A private funding group that says it provided $375 million in financing for 30 films from Paramount Pictures and DreamWorks Studios and haven’t received a single dollar in return, is back in court against the filmmakers with an amended complaint trying to recover costs.
Melrose Investors 2, a fund run by the 300-year-old German investment bank Dresdner Kleinwort, has asked a Los Angeles Superior Court judge to force Paramount and DreamWorks — now operating as DW Studios LLC — to pay up at least some of the $2 billion the fund says Paramount and DreamWorks made on the films, which include the entire Transformers film series.
Sue Oliver, a business development associate director for the law firm Kirkland & Ellis who is representing Melrose, tells Airlock Alpha that the studios overcharged Melrose 2 for advertising costs while entering into secret agreements with third parties to receive rebates on media spending. Those side agreements, which Melrose 2 said was funneled through Paramount’s then parent Viacom, concealed “hundreds of millions of dollars” in payments and cost reductions that were not allocated back to the investors.
Paramount, however, said in a statement to The Hollywood Reporter that one of the main investors in Melrose 2, Vine Alternative Investments, is “attempting to inappropriately parlay a successful motion picture investment into a windfall.” The studio adds that Melrose 2 is “expected to make a double-digit return on its investment.”
“Melrose 2’s hedge fund investors now seek to inflate those returns through false and sensationalistic allegations,” Paramount said in its statement. “Paramount has complied with agreements with Melrose 2, including in its dealings with both affiliated and unaffiliated companies. Paramount has been forthcoming in the audit process, and has paid and continues to pay Melrose 2 what it is owed. We intend to vigorously defend this lawsuit.”
The lawsuit seems to be an aftershock of the growing trend in recent years of what some would describe “laymen investment” in films. Hedge funds like Melrose 2 raise money from investors looking for big returns, and have found solid investment opportunities in films because of the number of distribution avenues available to studios now, most especially digital downloads and DVD sales. That makes it a lot harder for a properly financed film to lose money, even if it’s a flop at the box office.
These funds help studios as well, because it takes away some of the financial risk associated with larger-budget films. By sharing that risk with other investors, studios can take chances it might not have otherwise, or add money to budgets to help create what they hope will be a much more well-received film to audiences.
One of larger areas that seem to have Melrose 2 investors upset is over the Transformers series of films, and both the product placement and merchandising that appeared in those films. According to Melrose 2’s lawsuit, Paramount has yet to supply documentation of product placement to appropriately determine how much money received in that product replacement reduced production costs.
Those reductions in production cost would mean a larger profit margin for Melrose 2, the fund claims, and thus could be money that is owed to investors who helped make those films happen.
Also at issue is merchandising surrounding the Hasbro line of Transformers made to complement the film series. Melrose 2 says in its lawsuit that Paramount refuses to provide documentation on the accounting of what was “millions of dollars” in merchandising, to see if any of those funds are owed to Melrose 2.
Melrose 2 also claims that Paramount under-reported DVD sales of “Transformers” and several other films like “Jackass 2” and “World Trade Center.” On top of that, Melrose 2 says that Paramount overstated the production cost of “Transformers” by $655,000, and that Paramount underreported net receipts of that film by more than $42 million.
Melrose 2 is seeking payment of the money owed, plus interest, court costs and punitive damages for what it describes as “egregious and fraudulent conduct” made by Paramount and DreamWorks.