"If you plan to hire your own musicians and singers and create an original recording of a copyrighted song, then you need the permission of only the music publisher."
That right there says that the #1 scenario is illegal if he did not obtain permission to create his own recording. It says nothing about selling or giving it away, but just the fact that you record someone else's song without obtaining permission. You may not need a license but you do need their permission to do so.
