Paramount Alleges JPMorgan-Led Financial Conspiracy (Exclusive)
According to explosive new court documents, the largest bank in the United States thought it was making "risk-free" loans to fund major films, and when that turned out to be wrong, a secret deal was made to cause trouble for the studio.
On the brink of trial in a three-year-old lawsuit that is worth more than $100 million, Paramount Pictures has dropped a bombshell cross-complaint that alleges that a financial firm colluded with Wall Street powerhouse JPMorgan to interfere with Paramount's rights and tarnish its reputation in relation to a series of film-financing transactions.
At the center of the allegation is an asset management company called Content Partners, which entered the entertainment space about five years ago with tens of millions of dollars in backing from a number of investors, including Mark Cuban and Todd Wagner. The company specializes in acquiring cash flows arising from intellectual property in film, television and music. Earlier this year, Content Partners made headlines by purchasing from Goldman Sachs for some $400 million a 50 percent stake in the lucrative, long-running CSI television franchise.
But now, Paramount says the company is "the Hollywood equivalent of a patent troll … with a business plan that has nothing to do with the development, financing, or distribution of entertainment properties."
Faced with defending a lawsuit brought by Content Partners for allegedly cheating profit participants on 25 Paramount films, including The Truman Show, Face/Off and Runaway Bride, Paramount has hit back. The new counterclaim comes just one week before a trial was supposed to happen, which was taken off the calendar when a Los Angeles judge retired. Now, Paramount is looking to blow the case open with revelations about how JPMorgan, "on the eve of the Wall Street meltdown and resulting financial collapse," allegedly used Content Partners as a conduit in what the studio says is a fraud.
Content Partner's lawyer responds that Paramount is bringing this cross-claim after he uncovered an unreported $100 million within the past couple of months.
The lawsuit and now the cross-complaint (read here in full) deal with two of Hollywood's most complicated topics -- financing and accounting.
Banks have long played a big part in financing films. Up until recently, banks would lend to a producer a portion of the production costs in return for a promise to repay plus interest. Fairly simple. But in the mid-1990s, banks began lending against a portion of the future proceeds generated by exploitation of the picture. Thus, the birth of slate financing. Over the past decade, most Hollywood studios have struck slate financing deals with Wall Street banks and hedge funds.
To make things more complex, banks started working with insurers whereby the latter would agree to repay any loan amounts that remained outstanding after a picture's release. This was done to hedge risk.
In the cross-complaint, Paramount says that JPMorgan "was a pioneer in insurance-backed financing deals."
In 1996, Paramount says it made the first of a series of these new kind of deals called Revenue Participation Agreements. That deal covered the films The Phantom, The Beautician and the Beast, In & Out and Truman Show. A special-purpose company was set up that entered into a credit agreement with JPMorgan. That company would receive a share of receipts from the films, which it would assign to JPMorgan as security for the loans. The bank used insurance policies to cover any shortfall from the loan amounts and the money paid out by Paramount.
More revenue participation agreements followed under similar terms on films including Event Horizon, The Saint, A Night at the Roxbury and A Civil Action. Basically, a good chunk of Paramount's film slate in the late 1990s.
But Paramount now alleges that something went wrong. Insurers wouldn't just hand over money.
"Like many Wall Street schemes, JPMorgan's attempt to craft 'risk free' loans to finance motion picture production proved too good to be true," it says. "Before the ink was dry on the Fifth RPA, JPMorgan came to the realization that the insurers might not make good on their policies."
One of JPMorgan's first deals using this financial structure -- the financing of The Mirror Has Two Faces from Mike Medavoy's Phoenix Pictures -- erupted in litigation in 1999 and Paramount says "it seemed a virtual certainty that JPMorgan would face the same denials of coverage in connection with insurance policies related to the Paramount transactions, and that JPMorgan and the other syndicate banks would be saddled with numerous loans in default."
Accordingly, Paramount says that it granted with no obligation JPMorgan's request to make accommodations, including making some terms adjustments, allowing the banks to participate in the film Varsity Blues and allowing a financial audit.
After an accounting firm took a look at Paramount's books, the studio says it was informed that it was incorrectly calculating "crossing" amounts, which pertains to the money of net receipts after Paramount had recouped its direct costs for the pictures.
From 2000 to 2004, JPMorgan is said to have been embroiled in litigation in New York and the United Kingdom with insurers over insurance-backed loans, and during the cases, the Paramount loans came up. The studio says it was unaware of this at the time. A settlement deal in the insurance disputes was allegedly reached in 2004, and Paramount says that it was informed by JPMorgan that the bank had "obtained the equivalent of a deed in lieu of foreclosure."
JPMorgan (which is not yet a party to the current dispute) is then described as attempting to interest Paramount in a "buyout" of the Revenue Participation Agreement, and discussions were held in the middle part of the last decade. To facilitate the process, the studio says it provided highly confidential information to L.A.-based investment bank Salem Partners for the purpose of arriving at a proposed buyout price.
But the parties couldn't come to an agreement. Everyone had different valuations of the worth of cash flows from those '90s films.
In order to drive up the price, JPMorgan is alleged to have directed Salem to deliver audit reports to Paramount with the "fabricated crossing claim." Paramount says it was threatened with litigation that would force the studio to "spend millions of dollars defending" and that the litigation "would be a 'PR nightmare,' with Paramount being portrayed as having intentionally 'screwed' its investors.' "
Around that time, Content Partners is described as entering the picture, allegedly obtaining Paramount's confidential financial information. JPMorgan and Content Partners supposedly made a secret deal with each other and reached agreement on financial terms for an acquisition of the Revenue Participation Agreements.
"However, they were faced with a predicament," continues the counterclaim. "JPMorgan and Content Partners knew that, under the express terms of the Revenue Participation Agreements, their transaction could not be consummated without Paramount's consent. But they also recognized that Paramount would never consent to an assignment of rights under the Revenue Participation Agreements to a 'scavenger' that was intent on pursuing baseless claims and bad faith litigation against Paramount."
The cross-complaint then details the crux of Paramount's allegation of a conspiracy:
"JPMorgan and Content Partners therefore retreated from their prior (and accurate) characterization of the intended transaction as a transfer of JPMorgan's interests in the Revenue Participation Agreements and set out to devise an artifice by which Content Partners could effectively acquire those interests without Paramount becoming aware of and taking steps to block that unauthorized assignment."
According to what Paramount says it has now dug up in the discovery process, "JPMorgan purported to substitute itself as 'debtor' under the Loan Agreements … and transferred the position as purported 'lender' under those Loan Agreements to Content Partners." This was allegedly hidden from Paramount because JPMorgan continued to communicate with the studio and receive payments as a "secret pass-through to Content Partners."
But in 2010, Content Partners went public in a big way about its stake in Paramount's films and filed a splashy lawsuit against the studio.
According to a copy of the third amended complaint alleging breach of contract and fraudulent concealment, which The Hollywood Reporter has also obtained, Paramount is accused of surreptitiously calculating and accounting for expenses and revenues on 25 films that failed to comply with cross-collateralization provisions of agreements. The lawsuit says that "Paramount sought to finance and exploit major motion pictures at minimal financial risk to itself, while at the same time deriving millions in misappropriated sums in addition to intangible benefits including valuable publicity."
As stated above, the lawsuit was set to go to trial next week, until a judge retired. During the shadowy pretrial stage, Paramount attempted to challenge the plaintiff's standing, but the previous judge rejected the attempt to toss the case, determining that Content Partners had sufficiently alleged it had acquired the rights of the revenue participation.
Now, in in the past couple of weeks, Paramount says it has determined that the plaintiff has "no interest whatsoever" in the participation agreements and says that Content Partners is merely a "plaintiff-for-hire."
Paramount, represented by attorney Richard Kendall, is now countersuing for tortious interference, fraud, misappropriation of trade secrets, unfair business practices and civil conspiracy.
"Paramount does not seek to deny Content Partners its right to scavenge," says the cross-complaint. "But even scavengers must comply with the law."
Marty Singer, attorney for Content Partners, has now responded. Read what he says here. JPMorgan said it had nothing to say at this time.
Asked whether a separate lawsuit would be filed against JPMorgan, Paramount declined comment.