Spending his 40th birthday testifying in federal court paid off for Trent Reznor, who was awarded $2.9 million in his countersuit against his former manager, John Malm Jr.


NEW YORK -- Spending his 40th birthday testifying in federal court paid off for Trent Reznor, who was awarded $2.9 million in his countersuit against his former manager, John Malm Jr.

On May 27, a New York jury found Malm and his company, J. Artist Management, liable for fraud, conversion and breach of fiduciary duty. The company was also liable for breach of contract.

The suit stems from the 18-year relationship between the Nine Inch Nails rocker and Malm, a part-time music promoter who worked in his family's machine equipment business when the two met in 1985.

After TVT Records signed NIN in 1989, Reznor and Malm entered a management agreement prepared by an attorney Malm selected.

Throughout the years, Malm hired attorneys and accountants for Reznor -- as authorized in the management contract -- and the two expanded their business relationship to form Nothing Records and J. Artist Management Merchandise. Under these arrangements set up by Malm, the two split profits equally.

In 1993, Malm provided Reznor with NIN trademark registrations to sign. Reznor was not aware they made Malm part owner.

By 1994 -- after NIN had moved to Interscope Records and become a huge success -- the management agreement expired. Yet the two orally agreed to continue working under the same terms.

At that point Reznor was in a position to renegotiate these terms, says his attorney, Zia Modabber with Katten Muchin Rosenman in Los Angeles. "John never had a lawyer represent Trent in any of the deals that he and Trent had with each other."

Prior to trial, Judge Jed Rakoff held that the 1989 management contract was not "unconscionable," but at trial the jury found that it was entered fraudulently and awarded damages for overpaid commissions.

Rakoff also held that Malm breached his fiduciary duties to Reznor in 1994 when they continued the agreement. Essentially, he found that Malm knew the earlier deal was no longer fair to Reznor because it provided for commissions for certain work in perpetuity at 20% with none of the standard deductions, Modabber says.

For example, the early legs of NIN's 2000 Fragility tour lost money, Modabber says. Reznor took recoupable tour support from Interscope. The last leg grossed about $9 million and was profitable.

Malm took 20% of the gross -- $1.9 million -- without any of the customary industry deductions, which left Reznor paying production costs and pocketing only $1.3 million while still owing $2.9 million for previous tour support, Modabber says.

In addition to the jury's award of $1 million for overpayment of commission, Rakoff rescinded the management agreement effective Dec. 8, 2003, when Reznor terminated their relationship. Rakoff also returned all trademark ownership rights to Reznor.

An additional $1 million was awarded for unpaid loans. When Nothing Records began running a deficit, Modabber says, Malm and Reznor jointly funded the company. At some point Malm began using only Reznor's money for it.

"Did John Malm take advantage of how he used Trent's money? Yeah," Modabber says. "But really the biggest problem was a complete lack of oversight or independent review on Trent's behalf of all of these businesses that John and Trent went into together."

On June 8, Rakoff will award prejudgment interest, which could add another $1.5 million to the verdict.

Malm had initiated the legal battle with a claim against Reznor. Modabber says Reznor earlier tried to resolve the dispute.

"I never wanted my relationship with John to end like this, but the things he did were wrong," Reznor says.

Malm's attorney, Alan Hirth, could not be reached for comment.