• The Hollywood Reporter on LinkedIn
  • Follow THR on Pinterest
OCT
5
2 YEARS

Paramount Investors Target Viacom Revenue in Amended Lawsuit (Exclusive)

Investors in the Melrose 2 film slate claim fraud in the way Paramount has treated revenue from "Dreamgirls," "Flag of Our Fathers" and "Transformers."

Transformers
Paramount Pictures

Melrose Investors 2, a New York-based entity, has updated a massive lawsuit against Paramount that contends a $375 million investment made in 2006 on movies that grossed $7 billion in revenue amounted to not a dollar in profits.

Read the Complaint Here

The key allegation in the original complaint was that Paramount was "under-reporting the revenue and overreporting the costs" of 29 co-financed films, including such hits as Mission: Impossible III, Blades of Glory and the Transformers series.

At the time of the original filing, Paramount's immediate reaction was to blast the lawsuit as "filled with hyperbole that ignores the true facts" and later in court, to attack the investors' specific claim there was any fraud involved. The studio argued the investors were dressing up their breach-of-contract claim and hadn't sufficiently alleged facts that took the dispute beyond a disagreement over the accounting.

So Thursday, the investors introduced new allegations that, among other things, represents a challenge to the way that Paramount's parent company, Viacom, operates. The plaintiffs say that Viacom, National Amusements, Paramount, DreamWorks and MTV have been "alter egos of one another, acting as a single enterprise."

While it's well known that that Viacom has subsidiaries, and that its officers and directors have the ability to influence operations at its subsidiaries, the investors are taking issue with the way that money is booked through the various organizations.

"National Amusements and/or Viacom have directed revenue and other benefits from the exploitation of Paramount and DreamWorks, thus depriving Paramount and DreamWorks' profit participants their share of revenue," states the amended complaint. "Accordingly, Defendants have used the imprimatur of their supposed corporate separateness to work a fraud and injustice on Melrose 2 by depriving Melrose 2 of revenues and values to which Melrose 2 would otherwise be entitled under the Agreement."

One of the biggest bones of contention made in the latest complaint is the alleged way that money from Melrose 2-funded films is being received through Viacom, not Paramount. The investors point out that in 2011, Viacom's filmed entertainment revenue rose 46 percent to $1.79 billion, but say that the entertainment conglomerate is structuring licensing deals so Paramount can conceal the benefits of hit films like Transformers 3 from profit participants.

One example given is a 2007 licensing agreement whereby Microsoft gained the right to use content from Paramount films on MSN and the XBox 360 gaming system. As a result of this agreement, Viacom is said to have received ad serving services for itself and subsidiaries reportedly worth at least $500 million. Melrose 2 believes it was credited no value from this deal.

Still, the investors have hurdles to overcome in alleging facts that distinguish their claims from a breach-of-contract dispute. The investors have now removed a cause of action against Paramount for breach of the implied covenant of good faith and fair dealing in favor of renewed efforts to demonstrate how Paramount's overall actions add up to fraud. That's where a big damages award from a jury might be, but the investors will need to convince the judge they are making claims that go toward Paramount's intent to breach its obligations.

To do this, investors represented by Mark Holscher at Kirkland & Ellis are stressing purported concealment on the part of Paramount.

Here's one example: "On information and belief, Defendants have also overcharged Melrose 2 for the cost of advertising Melrose 2-funded films by entering into secret agreements with third parties to receive rebates on media spending that Defendants have not allocated to Melrose 2..."

And another: "During the period in which Melrose 2 was funding films, Defendants hid several side agreements whereby Defendants received hundreds of millions of dollars in concealed payments, or cost reductions, that Defendants did not allocate to Melrose 2. These agreements further show that Defendants treat such 'bonuses' precisely the same as discounts when it is financially advantageous to do so."

The next phase of the lawsuit is likely to be a fight between the parties over whether investors have sufficiently alleged acts of bad faith that move the case beyond merely a discussion of what errors, if any, Paramount made in accounting to its profit participants.

Paramount responds:

 "Vine Alternative Investments and the other investors in Melrose 2 are attempting to inappropriately parlay a successful motion picture investment into a windfall. Based on the performance of the films in which it invested, Melrose 2 is expected to make a double-digit return on its investment. Melrose 2's hedge fund investors now seek to inflate those returns through false and sensationalistic allegations. Paramount has complied with its agreements with Melrose 2, including in its dealings with both affiliated and unaffiliated companies. Paramount has been forthcoming in the audit process, and has paid and continues to pay Melrose 2 what it is owed. We intend to vigorously defend this lawsuit."

Read the full amended complaint on the next page.

E-mail: eriq.gardner@thr.com; Twitter: @eriqgardner