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Cubs Allowed to Scalp Own Tickets

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Cubs Allowed to Scalp Own Tickets

Postby StlSluggers » Fri Aug 11, 2006 1:55 pm

I'm from Illinois, and I know that, like many other states, they forbid the resale of tickets above the face value printed on the ticket. Not only are these tickets being sold above face value, the Cubs are actually prohibiting their sale below face value.

Here's the article:

NBC Chicago wrote:CHICAGO -- The Chicago Cubs have won a lawsuit on Monday according to Mary Ann Ahern that claimed the team scalped their own tickets through a business less than a block away from Wrigley Field.

While reading her ruling, Judge Sophia Hall said that Wrigley Field Premium Ticket Services and the Cubs had "not violated the Ticket Scalping Act, the Consumer Fraud Act or the Deceptive Trade Practices Act."

Hall also said that neither had engaged in any bait-and-switch tactics to lure fans, as claimed by plaintiffs.

The plaintiffs were seeking refunds and damages for everyone who purchased tickets from Premium from April 2002 to May 15, 2003.

Attorneys for the Cubs said Wrigley Field Premium Ticket Services Inc. was a separate subsidiary of the Tribune Company, which owns the Cubs, and was legally engaging in the resale of tickets to Cubs home games.

"It is undisputed that Tribune Company owns the ball club and Premium," the judge said. The Ticket Scalping Act, she said, did not prohibit a single entity like the Tribune Company from owning a sports team and a ticket brokerage, or the team from selling its tickets to its sister company.

Most importantly, the judge said, plaintiffs failed "to prove that the business relationship between them violates any law or violates custom or practice."

Hall added that the state legislature could address any public concern about such relationships between a sports franchise and a ticket broker. She said the court was bound by the law as it is written now.

Plaintiff attorney Paul Bauch said he was disappointed by the ruling, but said he would analyze Hall's decision before he considered whether to file an appeal.

Bauch maintained that had many of the tickets not been turned over to Premium to be sold at higher prices, they would have been sold to fans at face value.

"We continue to believe this type of conduct is not permitted. We'll have to study the court's ruling and determine whether or not there's anything that we can do," Bauch said.

When asked for the overall impact of the ruling, Bauch said, "I think it'll mean higher prices and less tickets for the fans."

"Fans win because those who purchased tickets on the secondary market have a better source to buy tickets from, at better prices," James A. Klenk, the lead attorney representing the Cubs and Premium said after the hearing.

He declined further comment.

During the week long trial in mid-August, the Cubs argued the suit was filed to benefit rival brokers who want to eliminate competition from Premium.

Plaintiffs' attorneys in the suit, which was filed last November, argued that Premium was not reselling tickets at all. Instead the Cubs placed prime seats with Premium, a "shell corporation" to sell them at more than face value. These actions violated both Illinois ticket scalping and consumer fraud laws, the suit alleged.

During the trial, Bauch said since the 2002 season, the Cubs engaged in "accounting gimmicks" and other trickery to skirt state law prohibiting the owner of a ball club from selling tickets at any price other than the face value.

"Premium Tickets is simply acting as a front, or alter-ego instrumentality to allow the Cubs to sell tickets at above face value," Bauch said. "The whole purpose of setting up Premium Tickets was as a way of evading the law."

When it opened for business inside a Tribune-owned building about a block from the ballpark, the Cubs provided numerous services to Premium, including television commercials, no-cash rent, and accounting services, Bauch said.

"The evidence shows complete domination of Premium Tickets by the Cubs," Bauch said. "The Cubs dominated this corporation. They did a good job setting it up and making it look separate."

Current Premium President Dan Guza, a former employee of the Cubs ticket offices, testified during the trial that he was general manager of the brokerage in 2002, before becoming president at the start of the current season. But Bauch said it was Mark McGuire, Cubs assistant vice president of Business Operations, and other team brass that called the shots.

"It's undisputed that Mr. McGuire was the master mind. It was his brain child," Bauch said. "Mr. Guza, the putative general manager, had no authority under the agreement for 2002."

The key dispute in the case, Bauch argued, was whether the team "sold" tickets to Premium or "placed" tickets with the brokerage.

But Klenk said that by definition, a sale takes place whenever an asset changes ownership for a price, and that the plaintiffs' arguments carry no weight. "The purchase was funded and paid for with Tribune money through an inter-company account," Klenk said. "I'm afraid that's how business is done in America. The evidence shows this is a sale."

The Cubs and Tribune Company financial records are audited by several third parties including Major League Baseball, none of which was concerned by the ticket transaction, he said.

"We're not in the business of cooking the books and making sham transactions. Our business is following the law," Klenk said.

Fans are not harmed by the presence of Premium in the crowded resale marketplace, but rather helped because the added competition drives down prices and because Premium offers returns and other benefits not available from other brokers, Klenk said.

"There is a segment of Cub fans who use ticket brokers," Klenk said. "They need ticket brokers because they don't like to stand in line."

"It is not a fraud to provide better products at better prices to the public, better products to Cub fans who buy tickets on the secondary market," Klenk said. "Why are we here? We're here because the ticket brokers don't like our business."

Klenk recalled the testimony of Peter Cavoto Jr., the first plaintiff in the case, who testified that he was directed to Premium by his was friend Richard Mark Hamid, owner of a rival broker who filed the initial complaint against Premium.

"He's the only alter-ego I've found in this case," Klenk said of Cavoto. "He's completely under the control of Mr. Hamid."

On a side note, let me add my "expertise" and elaborate on how wrong the judge is in the highlighted part above. I have an accounting degree. I've worked in corporate accounting, and I now work in corporate finance. In accounting, there is a thing called an intercompany sale. We do them all the time where I work. In fact, they are very commonplace among any company that is part of a bigger company. It's a real handy way for a parent company to monitor, and even control, how their subsidiaries perform.

Here's the gist:

Let's say there are two companies, named Little One and Little Two, that are both wholly-owned by the the same parent company, Big One.

If Little One sells something to Little Two, they process the sale exactly as any other sale would be processed with one exception - the revenue is credited to an intercompany revenue account, and the expense is debited to an intercompany expense account. When Little One and Little Two present their financial statements to Big One, Little One will show extra revenue and Little Two will show extra expenses.

Here's the important part: In consolidation, all intercompany accounts are netted against each other. Since the revenues should equal the expenses, the parent company should see zero impact from those intercompany transactions - no revenue, no expense.

If you have problems conceptualizing that, imagine it this way. If your right hand sells a piece of gum to your left hand for a quarter, in the end you - who are the "parent" of those hands - still has one piece of gum a quarter; not two pieces of gum or two quarters. Just one of each, as if nothing had ever happened.

When the judge says that "a sale takes place whenever an asset changes ownership for a price," she's right. But is ownership changing hands? No. The Tribune still owns the tickets. Is there a price paid? No. The Tribune makes no money off of a sale from one of its subs to another.

And don't go thinking that an audit "by several third parties including MLB" wraps this issue up. Remember Enron? They were audited, too.

Anyways, in closing, Derek Zumsteg had a nice satirical article about this over as Page 2. He makes an excellent observation when he says...

The big teams, like the Yankees and Red Sox, who have rabid fan bases and see an active market for scalping their tickets, would love something like this. Instead of pricing a seat at $50 a game and seeing a ridiculous third taken away through revenue sharing to fund the infant-like flailing of the Royals, they can instead sell that ticket to their side business for $20, scalp it for $400, and then use the profits on whatever they want...
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Postby giants! » Fri Aug 11, 2006 2:00 pm

In New York there is some resale law, but one is allowed to sell tickets above face value.
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Postby j_d_mcnugent » Fri Aug 11, 2006 2:03 pm

you are right, but isnt this a few years old? i guess we didnt talk about it here but i remember a long thread about it on a cardinals board which basically ended in a big collective.
Last edited by j_d_mcnugent on Fri Aug 11, 2006 2:05 pm, edited 1 time in total.
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Postby Pogotheostrich » Fri Aug 11, 2006 2:04 pm

I read this yesterday and it is really disappointing. They take the tickets off the market before they are even offered to the public. If a private citzen tried to do the same thing they would be breaking the law but it is OK for the Cubs to do it. :-P

As for the accounting trick to get around revenue sharing, teams already do it with their broadcast rights. You really think the Yankees are getting the same money their YES network that they would get if the rights were on the open market? Same with the Cubs, Braves and Red Sox Even my hometown Cardinals have gotten into it by buying a radio station.
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