Judge Allows Investor Lawsuit Against Paramount to Continue

Mean Girls in hallway - H 2012
Paramount Pictures

Mean Girls in hallway - H 2012

As Paramount fights the Melrose 2 film investor group over claims the studio underreported millions of dollars in revenue in fraudulent accounting statements, it also is dealing with various financial institutions that put up money for the Melrose 1 slate of films. On Wednesday, a federal judge denied for the third time in as many years Paramount's attempts to escape allegations made on a slate of films that included Mean Girls, The Stepford Wives and The Manchurian Candidate.

As we've reported, the days of flush Wall Street capital flowing freely into Hollywood are mostly over.

In November, Melrose 2, a New York-entity that put up $375 million in exchange for a 25 percent share of revenue, sued saying that despite films such as Mission Impossible 3Blades of Glory and the Transformers series enjoying $7 billion in revenue, the investors hadn't seen a dollar in profit. Paramount responded by saying that it had complied with its obligations and had been forthcoming in the audit process.

But Paramount's troubles with Wall Street actually stretch back to 2008 and the country's deep financial crisis, when financial institutions including Allianz Risk Transfer, Marathon Structured Finance Fund, Newstar Financial, and Munich Re Capital Markets, filed their own lawsuit against Paramount.

The investors contributed about $40 million of the total $231 million Melrose 1 slate and reported that they expected to lose their entire investment. But unlike in the Melrose 2 lawsuit, these investors weren't suing for breach of contract or taking issue with the Hollywood accounting, but rather basing their claims on the idea that Paramount had violated securities laws by making false and misleading statements in a private placement memorandum (PPM) used to procure investments.

Specifically, the plaintiffs in this case pounded Paramount for allegedly touting "risk mitigation techniques," saying the studio had emphasized that it was a "culture of fiscal caution." At the time of the original Melrose investment, Paramount told investors it aimed to "achieve consistent slate profitability" by "opportunistically entering into output agreements and territorial sales."

What the plaintiffs say they didn't know at the time was that Paramount had abandoned some of its touted risk mitigation strategies—for example, allegedly backing away from international "pre-sale" agreements in favor of self-distributing pictures in foreign markets. Had Paramount co-financed pictures with foreign backing, the investors say, they would have gotten their money back.

Paramount has made several challenges to this argument since the case was first filed in New York federal court.

The latest objection came last July when the studio directed the judge's attention to the U.S. Supreme Court's 2010 ruling in Janus Capital Group v. First Derivative Traders, where the high court justices found that an investment advisor was not liable for fraud in the prospectus of a sponsored mutual fund because the investment advisor was not the “maker” of those statements. In Janus, the Supreme Court ruled that the fund itself had “ultimate authority over the statement, including its content and whether and how to communicate it.”

Paramount argued that Melrose was the real author of the PPM, so even if it had involvement in the drafting, it couldn't be held responsible. In short, Paramount believed the real defendant should have been Melrose.

In response, the plaintiffs said that Janus actually supported their arguments because the studio was the one with "ultimate authority" over the PPM and that Melrose had merely "attributed" statements in the PPM to Paramount.

On Wednesday, federal judge Thomas Griesa in New York held a hearing and agreed with the investment plaintiffs. The lawsuit over Melrose 1 lives on.

E-mail: eriqgardner@yahoo.com

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