Melrose II fund sues Paramount over profits

Studio says it's paid back nearly 90%

Paramount Pictures faces fresh accusations of “Hollywood accounting,” as investors in Melrose 2 — a fund that co-financed pics including the “Transformers” franchise — have sued the studio, demanding a jury trial over allegations of hidden profits and fraud.

In their lawsuit, filed Tuesday in Los Angeles Superior court, financiers claim they have not yet seen a profit on their nearly $375 million investment in 29 films dating back to 2006. Suit cites pics including “Mission: Impossible III,” “Charlotte’s Web,” “Dreamgirls,” “Flags of Our Fathers,” “Blades of Glory,” “Jackass 2” and all three “Transformers” films.

Complaint, which also names DreamWorks as a defendant, also says those investors were entitled to a 25% copyright interest in up to 30 films and agreed to fund a “pro rata” amount of the production costs.

Paramount responded in a statement late Tuesday, claiming the Melrose 2 investors have already received almost 90% of their investment back.

“Paramount has complied with its obligations to Melrose 2 and has been forthcoming in the audit process,” studio spokesperson Virginia Lam stated. “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. … 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.”

While the lawsuit does not specify a dollar amount, the contested sum is believed to be in the tens of millions. Plaintiffs claim that Paramount has made more than $600 million from Melrose 2-funded films and that financiers are entitled to a quarter of a reportedly $150 million deal inked by DreamWorks/Par and computer company Toshiba.

“Melrose 2 is an important investor and copyright owner and we’re going to fight to make sure that they get their fare share of these profits,” Kirkland & Ellis’s Mark Holscher told Variety. The law firm is representing the Melrose 2 group, which is mainly comprised of a handful of New York-based investors.

“On Melrose Avenue, at the oldest existing film studio in Hollywood, Paramount Pictures Corp. routinely calculates ‘net receipts’ to take in huge returns on one set of books while reporting losses to its profit participants on another,” the suit alleges.

This is not the first time Par’s co-financing vehicles have accused the studio of cooking the books.

In 2008, a number of investors from Par’s Melrose I financing group sued the studio for securities fraud and are currently seeking about $30 million in damages.

And last year, investors in Marathon Funding filed a suit against Par over profits from “No Country for Old Men.” A trial over the matter has wrapped and the parties are awaiting a decision.

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