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Will Ferrell and Jon Heder in "Blades of Glory," a hit movie that one investor says it never saw any income from. (Dreamworks)
Will Ferrell and Jon Heder in "Blades of Glory," a hit movie that one investor says it never saw any income from. (Dreamworks)

Liam Lacey: Behind the Screens

Hollywood special effects: Watch the profits disappear! Add to ...

Hollywood, we all know, is the land of illusion, versed in tricks of make-up and special effects. It’s also a realm of financial practices as shadowy as any espionage thriller. On Tuesday, for example, the investment company Melrose II filed a lawsuit in Los Angeles against Paramount Pictures Corp., claiming that, over the past five years, the studio has paid them zero profits on investments on a slate of films that have earned more than $7-billon(U.S.) at the box office.

Previous columns by Liam Lacey

Melrose II put up $375-million for 29 Paramount and DreamWorks films, including such hits as Mission Impossible 3, Charlotte’s Web, Dreamgirls, Flags of Our Fathers, Blades of Glory, Jackass 2 and all three Transformers films. The lawsuit claims that Paramount “routinely calculates ‘net receipts’ to take in huge returns on one set of books while reporting losses to its profit participants on another.”

As outrageous as that sounds, veteran entertainment-business watchers aren’t likely to be too shocked by yet another example of the longstanding phenomenon known as “Hollywood accounting.” That’s a system wherein studios manage to reduce or eliminate the amounts they must pay in royalties or profit-sharing agreements by making films unprofitable.

For example, a film may be set up as a separate corporate entity, which owes a series of arbitrary overhead costs to the studio – for production, distribution and advertising fees – so that the individual movie’s “losses” actually contribute to the studio’s revenues. Over the years, hits from Forrest Gump to My Big Fat Greek Wedding to Harry Potter and the Order of the Phoenix have, on paper, lost money. In an oft-quoted line from David Mamet’s inside-Hollywood play Speed-The-Plow, in Tinseltown “there is no net.”

Paramount, in a statement released in response to Tuesday’s lawsuit, didn’t deny that it hadn’t paid out any profits. Instead, the studio admonished Melrose II for its impatience: “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. The Melrose II investors have already received almost 90 per cent of their investment back under the financing agreement, and a number of the films in which they participate (such as the successful Transformers 3) remain in the earliest stages of their earning potential.”

This is not the first time Paramount has surprised its “sophisticated investors.” In fact, Melrose II is the third investor group that has filed suit against Paramount and DW Studios LLC (formerly DreamWorks) in recent years. In 2008, a number of investors from Paramount’s Melrose I financing group (Melrose II’s predecessor) sued the studio for securities fraud and are seeking about $30-million in damages. Last year, investors at Marathon Funding filed a suit against Paramount over profits from No Country for Old Men. The case went to trial, although a decision has not yet been made.

Paramount was also involved in one of the most famous breach-of-trust cases in Hollywood history, in 1990, when humorist Art Buchwald sued the studio for not compensating him for his original treatment for the Eddie Murphy film Coming to America. Although the movie made $288-million in revenues, it had earned no net profit. Rather than open its books to scrutiny, the studio paid Buchwald in an out-of-court settlement.

Paramount’s response to the current suit suggests a similar resolution may be reached: “While we intend to vigorously defend this lawsuit, the differences between the parties' positions are relatively modest in amount and we are confident they can be resolved in the ordinary course.”

What that sounds like is an invitation to an out-of-court settlement that allows a perverse system to continue as usual. Over the years, many players, including Tom Hanks, Peter Jackson, and Michael Moore, have resorted to lawsuits to claim earnings on “losing” blockbusters. As it has often been noted, in Hollywood, some of the most creative people are in the accounting department.

OPENING NEXT WEEK

The Artist Michel Hazanavicius’s Cannes hit and current Oscar front-runner is a silent black-and-white delight, set at the end of Hollywood’s silent era. Jean Dujardin stars as the dashing silent-movie hero George Valentin, who can’t adapt to the sound era and is all washed up until a young ingénue, Peppy Miller (Bérénice Bejo), reaches out to him.

The Eye of the Storm Australian veteran Fred Schepisi ( Roxanne, Six Degrees of Separation) directs this comic drama, based on the novel by Nobel Prize-winner Patrick White about an imperious matriarch (Charlotte Rampling) whose wandering children – a playwright son (Geoffrey Rush) and European princess daughter (Judy Davis) – return to the family estate for her death.

New Year’s Eve Garry Marshall’s sequel to his multi-stranded romantic comedy hit Valentine’s Day features a couple dozen TV and movie stars (Katherine Heigl, Ashton Kutcher, Robert De Niro) as they seek love on New Year’s Eve in New York City.

Sleeping Beauty Not the children’s version. A college student (Emily Browning) engages in a strange form of prostitution, in which she is put to sleep while old men lie beside her, in Australian novelist Julia Leigh’s debut Cannes competition film.

The Sitter Jonah Hill is a suspended college student who accepts a job as a babysitter for two bratty kids, setting up the circumstances for a wild night in New York. Director David Gordon-Green, the one-time art house favourite ( George Washington, All The Real Girls) continues his new slacker comedy streak in the vein of Pineapple Express and Your Highness.

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