony probe, including
Mr. Mendelsohn, didn't comment
The writings are among hundreds of thousands of emails and
documents stolen from Sony Pictures on Nov. 24 in a cyberattack
that the U.S. government connected to North Korea. The hackers
subsequently leaked documents and emails online.
Some emails include highly detailed notes and reports on
distribution partners and practices in China, illuminating the
difficulties faced by Hollywood movie studios as they navigate
quotas, censorship practices and other government oversight
there.
Despite the challenging business environment, China has emerged
as a critical outlet for studios, having surpassed Japan to become
the world's second-biggest movie market. Box-office sales totaled
$4.8 billion in 2014, according to a government agency, up 36% from
2013.
Hollywood studios are barred from distributing films on their
own in China, but instead work with the state-owned China Film
Group to secure one of the 34 highly coveted spots offered each
year for imported movies. DMG and other third-party distribution
firms help studios navigate the bureaucracy.
The emails, many from the inbox of Sony Pictures general counsel
Leah Weil, also provide a rare glimpse of the lawyer-client dance
that occurs when lawyers are hired by a company to collect and
analyze potentially incriminating information and pass that along
to the government.
In one instance, for example, an attorney for Paul Weiss sent
Sony attorneys an outline of the points that the law firm could
make to the SEC with the accompanying note, "The draft is naturally
designed to argue--and accentuate--our strong points, without
dwelling on potential weaknesses."
Those talking points were later edited by Sony's in-house
lawyers, according to the emails. It is unclear from the emails and
documents whether the talking points were presented to the SEC or
what the agency's response might have been.
A spokeswoman for the SEC said the agency had no comment.
Mr. Mendelsohn, who is based in Washington, D.C., said in his
talking-points memo that investigators at the law firm had
discovered documents that outlined DMG's "assertions of government
connections, or 'guanxi,' which appeared consistent with legal
relationships and permissible forms of persuasion."
Still, Mr. Mendelsohn noted in his talking points some findings
that raised questions. For example, his firm's investigators found
Sony budget slides that referred to line items listed as "red
pockets" for importing certain films into China.
He said that sounded like a reference to the Chinese practice of
distributing money in red envelopes as gifts.
The attorneys didn't find proof that funds were used to give
cash to Chinese government officials, let alone in exchange for
film importation, Mr. Mendelsohn said. He theorized that the funds
could have been an internal reference to importing fees levied by
the government.
In the course of their probe, Paul Weiss investigators focused
heavily on the business activities and emails involving Joe Zhang,
a senior Sony marketing executive in Beijing, the emails
indicate.
For example, they investigated the possibility that Mr. Zhang
was involved in creating fake invoices around the same time that
"Resident Evil" passed censorship, according to the emails.
Paul Weiss investigators also found an email that they said
appeared to show Mr. Zhang using coded language with a government
official to talk about a money exchange, according to the emails.
The outcome of the firm's investigation into Mr. Zhang's activities
is unclear.
Mr. Mendelsohn's prepared remarks to the SEC didn't mention Mr.
Zhang or the law firm's work to untangle his business dealings. He
wrote that his firm had examined government invoices from around
the time that "Resident Evil" was receiving approval and determined
that "the work consisted of post-production or marketing activities
that would or could have been performed in the weeks leading up to
a release."
Mr. Zhang declined to comment.
"Based on various aspects of these documents, we may wish to
explore whether the expense was paid for some other purpose than
was described on the face of the invoice," a Paul Weiss attorney
wrote to Sony attorneys last April.
Laurie Burkitt and Rachel Louise Ensign contributed to this
article.
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