Paramount Headed to Trial in Investors' Fraud Lawsuit

A six-year-old suit over money from 'Mean Girls' and 24 other films to finally go before a jury later this month

Paramount will have to face off against Wall St. investors who put up $40 million for a slate of films and say they never saw any return.

U.S. District Judge Thomas Griesa has denied the studio's motion for summary judgment in a lawsuit brought by Allianz Risk Transfer, Marathon Structured Finance Fund, Newstar Financial and Munich Re Capital Markets. As a result, Paramount appears primed to defend itself at a trial that is currently scheduled to begin on October 20.

The lawsuit filed in New York federal court concerns "Melrose 1," 25 films released between April 2004 and March 2006 that included Mean Girls, Elizabethtown, Collateral, The Manchurian CandidateCoach Carter, Team America: World Police, The Stepford Wives, The Longest Yard and Alfie. 

The investors sued in 2008, just as the country was entering a deep financial crisis. Up until that point, Wall Street had a hungry appetite for big slate financing. The money dried up, not entirely due to the lawsuits that would follow, but nevertheless, Paramount is still fighting over the significant investment that was put into big studio films.

The suing investors sank $40 million of roughly $231 million to fund these films. They say they were enticed by "risk mitigation techniques" hyped by Paramount. They say they didn't know that Paramount had backed away from international "presale" agreements in favor of self-distributing pictures in foreign markets. They allege that Paramount deducted hundreds of millions of dollars in "distribution fees" from the revenues shared with the Melrose investors. And they say that had Paramount been up front about its decision to abandon preselling distribution rights for movies in foreign territories, they would have suffered at least $100 million less in their aggregate losses in the Melrose Slate. Read more here.

In response to the allegations, Paramount attempted to argue on a summary judgment motion that responsibility for the investment documents — the private placement memorandum used to lure advertisers — fell to Merrill Lynch as underwriter for Melrose. Paramount also argued that the investors were expressly informed that Paramount would have discretion on whether or not to enter co-financing arrangements.

Without much analysis, the judge rejected Paramount's motion, writing in a short order this week that the "plaintiffs have demonstrated the existence of triable issues of fact."

Paramount did score a win, however, by getting the judge to deny the suing investors' attempt to preclude its damages expert.

The investors say their own expert has calculated damages on those 25 films to be approximately $18 million, and as a rebuttal, Paramount's expert Robert Wunderlich looked at films beyond the last film in the Melrose 1 slate. The theory is that if these investors had been satisfied with their investment and continued to put money into Paramount's films, they would have been part of "Melrose 2," a slate of 29 films including some of the movies in the Transformers series as well as many less successful ones.

"Based upon Paramount's calculation, by compelling Plaintiffs to continue investing in the Additional Films, Plaintiffs would conveniently have lost all their money and there would be no damage as a result of Paramount's fraud," argued the plaintiffs in a motion to preclude.

The judge denies the motion because the investors "have failed to show that the 'drastic remedy'' of preclusion is warranted based on defendant's purported delay in producing certain documents. Moreover, plaintiffs have failed to show adequate grounds for precluding defendant's damages rebuttal expert from testifying."

It appears at the moment that at a trial beginning on October 20, barring delays, that plaintiffs won't be arguing for punitive damages, but rather for rescissory damages, a return of the value of their investment. The situation is fluid, however.

Among the witnesses that may be called to testify, according to documents, is former Paramount CEO Sherry Lansing.

The plaintiffs are represented by James Janowitz and other attorneys at Pryor Cashman. Paramount is represented by teams at Paul, Weiss, Rifkind, Wharton & Garrison and Kendall Brill & Klieger.

Twitter: @eriqgardner