November 29, 2011 6:42pm PT by Matthew Belloni
Paramount Responds to Massive Fraud Lawsuit, Claims Finance Partner 'Ignores the True Facts'
Paramount Pictures has come out swinging against a fraud lawsuit filed Tuesday by a financing entity that backed a string of high-profile movies but sued claiming the studio underreported millions of dollars in revenue in fraudulent accounting statements.
Melrose 2, the New York-based entity that agreed in 2006 to back a slate of Paramount films in exchange for about a 25 percent share of revenue, argues in a lawsuit filed Tuesday that the studio has engaged in a practice of "under-reporting the revenue and overreporting the costs" attributable to 29 films co-financed by Melrose, including such hists as Mission Impossible 3, Blades of Glory and the Transformers series. "In contrast, five years after [the co-financing agreement] was signed, Melrose 2 has still not seen a dollar of profit from its $375 million investment" despite the films bringing in $7 billion in revenue, states the complaint, filed in Los Angeels Superior Court.
But Paramount responds in a statement released Tuesday afternoon that the studio has played fair with its financial partner:
“Paramount has complied with its obligations to Melrose 2 and has been forthcoming in the audit process. We are disappointed that these sophisticated investors would choose to file a lawsuit filled with hyperbole that ignores the true facts rather than seeing that process through to completion. The Melrose 2 investors have already received almost 90% of their investment back under the financing agreement, and a number of the films in which they participate (such as the successful Transformers 3) remain in the earliest stages of their earning potential.
“While we intend to vigorously defend this lawsuit, the differences between the parties’ positions are relatively modest in amount and we are confident they can be resolved in the ordinary course.”
The lawsuit claims potentially millions of dollars in damages and argues that Paramount has repeatedly tried to hinder the audit process on specific films, as well as charge improper expenses against its profit participation obligations.
There was a ton of press coverage of the Melrose deal and other mega-budget "slate" financing arrangements back in 2006 and 2007. Wall Street money was flowing freely into Hollywood, and studios were happy to take the cash in exchange for back-end participations down the road. Then, when the economy crashed and hedge funds and other financing entities shied away from movie investments, speculation arose about whether investors would make back their money on the Hollywood deals.
Melrose investors believe they've been cheated. Paramount says it has complied with the deal. It will be interesting to see how this case turns out.
The suit alleges causes of action for breach of contract, breach of the covenant of good faith and fair dealing, fraud, unfair competition and declaratory relief.