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Case 6-9
Reznor v. J. Artist Management (JAM), Inc.
Michael Trent Reznor met John Malm Jr., a part-time promoter of local rock bands who also is a licensed
CPA, in Cleveland, Ohio, in 1985. Malm became Reznor’s manager and formed J. Artist Management
(JAM), Inc. Reznor became the lead singer in the band Nine Inch Nails, which performed its first show in
1988. Reznor and Malm signed a management agreement, under which JAM was to receive 20 percent of
Reznor’s gross compensation.
In 1966, Malm hired a CPA, Richard Szekelyi, and his firm, Navigent Group, to provide tax-consulting
services to Reznor personally; his duties also included examining Reznor’s financial records. Szekelyi
discovered flawed accounting between the two parties to the detriment of Reznor by about $4 million. The
primary cause was that Malm received tax benefits that should have gone to Reznor. Reznor filed a separate
lawsuit against codefendants Szekelyi and Navigent Group charging them with negligence, breach of
fiduciary duty, and aiding and abetting fraud. The codefendants sought summary judgment to dismiss
Reznor’s claims stating they did not breach any standard of care in preparing or presenting reports of
Reznor’s financial status, nor did Szekelyi fail to counsel Reznor adequately concerning other transactions.
The court granted the summary judgment dismissing the charges against Szekelyi and Navigent. Reznor
had also filed a lawsuit in 2004 in New York claiming that former manager John Malm mismanaged the
band’s finances and actually stole money from them. Apparently Malm had tricked Reznor into signing a
contract that assigned the manager 20 percent of gross earnings. The problem is that the assignment should
have been of net income, not gross earnings. This means that Malm would have received 20 percent of all
earnings, before taxes and before more important distributions like his band member payments.
On June 1, 2005, a verdict was rendered in favor of Reznor. Malm was ordered to pay up to $2.9 million
for allegedly cheating Reznor out of millions. The verdict also awarded trademarks back into Reznor’s
hands.
Questions
1. Describe the nature of the relationship between Szekelyi and Reznor. Did a privity relationship
exist between the two? Why or why not?
Szekelyi was hired by Malm to do work for benefit of Reznor. However, the contract was between Malm
2. What were Szekelyi’s ethical obligations to Reznor given the nature of the services provided?
Which of the ethics standards in the AICPA Code should have been of particular concern to
Szekelyi in performing professional services for Reznor?
Szekelyi should be concerned with integrity, objectivity, and due care. Even though there was no
3. During the course of working as the manager for Nine Inch Nails, John Malm mismanaged the
band’s finances and was found guilty of those charges. Malm, who is a CPA, was not hired to
perform any accounting services for Reznor or the band. Does that mean his actions are not
enforceable under the AICPA Code of Professional Conduct? What about the fact that Malm is a
licensed CPA. Would a state board of accountancy have any recourse with respect to Malm’s
transgressions?
All CPAs (no matter whether working in industry, government, accounting, as an accountant or not) are
expected to have integrity and not to discredit the profession of accounting. Malm is subject to the AICPA
Code of Professional Code only if he is member of the AICPA, a voluntary association, or if his state board
incorporated the AICPA Code of Professional Conduct as its code of conduct. If Malm is a licensed CPA
(not merely certified as passing the uniform CPA exam), Malm is subject to the state of licensure code of
conduct. Some states would have recourse with respect to Malm’s transgressions and some would not. New
York will allege acts discreditable to the profession for DUI or DWI (driving under the influence or driving
while intoxicated). Texas includes in acts discreditable: fraud; dishonesty; final conviction of a felony; a
criminal prosecution for a crime of moral turpitude; a criminal prosecution involving alcohol abuse or
controlled substances; a criminal prosecution for a crime involving physical harm or threat of physical
harm; cancellation, revocation, suspension or refusal to renew authority to practice as a CPA by any other
