April 22, 2014 1:46pm PT by Eriq Gardner
Paramount Fights Investors' Fraud Lawsuit Over Big Film Slate
On Monday, Paramount Pictures asked a New York federal judge to hand it victory in a fraud lawsuit that is now past its fifth birthday.
In 2008, just as the country was entering a deep financial crisis precipitated in large part by activity on Wall Street, some institutional investors there were lodging claims that they had been cheated by Paramount. Up until that time, Wall Street capital was flowing freely into Hollywood, but in this lawsuit, Allianz Risk Transfer, Marathon Structured Finance Fund, Newstar Financial and Munich Re Capital Markets asserted that Paramount had violated securities laws by making false and misleading statements in a private placement memorandum (PPM) used to procure investments on a film slate known as "Melrose 1."
"Melrose" consisted of 25 films released between April 2004 and March 2006 and included big hits like Mean Girls and The Manchurian Candidate, modest performers like The Stepford Wives and Collateral and bombs like Alfie and Elizabethtown.
The suing investors put up $40 million of roughly $231 million to fund these films. They say they were enticed by "risk mitigation techniques" hyped by Paramount that aimed to "achieve consistent slate profitability" by "opportunistically entering into output agreements and territorial sales." They say they didn't know that Paramount had backed away from international "presale" agreements in favor of self-distributing pictures in foreign markets. And recently in the lawsuit, the plaintiffs have taken issue with Paramount's alleged failure to secure tax credits for the Melrose films.
Now, after a lengthy period where the two sides engaged in discovery, Paramount says that the suing investors don't have enough to continue their claims.
"Paramount did not draft or issue the PPM," says the company in its summary judgment motion. "Melrose did."
In other words, the studio says that if any liability exists, it's on the Melrose Investors LLC, the special purpose vehicle that was created to issue debt and equity to investors.
Paramount says that the PPM expressly informed investors that Paramount and Viacom wouldn't be assuming liability and, further, that potential investors "will not be investors in Paramount Pictures Corporation, will have no direct interest in Paramount Pictures Corporation or any of its assets (including any motion picture) and will have no standing or recourse against Paramount Pictures Corporation, Viacom Inc. or their affiliates."
The investors are said to have also gotten warnings that Paramount would have discretion on whether to enter co-financing arrangements such as international presales and that the investors had to waive claims as a function of their subscription agreements.
Paramount has settled big investor lawsuits before, including one over the Melrose 2 film slate that included such films as Mission: Impossible III, Blades of Glory and the Transformers series as well as the company that had funded its slate of films in the late 1990s. In that latter case, the studio was troubled by the actions of JPMorgan.
In the dispute over Melrose 1, which unlike the others has refused settlement, Paramount points to another big Wall Street bank -- this time on friendlier terms.
The studio says it was Merrill Lynch's responsibility as the sole placement agent and underwriter for Melrose to act "as the primary point of contact for all potential investors and marketed the investment to them."
Merrill Lynch, which was acquired by Bank of America in 2009, isn't a party to the present dispute. Paramount says that witnesses say no one from Merrill "ever made any representation to potential investors that any particular amount or type of future co-financing, including international presales, would be achieved with respect to the Melrose Slate," and that Merrill eventually made its own substantial investment.
In its motion for summary judgment (read here), Paramount also says that the investors are sophisticated and understood that there weren't any guarantees about a certain type of co-financing arrangement. The judge is being asked to absolve Paramount because the investors waived their claims, there's no evidence of false statements, no reliance on alleged misrepresentation and that Paramount can't be considered the "maker" of the misrepresentations.
The investors should be filing their opposition soon.