Franchise must pay $77 mil for fraud
This article was updated at 7:20 p.m.
Elie Samaha’s mercurial rise as a prolific producer took a major hit Wednesday. A federal jury slammed Samaha’s Franchise Pictures with a hefty judgment, awarding $77 million to German distributor Intertainment.
The fraud judgment against Samaha could potentially impede the producer’s relationship with Warner Bros. Samaha’s output deal with the studio has slightly more than a year to run.
The nine-person Santa Ana jury awarded Intertainment the amount asked by outside counsel Scott Edelman: $115 million minus a nearly $40 million sum written off by Hypovareins Bank, Intertainment’s lending bank. The jury rejected Intertainment’s claims under the Racketeer Influenced and Corrupt Organizations statute, which would have trebled the verdict.
A hearing is scheduled for today to present evidence on punitive damages.
The jury apparently agreed with Intertainment CEO Barry Baeres’ version of the dispute — that Samaha made up inflated budgets on a slate of pictures so that instead of paying 47% of the budget, as the companies’ agreement called for, Intertainment ended up paying most of the costs by itself.
After the verdict came in, Baeres said, “I want to thank the jury for reaching their unanimous decision after hearing the evidence presented over the past nine weeks.”
Franchise lead attorney Bill Price tried to put the best possible spin on the verdict. “This is a pretty amazing result for us. No compensatory damages were awarded against Elie personally and the jury rejected the RICO claim.” (Although the jury found Samaha personally liable for the fraud, it apportioned all of the damages to Franchise. Whether Samaha can be required to pay the damages personally will decided by U.S. District Court Judge Alicemarie Stotler.)
Price said Franchise had not yet decided whether to appeal.
During the nine-week trial, Baeres trod a thin line to appear naive but not stupid. He presented himself as an ambitious but inexperienced rights broker who wanted to expand into film production with his newly public company.
Paying the bill
He testified that in Samaha he believed he was getting a producer who could deliver studio-level talent cheaply. What he did not know was that he was the victim of an elaborate budget scam designed to hide the fact that he was the only one financing the pictures.
Baeres’ biggest challenge at trial was explaining away the numerous red flags he seemingly ignored about the budgets. According to testimony, Baeres saw the real budgets on at least three films and approved the higher sums. Baeres testified that when he asked Samaha about a pic’s two budgets, Samaha would tell him the higher one was real because there was nonbank financing for the pictures.
Because Samaha’s expertise was getting talent like Sylvester Stallone and Bruce Willis to take salary cuts to get their pet projects filmed, Samaha would tell Baeres the higher budgets represented the stars’ salary deferments. Once the litigation started, it was revealed that the deferments were bogus and included hugely inflated numbers on actual costs, such as food service and equipment rentals.
Hardest for Baeres to explain away was a $9 million producer fee on “Get Carter.” Baeres testified that Samaha told him producer Mark Canton got a $6 million fee, and the remaining $3 million went to the film’s other producers.
With constant quips and irreverent asides, Samaha certainly provided the most entertaining testimony of the trial, but ultimately he did not play well with the jury. The Lebanese-born Samaha described his background as dry cleaner to the stars, club owner and B-picture producer.
His one great talent, he said, was getting the celebrities who hung out at his clubs to work for cheap. He said that with his grade-school education and limited access to financing, he was no match in business for Baeres, who has a law degree. He did, however, note that he was very good with numbers.
Samaha’s brash defense strategy was to admit to budget fraud but claim that Baeres was a willing participant in the deception. Baeres’ motivation was variously described as his desperate need for the star-laden films in order to keep the stock price of his company up or alternatively that Baeres was ultimately going to buy Franchise so he didn’t care about the budgets.
At trial, Samaha claimed that he told Baeres he had no ability to finance mid- and high-budget films and that Baeres told him not to worry about the budgets. As proof, Samaha testified that the fraud was so obvious that it couldn’t possibly be a secret.
Samaha said the best evidence was the $9 million producer fee on “Get Carter.” He testified that he told Baeres it was ridiculous but that he had no other place to hide the inflated numbers. Samaha claimed he intentionally sent Baeres the real budgets on the early films. Baeres was furious because he didn’t want his employees to find out about the scam, according to Samaha’s testimony.
Besides the two principals, Baeres’ former second-in-command David Williamson was the chief witness. Testifying on behalf of Franchise, he claimed that he repeatedly brought his concerns about budgets to Baeres’ attention and that Baeres always worked things out with Samaha and approved the budget.
While Williamson provided the most damaging testimony to Intertainment, his credibility was easily impeached. Not only was he a disgruntled ex-employee who had been fired, but he actively participated in the litigation before he was courted by Franchise and switched sides.
Under a five-year output deal, Intertainment was to finance 47% of the budgets of 60 films, including “Battlefield Earth,” “The Whole Nine Yards” and “Art of War.” Because of the phony budgets, Intertainment actually ended up financing 60%-90% of the budgets.
After screening “Get Carter,” Baeres and Intertainment president Stephen Brown claimed that they discovered the fraud, but the company had already put up letters of credit on nearly a dozen more films. At trial, Intertainment claimed it lost $115 million in the phony budget scheme. With the exception of “The Whole Nine Yards,” all of the pictures performed very poorly.
Much has changed since the suit was filed in late 2000. Intertainment, which had the most successful public flotation of 1999 on Germany’s now-defunct Neuer Mart, has seen its stock price plummet. While shares are still publicly traded, the lawsuit is now the company’s major asset. As for Franchise, it still retains its distribution deal with Warners, which runs until November 2005, but now occupies a B-movie, low-profile niche.
Intertainment moves on to a pending arbitration involving Comerica Bank (formerly Imperial) and the two completion bond companies on the pictures.
Intertainment claims that both the bank and the bond companies knew that Intertainment was paying on inflated budgets even though the bank loaned and the bond companies bonded on the real, lower budgets. The financial companies claim they owed no duty to Intertainment and that the distributor could easily have determined the real budgets.