Paramount Settles Massive Fraud Lawsuit With Finance Partner (Exclusive)

"Transformers: Dark of the Moon"


Industrial Light & Magic really upped the complexity on the latest "Transformers" film with 3D and the most complicated creature the company had ever created -- the snakelike Driller, made up of 70,051 parts. Says Scott Farrar, "The Driller wrapped around that tilted building demonstrates everything we put into these movies."

Paramount Pictures has resolved a massive fraud lawsuit brought by the investors of the Melrose II film slate. On Friday, an attorney for the studio filed papers in Los Angeles Superior Court indicating that a settlement of the entire case had been reached and that a motion for dismissal would follow.

A spokesperson for the studio confirms to The Hollywood Reporter that the "dispute was satisfactorily resolved."

The Melrose investors sued Paramount in November 2011, alleging that five years after agreeing to co-finance a slate of 29 films, they had not seen a dollar of profit on an investment that totaled $375 million.

The films at issue included Mission: Impossible III, Blades of Glory and the Transformers series. Together, these movies were said to have earned $7 billion in revenue at the worldwide box office.

The lawsuit shed light on the frustration experienced by some Wall Street investors who have funneled hundreds of millions of dollars to Hollywood in the past half decade.

The financiers charged Paramount with understating gross receipts, delaying payments, overstating production and distribution costs and hindering audit rights to verify revenue and costs with the films that Melrose II had funded. The plaintiff also had a bone to pick with how revenue from Melrose II-funded films was being received through Paramount parent Viacom, not Paramount, and how money was flowing. For instance, Paramount allegedly paid sister company MTV as a third-party participant for Nacho Libre and Charlotte's Web.

In reaction to the claims, Paramount initially described the lawsuit as "filled with hyperbole" and claimed that it "ignores the true facts."

Later, Paramount characterized the investors as being impatient. "Based on the performance of the films in which it invested, Melrose II is expected to make a double-digit return on its investment," the studio alleged.

The settlement comes on the eve of a hearing that was scheduled to consider Paramount's latest effort to shoot down the plaintiffs' fraud claims as being duplicative of its breach-of-contract claim. In turn, the financiers were pushing the judge to allow wide access to Paramount's financial documents.

Paramount is in the midst of a legal-settlement frenzy. In recent weeks, it has wrapped up a dispute with the estate of The Godfather author Mario Puzo and a dispute with the Swedish gaming company ProCloud. The Melrose II suit no doubt is the largest piece of litigation the studio had pending.

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