Paramount Pictures sued by financing partner for fraud

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Paramount Pictures withheld profit from such hit movies as “Mission: Impossible 3,” “Jackass 2” and the “Transformers” trilogy, according to a lawsuit filed in Los Angeles Superior Court by one of the studio’s key co-financing partners.

The complaint was filed Tuesday on behalf of investors in the Melrose 2 co-financing fund, named after the street where Paramount is headquartered. Among the accusations is that the studio underestimated revenue on films by up to $16.3 million and that it improperly attributed $3 million in charitable donations to movie budgets.

Investors in the fund, an unidentified group of private equity firms, stated they have not made any profit on the $375 million they invested in 29 Paramount films over the past five years that grossed nearly $7 billion worldwide in ticket sales.

“This lopsided distribution of earnings comes about as a direct result of Defendants’ practice of understating gross receipts, delaying payments to Melrose 2, overstating production and distribution costs and hindering Melrose 2’s ability to…verify the revenues and costs associated with the films it funded,” the complaint says.

The lawsuit accused Paramount of fraud and breach of contract but didn’t specify the amount of damages that the Melrose 2 investors are seeking.

A spokeswoman for Paramount said that the studio had paid back Melrose 2 nearly 90% of its investment and that the differences in the two sides’ positions are modest.

‘Paramount has complied with its obligations to Melrose 2 and has been forthcoming in the audit process,’ she said. ‘We are disappointed that these sophisticated investors would choose to file a lawsuit filled with hyperbole that ignores the true facts.’

Accusations that studios use improper accounting methods to withhold profit from partners or creative talent are common in Hollywood, but such disputes are often settled quietly behind the scenes. One of the most famous cases that went to court involved Paramount and author Art Buchwald over the profit and authorship of the 1988 Eddie Murphy comedy ‘Coming to America.’

Melrose 2 launched in 2006 when so-called ‘slate’ deals, in which Wall Street investors poured hundreds of millions of dollars into a group of movies released by a studio, became popular throughout Hollywood.

The fund covered up to 25% of the costs of the Paramount movies and was supposed to receive that share of revenue back after certain deductions, according to the complaint.

The lawsuit contends that Paramount improperly deducted payments it made to MTV Networks, a sibling unit of media conglomerate Viacom Inc; that it didn’t share any money from a technology partnership with Toshiba related to movies that Melrose 2 co-financed; and that it attributed costs to movies that had nothing to do with their production or distribution, including anti-piracy efforts, generic market research and design work on a new logo for the studio’s Nickelodeon Movies label.

Investors also alleged that Paramount has not always shared information related to movies’ accounting as required by its contract.

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-- Ben Fritz

[This post was updated at 5:15 p.m. to include Paramount’s response.]