A Legal Minute: Hollywood Accounting Practices: Results of the Melrose 2 case could upend the whole system of “Hollywood” accounting.
One of the issues that comes across my desk in the entertainment law world is setting up agreements for film production companies to use to invite folks into investing in their films. If you have ever had the opportunity to make a film you might have run into this issue. Most independents largely ask for help from friends and family to finance a film, and often they skirt the legal issues around those types of investments, knowing that their friends and family won’t sue them if the film makes no money.
But as the size of the investment gets bigger, the stakes obviously get higher and usually the more money a film production asks for, the less it’s about getting investment from friends and family. Usually institutional investors get involved (i.e. people with deep pockets who create companies solely to make investments). And nothing angers a deep pocketed investor more than investing in something where the return is minimal or less than advertised.
So it appears that is what is happening in New York. One of these institutional investors, Melrose 2 (no relation to the Place), invested in a slate of movies in 2006 that were being distributed by Paramount. And these are not exactly small films. You might have actually heard of these films: The Transformers franchise, Mission Impossible 3 and Blades of Glory (well maybe you didn’t hear about that one). The Melrose investors claim “five years after [the co-financing agreement] was signed, Melrose 2 has still not seen a dollar of profit from its $375 million investment” despite the films bringing in $7 billion in revenue.”
Wow! After a $375 million investment the investors haven’t gotten any money back. And I’m sure you’re asking, “how can they get no return if those films (and others unmentioned here) made over $7 billion?” The answer is both simple and complex: Hollywood Accounting.
Hollywood Accounting is not a recognized accounting practice (and I will also mention I’m bad with numbers), but rather what those in the industry use as the term to explain why so few films actually turn a “profit.” What do I mean? Well, let’s use that $7 billion in revenue I mentioned above. Even though that money was made, it is common Hollywood practice for a film company like Paramount to have a line item in their budget for everything, from the costs of marketing to the ever so clever “consulting fees,” and beyond, using each dollar that comes in from the box office and DVD and BluRay sales to “reimburse” costs so that there never is a net profit.
As a matter of fact, although we have not seen that accounting for these Paramount films, it would not be surprising to see that every dollar that came in was accounted for and that on paper Melrose 2 is entitled to nothing. And this is what is happening so far. This past week a California judge was narrowing the issues for the case which largely center around fraud. This is a big challenge to the Hollywood Accounting practices. This result of this case could be interesting if the investors can show that the accounting practices that Hollywood has used for years to keep most of the profits in the hands of the studios is fraudulent. It could upend the whole system.
Roberto “R.C.” Rondero de Mosier is an attorney licensed to practice law in Texas, California, New York and Illinois. He is a partner at Gonzalez & Mosier Law PLLC. His practice specializes in Entertainment Law and Intellectual Property rights. In his spare time he enjoys watching television and films, and writing about it. Follow him on Twitter @showbizattorney, or e-mail him at email@example.com
Hollywood Accounting Practices:
Paramount Responds to Melrose 2 Lawsuit:
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