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Suits Fly as a Multifilm Deal Sours

German Film Firm Claims Franchise Pictures Took It to Cleaners for $75M -- Lawsuits Fly as 60-Picture Deal Turns Sour

Daily Journal - May 1, 2001 Part One of Two By Ross Johnson Special to the Daily Journal

LOS ANGELES After 30 years in the business, film distributor Tom Bernard thought he had seen and heard it all. Of course, for most of those 30 years, Elie Samaha, chairman of Franchise Pictures, wasn't in the film business.

A flamboyant, former nightclub owner and dry-cleaning magnate, Samaha struck a deal in 1999 with a German film financing and distribution company that transformed Samaha into a major Hollywood player.

Less than two years later, the deal unraveled. Both sides exchanged lawsuits and went to war in the international press and the trade journals. Samaha, responsible for the midlevel hit "The Whole Nine Yards" and massive misses like "Battlefield Earth," admitted that how much his movies cost to make depends on which budget he shows you. His German partner, Intertainment Licensing GmbH, said those varying budgets allowed Samaha to steal $75 million of its money.

"There was no fraud," Samaha said, "except for the lies that Barry Baeres told his shareholders."

elie_samaha.jpg

Barry Baeres: Before the Makeover

Rudiger "Barry" Baeres is the chief executive officer of Intertainment, the Munich, Germany-based public company that distributed Franchise films in Europe. Intertainment filed a lawsuit Dec. 21 charging Samaha and Franchise President Andrew Stevens with conspiring with Imperial Entertainment Group, a subsidiary of Imperial Bank, to steal the $75 million. That same day, Franchise sued Intertainment for breach of contract and promissory fraud.

On April 19, U.S. District Judge Carlos Moreno ordered all litigation among Intertainment, Franchise and Imperial Bank stayed while he sent Intertainment's claims against Imperial Bank to arbitration. The numbers and charges are surprising even for jaded industry observers like Bernard, co-founder of Sony Pictures Classics, distributor of "Crouching Tiger, Hidden Dragon."

"There's a lot of petty graft in the film business," Bernard, who is not connected with either company, said, "but you don't just walk in and steal $75 million. I don't get it."

That may be because the flood of stories surrounding the dispute haven't detailed how Franchise allegedly pulled off the scheme. The principle players and a close check of the lawsuits reveal what happened.

The story began in May 1999 at the Cannes Film Festival when Samaha, a B-movie producer who had been in the film business for only five years, signed an agreement with Baeres to make 60 films in a five-year period. The films were to have an aggregate cost of $1.25 billion. Baeres co-founded Intertainment in 1993 with David Williamson, a fellow-lawyer with Long Beach firm of Johnson & Vorwerck.

The deal that Samaha struck with Baeres would quickly establish Franchise as the most prolific independent production company in Hollywood. Samaha's company produced 25 films during the next 22 months. (In comparison, the larger MGM "studio" released eight films in 1999.)

It was quite a coup for a B-movie producer better known for his West Hollywood nightclub, The Roxbury, and his Celebrity Cleaners chain. Before the deal, Samaha made films with midlevel actors like Eric Roberts and Keifer Sutherland. After the deal, he was working with stars like Bruce Willis, John Travolta and Sylvester Stallone.

The deal also would make Baeres the darling of Frankfurt, Germany's exploding Neuer Markt, the German version of Nasdaq. Soon Baeres would be a billionaire, at least on paper. Like most deals that sound too good to be true, the arrangement between Franchise and Intertainment quickly unraveled.

Under the contract, Intertainment was to put up to 47 percent of the "bonded budgets" of the Franchise films in exchange for European distribution rights. Intertainment had almost no creative control over the films produced and hardly any control over the cash flow of the Franchise productions once Intertainment signed off on the bonded budgets of each film, Stephen Brown, head of Intertainment's American office, said.

In the independent feature film business, production lenders like Imperial Bank almost invariably require a company like Franchise to purchase a completion bond to cover budget overages. This bond insures the bank against the possibility that the film will go over budget or risk being left unfinished and undeliverable.

The bond company provides this guarantee in return for a premium based on the estimated cost to complete the film. Franchise's films were bonded by two companies.

Intertainment claims the alleged fraud was committed on 10 films, including "The Whole Nine Yards," "Battlefield Earth," "Get Carter," "The Pledge," "3,000 Miles to Graceland" and "Driven."

According to the lawsuit, Franchise submitted two line-item budgets before the films in dispute were made. The first budget, the "high" one, went to Intertainment.

That budget bore the signature of one of the bonding companies and a line producer or other film executive from Franchise. Intertainment relied on the signature sheet of the bonding company representative when it calculated its 47 percent financial obligation for each film.

Franchise, according to Intertainment's lawsuit, was then almost invariably bound by the license agreement to shoot the film with a budget that would meet or exceed the bonded budget.

The license agreement then would be assigned to Imperial Bank, which counted on the license agreement with Intertainment for security against its production loans to Franchise.

Intertainment claims that Franchise submitted a second, much-lower budget, to Imperial Bank. This second budget also was signed by a bonding company representative and, usually, by a Franchise-paid line producer. The "low" budget, or bank budget, was the one on which Imperial based its production loan and was the budget Franchise used to make the film.

Because it saw only the high budget, Baeres claimed his company based its guarantees on inflated numbers. He cited the Franchise film "Get Carter," released in October as an example of the Franchise scheme.

Intertainment signed off on a $63.6 million budget for the Sylvester Stallone action film. But the actual budget was $44.6 million. Imperial Bank knew of the two different budgets but did not inform Intertainment, Baeres said.

Under that formula, Intertainment overpaid by $8.9 million for the European rights to "Get Carter." The overpayments on the other nine Franchise films bring the total to $75 million, according to the lawsuit.

"They didn't reveal these two separate budgets," Intertainment lead counsel Scott Edelman said. "Imperial actively allowed Franchise to engage in this fraudulent scheme, concealed the fraudulent scheme from Intertainment and, on at least two instances, signed inflated budgets knowing that such budgets would be used to mislead Intertainment," the Intertainment lawsuit said.

The view from Samaha's side is very different.

Franchise and Imperial Bank committed no fraud, according to Samaha and Franchise lawyer Larry Stein of Alschuler, Grossman Stein & Kahan. They said Intertainment is trying to forestall lawsuits from its shareholders, who lost hundreds of millions when Intertainment's stock plummeted from a post-deal high of $138 to a low of $4 in December.

Samaha and Stein said Franchise was willing to dismiss its lawsuit against Intertainment if Intertainment submitted its claims to binding arbitration. They blamed Intertainment for dragging out the litigation. Franchise was willing to pay up to $35 million and unwind the 60-picture deal in order to settle the Intertainment suit, according to both men.

Some industry experts, like Bernard, found Intertainment's charges hard to believe.

"There is no way that Intertainment was cheated out of all this money unless one of its own was in on the fraud or if Intertainment totally abandoned all the checks and balances that independent film companies are supposed to have," Bernard said.

Samaha said Baeres knew exactly what was happening. "He always knew the budgets were high," Samaha said. "He wanted them high so that his stockholders would think the films were more valuable than they were. He pumped up the cost figures of the films when he sold them to European subdistributors."

According to the Intertainment lawsuit, Franchise had made "Battlefield Earth" for $44 million after telling Intertainment in February 1999 that the budget would be $55 million. But in a March 17, 2000, letter to his Intertainment shareholders, Baeres pegged the budget of "Battlefield Earth" at $80 million.

According to Samaha, he didn't do two different budgets for each film; he did four.

"The highest one was the one we showed Intertainment," Samaha said. "Next came a lower one that we showed the bank. Then we would show the director [of the film] a lower budget than that, 'cause you never want the director to know how much fucking money you really have to spend on the movie. And the lowest one would be what we showed the [talent and crew] guilds."

(When a film's "going-in" budget is under a certain figure, talent guilds give producers a discount.)

If that sounds a little on the shady side, it's not, Samaha said.

"Can you tell me how much a film is gonna cost before you make it, my friend?" he asked.

Samaha pointed out a rebate clause in the Franchise-Intertainment 60-picture deal that was supposed to enable Franchise and Intertainment to settle on money owed once the films were completed. Intertainment said that it was unable to execute the rebate agreement because Franchise never submitted a final cost report on any of the films.

Samaha cited a very simple reason for Baeres' suing him over inflated film budgets: "Barry Baeres is not man enough to tell his stockholders the truth."

At his Sunset Strip office, the hyperactive dealmaker claimed he is often frustrated by outsiders' lack of understanding of the vagaries of the independent-film business.

Samaha's loan officer at Imperial agreed. "Asking if a producer is honest is not a fair question," Jared Underwood said before before Imperial's inclusion in the lawsuit. "A producer has to say a lot of things to get a film made," Underwood said.

As long as Intertainment's stock was pricey, Baeres didn't care about the budgets that he was getting from Franchise, Samaha said.

But since October, media stocks on the Neuer Markt have crashed.

Now that Intertainment stock is worth $6 a share - down from the high of $137 a share shortly after the 1999 Cannes deal - Baeres needs a fall guy, Samaha said.

When it was released on the Neuer Market, Intertainment stock traded at $18 a share. After the Franchise deal and the subsequent rise in the stock price to $137, Intertainment's market capitalization was $1.3 billion.

"Barry told me I could bond these films for whatever I wanted," Samaha said.

His much-publicized case is simply not his fault, he adds.

"I'm trusting and take people at their word," Samaha said. "That's my biggest problem."

DEATH OF A DREAM DEAL

A landmark financing and distribution agreement put Hollywoods Franchise Pictures and Germanys Intertainment AG on the industry map in 1999, but the deal quickly unraveled. Heres a snapshot of how it happened:

DOUBLE BUDGET?

Intertainment AG claims that Franchise Pictures provided a high budget when seeking financing, but used a lower budget when making a film. This breakdown comes from Intertainments lawsuit, and includes the domestic revenue from each film.

'HIGH' BUDGET SUBMITTED TO INTERTAINMENT/ACTUAL BANK BUDGET/U.S.BOX OFFICE

"Whole Nine Yards" $41 million $24 million $57 million
"Battlefield Earth" $55 million $44 million $21 million
"Art of War" $38 million $26 million $30 million
"Get Carter" $63 million $44 million $15 million
"The Pledge" $55 million $35 million $21 million
"3000 Miles to Graceland $61 million $47 million $16 million

THE UNRAVELING
It took about two years for the collapse. Here's a blow-by-blow account:
* February 1999 Intertainment AG goes public. Stock price on the German exchange is $18 per share.
* * May 1999 Franchise Pictures and Intertainment agree to make 60 films in a five-year period. Intertainment agrees to provide up to 47 percent of the budget for each film in exchange for European distribution rights.
* * June 1999 Intertainments stock price rises to $138 per share, producing a market capitalization of $1.3 billion.
* * May 1999 to October 2000 Franchise produces 25 features films including The Whole Nine Yards, Get Carter, Battlefield Earth, The Art of War, The Pledge and 3000 Miles to Graceland.
* * Oct. 20, 2000 As reports of a budget dispute between Intertainment and Franchise surface, Intertaiments stock price drops to $72.
* * Dec. 18, 2000 Franchise President Andrew Stevens walks out of settlement negotiations with Intertainment in Munich, Germany. Both sides tell conflicting stories about what happened during those discussions.
* * Dec. 21, 2000 Both Franchise and Intertainment file lawsuits in U.S. District Court.
* * Dec. 22, 2000 Intertainments stock price plummets to $4 per share.
* * Feb. 20, 2001 Intertainments lawsuit is expanded to include Imperial Bank.
* * April 19, 2001 U.S. District Judge Carlos Moreno orderes all litigation stayed. He sends Intertainments claims against Imperial Bank to arbitration.
* * Today Intertainments stock price is $6 per share.
*

* Tomorrow: A Long Night in Munich for Andrew Stevens, and How Settlement Negotiations Left Everyone Crying foul.

********** (c) 2000 Daily Journal Corporation. All rights reserved

barry baeres.jpg

-----------------------------------------The New Barry Baeres: The chairman poses for his portrait in Intertainment's 1999 initial offering to shareholders.