SEC inquiry could complicate China biz

Scrutiny comes as Hollywood makes inroads

Just as Hollywood is making inroads into China’s fast-growing film market, bizzers are fretting that the Securities and Exchange Commission’s inquiry into the majors’ dealings with government officials could put a speed bump in expanding business relationships in the world’s most populous nation.

Studio sources confirmed Wednesday that the majors had received letters of inquiry from the SEC and that the informal probe appeared to focus on possible instances of bribery in connection with getting pics approved as part of China’s strict quota system for film imports.

But one studio source with knowledge of the letter cautions that the inquiry was a “request,” not a demand, indicating that the SEC is in the very earliest info-gathering stage.

The SEC and reps for Disney, Fox, Warner Bros. and several other studios declined comment on the letters, whose existence was first reported Tuesday by Reuters. Sources indicated that at least some of those contacted were likely to comply with the request for information.

While industryites downplayed the significance of the SEC action at this stage, execs expressed frustration that business dealings were being scrutinized shortly after China agreed, after heavy lobbying by the MPAA and Vice President Joe Biden, to expand the number of non-native films allowed into the country from 20 to 34.

Legal eagles said showbiz shouldn’t be overly concerned about the probe, at least for now.

Letters of inquiry are often “innocuous,” according to one attorney who has received such letters on behalf of his clients but declined to comment publicly.

“I think it’s important to underscore that, while it is one thing for the SEC to send a letter to a studio, it is quite another were the SEC to issue subpoenas,” the attorney said.

The Obama administration has recently stepped up its enforcement of the Foreign Corrupt Practices Act, which bars U.S. businesses from bribing foreign government officials in connection with business opportunities. Some speculated that the letters of inquiry could be a “fishing expedition” on the part of the feds.

“I don’t think anything’s going to stop the push to do more deals in China,” Peter Shiao, founder and CEO of Orb Media Group and chair of the U.S.-China Film Summit, told Variety. “The people who are pushing the hardest are the MPAA, (and that’s) happening in an above-board way. So nothing’s going to stop the government from pushing, or the trade organization.”

Harvey J. Goldschmid, a law professor at Columbia U. and a former SEC commissioner, said that letters of inquiry from the agency are usually aimed at gathering basic facts, such as whether a company does business in a certain region.

While China is seen as the single biggest opportunity for the Hollywood studios to boost pic profits, formidable barriers to entry remain. Getting pics approved for release with state film regulators can be extraordinarily difficult, and knowing the right people is critical.

“Given the choice between getting the business corruptly and not doing business, (Congress’) answer is, ‘You have to give up doing business,'” said Goldschmid.

By some measures, China’s levels of corruption across all industries surpass those of other nations. According to the nonprofit org Transparency Intl., China ranks second-to-worst on its 2011 Bribery Index, which measured the world’s 28 largest economies and their likelihood to bribe businesses and government officials. (Russia, another major emerging market for the film biz, ranked 28). China also ranks 75 out of 182 on the org’s overall Corruption Perceptions Index for last year.

But that hasn’t discouraged Hollywood from trying to break into a rapidly expanding theatrical market. The expansion of the foreign film quota was a sign of the growing importance of the film biz within China. State officials also increased the B.O. revenue split with distribs from 17.5% of total grosses to a maximum of 25%.

That takes advantage of China’s booming box office, which surpassed $2.1 billion in 2011 and could grow to $5 billion by 2015, according to some estimates. China currently has around 6,000 movie theaters, more than quintupling over the past decade. Local entrepreneurs and foreign investors are expanding that number rapidly, and the Chinese government has estimated that around 20,000 screens will be in operation by 2015.

Among the recent Hollywood hits in the territory has been Fox’s “Titanic” 3D retrofit, which earned $67 million in six days after its April 10 opening.

While censorship and regulatory matters can be difficult for U.S.-based companies to navigate, they’re not the only issues. In recent months, Hollywood has been besieged by Chinese groups claiming to want to invest in the film business, but few deals have been assembled that fund U.S.-based productions or ventures.

On the other hand, there’s a steadily increasing flow of foreign coin into China to beef up its film infrastructure. Deals like Shanghai-based Oriental DreamWorks and Disney’s pledge to lense “Iron Man 3” in China are helping to nurture local operations. That fits into the Chinese government’s mandate of building its entertainment industry with help from overseas partners.

“With more commerce comes more scrutiny,” Shiao said of the SEC’s inquiry. “It’s part of what anyone would expect to happen. Regulation tends to follow major sectors of commerce. These kinds of inquiries are healthy because (if) this kind of behavior is no longer condoned on either side, people won’t expect it as much, and people won’t be as pressured to even think about it.”

Shiao, along with Orb, has advised on numerous U.S.-China ventures and runs a film fund for U.S.-Sino co-productions. While the exec says he’s aware that corruption exists in China, he hasn’t experienced it.

“I’ve never heard of bribery on the studios’ parts,” he said. “But then again I’ve never asked.”

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