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Arrest speeds up Teuton fund collapse

Investigation unlikely to spill over to other co.s, observers say

BERLIN — The death of Germany’s private film fund industry has come hard and swift.

With tax-sheltering investment funds marked for termination next year, Germany’s fund operators were counting on an end-of-the-year blowout as well-to-do Teutons took advantage of their last chance to lighten their annual tax burden.

Those hopes have been dashed following the criminal investigation and arrest last week of Andreas Schmid, CEO of Germany’s leading fund operator VIP, on suspicion of fraud and tax evasion.

The crisis likely will trigger the premature collapse of the local film fund market.

“It’s a catastrophe for the industry,” says fund analyst Stefan Loipfinger. “With the end of the funds scheduled for next year, operators were expecting enormous business. For investors and financial advisors, there is now a lot of insecurity.”

Industry observers doubt the VIP investigation will spill over to other fund companies, but most agree the damage has been done.

German investment group Chorus, which operates Apollo Media, producer of “Crash” and “Reefer Madness: The Movie Musical,” says it’s having its current fund reviewed by outside legal experts in view of the VIP investigation in order to reassure its investors.

Prosecutors allege VIP defrauded investors who put millions in VIP funds believing they would get a tax break on their investment. VIP did not use their investments in its VIP 3 and 4 funds directly for film production, authorities charge, but rather placed the money with banks in order to secure attractive investment guarantees, which in turn drew large numbers of risk-averse investors.

If the investments were used primarily to secure bank guarantees and not to finance films, investors cannot legally claim a tax deferral as there would be no entrepreneurial risk nor intention to make a profit, say prosecutors.

“People investing in this business should be aware that it’s high-risk,” says Franz Landerer of Victory Media, a production company that last year halted its own media fund operations in view of increasingly stricter regulations. “We decided against bank guarantee funds because we didn’t think they would work.”

Landerer has turned to TV deals and private placement investments for Victory’s upcoming projects, including the historical TV miniseries “Pompeii.”

Private film funds are known for their complicated structures, and savvy tax lawyers have for years been able to adapt to new regulations without drawing the prying eyes of tax authorities.

Yet Schmid has attracted plenty of attention with VIP’s extraordinary success — company has raised more than $900 million since 2001, most of that for Hollywood productions.

He also has become a loud critic of the government’s decision to shut down funds and has spearheaded an initiative calling for their preservation.

By putting himself in the spotlight, Schmid may have drawn undue notice, says one fund expert, adding the launch of the investigation during the government’s drive to gut investment funds may be more than mere coincidence.

VIP withdrew its current funds from the market in the wake of the investigation, saying it would refund the money to investors.

Recent VIP productions include Sony’s “All the King’s Men,” Paramount’s “Ask the Dust,” Millennium’s “Edison,” Lakeshore Entertainment’s “Half Light,” “Lord of War” from Lions Gate and Centropolis’ upcoming “The Girls Next Door.”

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