31 Aug Film Fund-amentals: The 1,000 Percent Sure Thing

Recent box office may be slow, but it was a hot summer for the Feds. In June a series of major arrests were made against fraudulent film companies. In each case, the federal indictments read like a primer on boiler room flimflam. The cases are also a sharp reminder that sometimes the smartest people can make the dumbest mistakes.

The two main companies that were charged, Cinamour Entertainment LLC and Q Media Assets LLC, were both running operations that promised investors large returns for movies that were either never made or, if filmed, never really intended for release. Between the two companies, over $25 million is alleged to have been stolen from investors who responded to cold calls that were based on lists purchased from American Information Strategies, Inc., which has also been indicted in the investigation.

What is most interesting about these cases is just how much money was fleeced through a pretty low-brow effort. Basically, it was the same kind of scam used by bogus lotteries (for example, the “Microsoft Lottery“) and phony investment schemes. Half of what they promised sounded half-legitimate, and many of the investors had little experience with investing, so it had to have sounded half-real. Add to that mix the tasty magic of the movies and the deal was cooked. So, too, were the books.

Admittedly, film investment is a ripe zone for fraud. Even at its most mainstream level, the business is a convoluted and loosey-goosey enterprise that more resembles an old Monty Python sketch. Often the financial details move about in a random state with a cash flow that can seem more mysterious than the source of the Nile. The names of various directors and actors and writers come and go in a willy-nilly manner that sounds like a bad game of Clue. It is extremely hard to determine who might be legitimate, but ironically enough it is pretty easy (sometimes) to sort out the offers that are highly dubious.

For example, Cinamour was promising their investors a 1,000 percent return on investment. ROI is a tricky issue in the film business, with average returns varying from between zip to 655,505.52 percent, but the harsh reality is often in the negative category. Anyone promising a guarantee return of anything — least of all 1,000 percent — is being neither honest nor realistic. Many small-budget movies will have an ROI in the minus zone or, at best, a modest 1 to 10 percent. Of course, Paranormal Activity was the film with the 655,505.52 percent ROI, but that kind of success is extraordinarily rare.

Both companies were promising well-known stars for their movies. Not surprisingly, not a single one of the performers named had a clue that they were supposed to be committed to the productions. Names are cheap, especially if the “star” has no idea that you are using their name. Likewise, an actor may have actually given a passing nod to a project but has no intention of going anywhere near the movie. Until an actual legal commitment is made, none can be taken. Of course, this assumes that the actor in question has even been contacted about the movie. The companies under indictment didn’t feel the need to bug the named performers with such testy questions.

Besides, if a major player is interested in the movie, they’ll have signed a letter of intent. The LOI is a funny procedure. Since it’s not legally binding, it doesn’t really mean much. But a written confirmation that a major performer is interested in the project is a major help in attracting investors. Sometimes the most important aspect of an LOI is the degree to which it can help demonstrate the legitimacy of the project (as long as the document is legitimate itself — if the performer has gone so far as to sign an LOI, then that performer should be available for some form of support verification to potential investors).

Which gets to the biggest rule that any potential investor should follow: “Trust but verify.” In the case of the film business, I would suggest taking it light on the trust issue and going big on the verify part. Oh sure, everybody in this business is everybody else’s good friend. No matter. As I once pointed out to some business associates, the reason why people in Hollywood are always hugging each other is that is the easiest way to find the soft spot just before the backstabbing begins. So just remember that everybody is a sweetie and you just want to make a few calls to check things out.

One thing that is interesting to note about the cases against both Cinamour and Q Media is that they were both largely running call centers to find investors. Calling (or e-mailing) total strangers in order to pump them for money is a strange experience. It does happen and it can be basically legitimate (while writing this piece I got such a call that was legitimate). In such cases I can only say “Do not trust and most certainly verify.” To be honest, I would not particularly trust anyone making a cold call, sending an unsolicited e-mail or making unverifiable contact via a social networking site. We all have to work with all forms of the new technology, but we also need to know who the other person is and what they really represent before any actual transaction can take place.

Which is why it is always good to keep the key rule in mind: The minute it is too good to be true and too easy to be believed, then something is wrong.