Courting disaster: Banks, Schmid in investor sights

Prison sentence just the beginning

Now that Germany's fraud case against Andreas Schmid, founder and ex-CEO of film investment fund VIP, has come to end with a six-year prison sentence for Schmid for tax evasion, the real fun begins.

The 10,000-plus high-income investors that poured money into VIP have civil cases pending against Schmid and the banks — Commerzbank, HypoVereinsbank and Dresdner Bank — that marketed VIP funds. This week's ruling, which also saw Schmid's former partner, Andreas Grosch, handed a two-year suspended sentence, will add fuel to their fire.

Schmid was found guilty of massive tax evasion in connection with VIP, which raised more than $900 million to back productions ranging from comic book adaptation "The Punisher" and Oscar-winner "Monster" to the Bruce Willis-Josh Hartnett thriller "Lucky Number Slevin."

VIP's backers assumed they could write off their investment. At the time, German tax authorities allowed investors to defer taxes on money invested directly in film production.

But instead of investing the $900 million in films, Schmid played an elaborate shell game. He would first transfer the money for a film to a third-party production company such as L.A.-based Rising Star Pictures. Rising Star would then transfer back 80% of the cash to a German savings account. Schmid used that money to secure bank guarantees.

Only 20% of VIP's declared investment in such features as Tom Tykwer's "Perfume: The Story of a Murderer" or the teen spy film "Stormbreaker" actually went into production.

Presiding Munich regional court judge Huberta Knoeringer ruled the scheme a clear violation of German tax laws and ordered both Schmid and Grosch to pay back taxes.

The same goes for VIP investors, who have the additional problem of having their money locked up in the fund. Schmid, free on €4 million ($5.8 million) bail pending his appeal, has made no move to return investors' money.

So they have taken the case to Germany's civil courts. While investors are unlikely to get much out of Schmid or Grosch, the deep-pocketed banks are another matter.

"The banks are going to have to pay, and pay big time," said one leading German fund expert. "Commerzbank, in particular, had to know what was going on. They were warned repeatedly and they did nothing. They didn't care about the investors, all they were looking at was their bloody commission."

Wolfhart Fabarius chief editor of German investment newsletter Fondzeitung and an expert on German film funds, believes VIP investors have a strong case but that it could take years before any of them get their money back.

"Both sides can point to past rulings that appear to favor them so it will really be a case-by-case thing," Fabarius said. "Some banks may settle out of court quickly, others will appeal and appeal, dragging the case out for years. This week's ruling is only the beginning."
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