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Paramount Hit With Lawsuit From $375M Investor

Group says it wants money from investments in films like ‘Transformers: Dark of the Moon’

The hot investor market that’s used to bankroll multi-million dollar films and returning high profits may have finally cooled down a bit. And it could be the fault of Paramount Pictures.

Melrose 2, an investor group that says it chipped in $375 million to finance films like the recent “Transformers: Dark of the Moon” and “Mission: Impossible 3,” but has not received even a single penny in return.

The fund is run by investment bank Dresdner Kleinwort, a 300-year-old company that is now operating under its new owner, Commerzbank of Germany. It was a followup to a 2004 fund simply named Melrose, and funded nearly 30 films under the Paramount banner, according to The Wrap. The bank has filed the suit in Los Angeles County Superior Court, where Paramount has “deliberately inflated losses and under-reported gross receipts,” according to Melrose 2 attorney Mark Holscher.

The funded films include all three Transformers films, as well as “Flags of Our Fathers, “Blades of Glory” and “Dreamgirls.” Those films grossed nearly $7 billion at the box office. Melrose 2 invested an average of $12.9 million in each film, typically a smaller piece of the overall budget for these films. For example, “Transformers: Dark of the Moon” had a budget of $195 million, but grossed $352.4 million in North America alone. “Mission: Impossible 3,” which premiered in 2006, had a budget of $155 million, but grossed just $133.4 million in North America.

Pulling in financing from various banks and lenders is not new to Hollywood, however, laymen investment in films is a growing trend, experienced more on the independent movie side. Because of the new avenues of distribution available to films — like digital downloads and DVD sales — it takes a lot more for a properly budgeted film to lose money. A hit — like say “Paranormal Activity” in 2007 which was made on a $15,000 budget but grossed $107.9 million in North America — could create returns at heights not experienced in any other investment.

However, Hollywood studios have a long history of creative accounting. While a court has yet to decide this case (and Paramount should be presumed innocent of these claims until final decisions or settlements are made), others have not done too well for studios.

In fact, Paramount itself was the subject of one of the more famous cases where how it conducted its accounting of film projects was called into question. Late writer Art Buchwald sued Paramount in 1990, claiming the studio stole his story idea for the 1988 Eddie Murphy hit “Coming to America.” While Buchwald would win the initial creative claims, the case would eventually be tied up in how much Paramount had to pay Buchwald out of net profits.

In this case, Paramount claimed it experienced no net profit from “Coming to America,” despite the film grossing $288 million worldwide based on a $39 million budget. When a court decided in Buchwald’s favor about how net profits were distributed, the studio settled out of court.

Buchwald died in 2007.

Melrose 2’s lawsuit says that Paramount has understated gross receipts, delayed payments, overstated production and distribution costs, and not allowed Melrose 2 to fully audit the studio’s books. Melrose 2 also wants to look at how much Paramount may have made in product placement, something it says are not part of the studio’s general books provided to investors like Melrose 2.

Paramount told The Wrap that it has complied with its obligations to Melrose 2, and been open in the audit process.

“We are disappointed that these sophisticated investors would choose to file a lawsuit filled with hyperbole that ignores the true facts rather than seeing that process through to completion,” Paramount said in its statement.

The investors have already received nearly 90 percent of their investment back, Paramount said, and other films like “Transformers: Dark of the Moon” are still in the “earliest stages of their earning potential.”

So far this year, Paramount is the top studio at the box office, averaging a gross of $85.6 million for each film it distributes, for a total of $1.71 billion, and 18.6 percent of the total market, according to The Numbers. Warner Bros. is not far behind with $1.62 billion, but is averaging a gross of just $45 million per film.

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