12:42pm PT by Eriq Gardner
Harvey Weinstein and Steve Bannon: The Troubled Business Relationship Revealed
In the week since bombshell allegations against film mogul Harvey Weinstein became public, the Breitbart website has been all over the scandal as an opportunity to showcase liberal hypocrisy in Hollywood. One thing missing from its coverage, though, is the role that its executive chairman Steve Bannon once played for Weinstein. In fact, their business relationship continues to have relevance not only because it shows how Bannon once profited off of Weinstein's endeavors, but also because it is the subject of an ongoing fraud lawsuit that will now have to be fought by a divided Weinstein clan.
Twelve years ago, long before Bannon helped Donald Trump overcome groping claims to become president, he was the chairman of a company called Genius Products. The year was 2005, and when Weinstein and Bannon crossed paths, it was a particularly important time for the movie mogul. Weinstein had just separated from Disney and was launching The Weinstein Co. And he was searching for financing.
According to a proxy statement that Genius once filed with the SEC, about a month after Bob and Harvey Weinstein and Disney jointly announced the termination of their employment contracts, Bannon and Genius CEO Trevor Drinkwater met with representatives of Goldman Sachs — where Bannon once worked as an investment banker. They discussed the possibility of Genius Products as an alternative independent distributor for the Weinsteins' new company. In a story that ran in The New Yorker earlier this year that recounted Bannon's time in Hollywood, Drinkwater nodded to this meeting in an interview. “Goldman Sachs was raising the money for The Weinstein Co., and Steve called one of his buddies at Goldman,” said Drinkwater.
In recent days, Bannon has privately told people that his business with Weinstein is much ado about nothing because Genius came to distribute DVDs for about 50 companies.
But any playing down of the relationship is belied by some inconvenient facts. For one thing, after a series of additional meetings that year between Bannon and Drinkwater on one side and the Weinsteins and other TWC management on the other, an agreement was hatched that gave TWC a 70 percent stake in Bannon's old company. Also, for a short time, Genius was registered as The Weinstein Company Funding LLC and operated as a subsidiary, according to more court and SEC filings.
The Weinsteins might have been enticed by Bannon's company offering to distribute its product in home markets at distribution fees much less than what was being charged by other Hollywood giants. And for a while, the partnership appeared to be working and was generating increasing curiosity. For example, a 2007 Fortune story discussed how Wall Street was "starting to buzz" about Weinstein's interest in Genius, and it quoted Bannon as boasting how the company had grown from $32 million in revenue to around $800 million. A few days after that article appeared, The New York Times ran a story headlined, "Using Genius, Are the Weinsteins Plotting an I.P.O.?"
Genius indeed was eyeing a public offering. In 2007, the company executed a reverse stock split so it could meet the minimum $5 share price to be listed on NASDAQ, only to be sued in Delaware by a shareholder who traded the company's stock in over-the-counter markets. The plaintiff claimed that the reverse stock split was to the detriment of existing shareholders, and the litigation caused the stock price to sink low enough that Genius had to abandon its ambitions.
Meanwhile, Genius picked up other customers, including ESPN, Discovery and Sesame Street. Press releases spoke highly of the future. For example, when World Wrestling Entertainment entered into a multiyear agreement with Genius in 2006, Vince McMahon stated, "Home entertainment is a major part of the WWE’s business, and we believe we have found in Genius a company that understands our brand and will help us continue to drive our company’s growth. Bob and Harvey Weinstein have a tremendous track record. We’re excited about this partnership and its long-term potential."
But things might not have been totally hunky dory for Genius under the stewardship of Bannon and Drinkwater, a former executive at Warner Bros.
As revealed in a March 17, 2008, earnings call, The Weinstein Co. was still responsible for more than half of Genius' revenue despite efforts to diversify. And the terms may have been wanting. "We're continuing discussions with the Weinsteins and other content partners to ... improve the deals. Then when we have something, we'll get right back to you guys," Bannon told inquiring analysts.
The cause of the collapse of Genius — which earned Bannon more than $450,000 in consulting fees as well as stock in the company — remains somewhat of a mystery.
Certainly, as digital distribution became bigger and bigger, the DVD business wasn't the smartest place to be for an upstart company. And its relationships with other entertainment partners weren't quite living up to the advance hype. Owed $8.5 million, WWE eventually forced Genius into involuntary bankruptcy in 2011.
Then, there's the alleged malfeasance put forward by Chapter 7 trustee Alfred Siegel in a $130 million fraud lawsuit in bankruptcy court.
At the same time that Harvey Weinstein was allegedly renting luxury hotels to harass and assault women, Siegel accuses Weinstein's company of essentially treating Bannon's old company as his piggy bank.
According to the complaint, Genius' supposed independence was a sham. In 2008, when Genius was running out of money, majority ownership was transferred to an investment firm, but Genius was allegedly forced to sign an "onerous and one-sided" amended distribution deal with TWC, and later a restructuring agreement that "no independent distributor would have entered into."
Genius had become insolvent, according to Siegel, and those other licensors — ESPN, Discovery, WWE — became unwitting funders of Weinstein's endeavors.
As the complaint puts it, "In order for [Genius] to operate at a loss to facilitate the Weinstein scheme, the Debtor needed third parties to extend credit, which borrowed funds could be used to make transfers to Weinstein and pay overhead expenses. To obtain such borrowed funds, the Debtor entered into distribution agreements with third party licensors at market terms. Pursuant to the distribution agreements, the Debtor was obligated to timely pay proceeds to the licensors after retention of the negotiated distribution fee. Instead, the Debtor used the proceeds to make transfers to Weinstein and pay overhead expenses, thereby turning the third party licensors into unsecured creditors who were not paid timely."
In total, more than $130 million was counted as being transferred by Genius to TWC after Dec. 27, 2007, which Siegel is now claiming is recoverable as fraudulent transfers. A judge has trimmed the claims, but is nevertheless allowing the lawsuit to proceed.
Additionally, Siegel briefly sued Bannon Strategic Partners in an effort to recover money while also going after Drinkwater for an alleged breach of fiduciary duty in the relationship with TWC. (The latter was recently resolved. Drinkwater couldn't be reached for comment.)
No trial date has been set in the Chapter 7 trustee's lawsuit against TWC, but as investors in Weinstein's business eye potential claims against him, the ongoing investigation into TWC's finances may be spotlighted in forthcoming summary judgment papers. It's unclear how prominently Bannon himself will figure in all of this.