Payola Probe Focuses on Latin Music Airplay

Culminating a wide-ranging probe of corruption in the Latin music business, federal agents began serving subpoenas Wednesday on several dozen record distributors and radio stations suspected of taking cash to play records, law enforcement sources said.

The payola investigation was launched seven months ago after lawyers representing Fonovisa, the dominant independent label in Latin music, which is the fastest-growing segment of the record industry, contacted the U.S. Justice Department to report improprieties within their own radio promotion department.

About 18 wholesale record distributors were served Wednesday and 20 radio stations are scheduled to receive subpoenas before the end of the week requiring them to turn over payroll records and other data that could help document improper payments to program directors and others, sources said. Many of the radio stations and record distributors are in Los Angeles, sources said.

Radio airplay is the most powerful promotional tool for record companies. Many people buy records based solely on what they hear on the radio, believing that those songs are the best available. Consumers find it offensive if those selections are made because of payoffs.

Federal law prohibits radio stations from taking money for playing specific songs without disclosing the payment to listeners.

Law enforcement sources said Wednesday that information gathered from the subpoenaed documents and follow-up interviews could trigger a wide-scale probe of promotional practices among other Latin music labels and perhaps throughout the $12-billion U.S. music industry.

No arrests have been made in connection with the probe, but law enforcement sources said a number of radio station employees could face criminal charges for payola, a misdemeanor, and tax evasion, a felony.

Fonovisa, which releases music by Spanish superstar Enrique Iglesias and accounts for about 16% of the nearly $500 million in Latin music records sold in the United States annually, is so far the only record label under investigation--although it is unclear whether the company or any of its employees will be charged.

It has been 12 years since the last big radio corruption scandal rocked the music business. Wednesday’s sweep comes at a time when record companies have begun to expand their involvement in a controversial but legal form of programming called “pay for play.” Under this new infomercial-like practice, radio stations bill record companies for airplay but notify listeners at the time of broadcast that the song is paid for.

Fonovisa is a subsidiary of Grupo Televisa, the largest media company in the Spanish-speaking world. Televisa, which last year generated about $2 billion in global revenues, also has interests in television programming, radio broadcasting, direct-to-home satellite services, publishing and film production.

Fonovisa is credited by many in the industry with developing the U.S. market for banda, mariachi, norteno, ranchera and other types of music that fall into the regional Mexican category. The company’s biggest star is multimillion-seller Iglesias, the Spanish heartthrob son of Latin pop sensation Julio Iglesias.

Sources said that investigators are studying a possible correlation between Fonovisa’s ascension as a powerhouse in the U.S. Latin music business in recent years and its alleged use of radio station payola to drive record sales. Last year, Fonovisa’s total sales surged to more than $60 million--up from $350,000 in 1986, its first year in business.

Televisa acknowledged in a statement released to The Times on Wednesday that its Fonovisa record division “has made certain promotional payments in apparent violation of applicable laws.” The company said it reported the activities to the government and is cooperating fully with the investigation and “has acted to assure that such payments will not be made in the future.”

Officials at the IRS and the Justice Department, both of which are involved in the probe, declined to comment Wednesday.

Allegations of Cash Payments

Sources close to the investigation said Fonovisa wrote a series of checks last year to an independent record promoter who in turn dispersed cash to couriers on the Fonovisa payroll. The couriers allegedly visited radio stations and handed packages containing cash payments, sometimes as large as $10,000 per month, to program directors who agreed to play specific Fonovisa songs, sources said.

Some of the cash payments may have been financed by funds raised through the improper sale of promotional items--usually recorded music--to wholesale record distributors throughout the Southwest United States.

It is unclear whether employees at Fonovisa’s Van Nuys office were acting at the direction of the independent record promoter or senior managers at the company. It is also unclear whether those employees understood that paying broadcasters to play songs is against the law in the United States, because such transactions are legal and a common practice in Mexico.

After Fonovisa discovered that a potential legal problem existed, the company’s parent hired attorneys from Fried, Frank, Harris, Shriever & Jacobson, a New York corporate law firm, to conduct an audit of questionable record promotion expenditures within the organization.

In December, Televisa’s lawyers contacted the Justice Department with the results of that audit. For the last five months, executives at Fonovisa and Televisa have cooperated with Justice Department prosecutors in Los Angeles and Washington and agents from the criminal investigation division of the IRS in Los Angeles.

In March, federal agents questioned a number of employees at Fonovisa’s Van Nuys headquarters, including several couriers, about how the cash payments were dispersed to radio stations, sources said. Investigators have also interviewed a handful of Fonovisa’s senior managers in recent months.

This is the first payola scandal that the government has investigated since 1986, when an NBC News report alleged that independent record promoters with Mafia ties offered cash, drugs and prostitutes to radio programmers in exchange for airplay. The allegations triggered grand jury investigations and led to the indictment of a top Los Angeles independent promoter, but the case was ultimately thrown out after the lead prosecutor was convicted of conducting illegal business transactions.