Over the past couple of years I have reviewed several dozen creative financing schemes.
Major studios, independents, first-time producers and well-respected producers all have been approached with a wide variety of financing arrangements.
Usually these transactions are virtually impossible to complete either because most reputable banks, critical to the structure of most of these transactions, shy away from involvement in these transactions based on a past history of most being a kite or money launder or the transactions are actually cons or they just don’t work.
Unfortunately, convincing a producer not to waste any more time or money on the matter is virtually impossible when faced with the potential of financing a film.
A client recently sent me a solicitation that he had received. The solicitation was very bold in asking for $ 7,500 up front as their “retainer” to fund films. The brochure made their organization look very impressive by citing several obscure, but somehow familiar, entertainment transactions in which they were supposedly involved.
Whether they were or not actually involved in the alleged transactions is unknown. Generally, due diligence would reveal that either the projects don’t exist or they were not in fact involved in the projects they said they were involved. Nevertheless, my client wanted to find out more.
Chief financial officers of major studio, respected independent producers and first-time producers have all been approached with these types of transactions. Notwithstanding advice from legal counsel and others, they continue to pursue them until it appears that nothing will in fact come of it.
Why? Money! And that’s what con artists feed upon. Probably more than any other industry, motion picture producers will look at just about any transaction in the pursuit of funding.
These producers also have significant resources at their disposal, both in terms of clout and reputation with banks and others, as well as financial resources of their own, in which to fund “expenses” of the con artist and/or make a “matching” cash investment, the ultimate swindle.
What does the con artist look for in these “transactions”? If it is a money launder, the money launderer needs the reputation and bank introductions that a reputable producer, studio, etc. can offer.
As a con or scam, the con artist is interested in everything from expense advances (which you’ll never see again), to actually conning the producer out of major investment funds.
In its simplest form, the con artist supposedly represents a trust, wealthy Arab sheik or anonymous entity who will loan funds via an international arbitrage.
In one format, certificates of deposits, bonds, letters of credit or other instruments are purchased in a high interest rate jurisdiction (10% interest rate) and immediately sold in a low interest rate jurisdiction (6% or 7%) yield a spread of 3% or 4% on the transaction.
More complicated transactions might involve transfers to the producer’s bank followed by borrowing against the bank account, which borrowed funds are used to margin the acquisition of U.S. Government Treasury Notes (with only 5% down), which notes are then bifurcated between the principal and the interest.
Allegedly, after the dust settles on these transactions (usually 48 hours), the investor has his entire money back plus a 1% or 2% profit while the producer has 2%, 3% or 4% of the transaction available to make his film. Assuming $ 100 million is used, there’s enough to make a low budget film.
If you are approached by an investor who is investing their own cash in a simple, straightforward transaction, either the cash is there or not.
On the other hand, if you are approached by someone who”represents” others, or “controls” the funds of others, even if this person was recommended by someone you trust, red flags should go off.
How can you discern whether these transactions are real or not?
First, obtain professional assistance. Enlist the aid of your lawyer, accountant and banker. Most of the large banks have anti-fraud squads who may be aware of the individuals involved in these types of transactions.
Second, don’t be afraid to ask questions.
Third, if something still doesn’t make sense or seems illogical, it probably is a fault in the plan.
Last summer a client came to me with a transaction in which a group of midwesterners would put up 80% of the film’s financing against my client’s 20%
My client’s 20% had to be “escrowed” before they would put up their money. Further inquiry revealed that the “escrow” was with the “financial consultant” himself.
No matter how hard I pressed the financier that the funds must be set up in a formal escrow with a bank or other licensed, bonded entity, the financier held out that their structure was the only way in which it could be done.
My client fortunately dropped out before they had actually transferred funds, when they saw that another colleague who had transferred funds had not, after three months, closed on the 80% coming from the investors.
Fourth, see if they can perform. Verify cash deposits on hand.
If the transaction is going to involve the investment of extremely large sums of money, have them transfer a fraction (5% or 10%) as a good faith showing of their ability to actually conclude the transaction.
Many times the transactions will sound easy and safe. Theoretically, they may work. But is it worth spending $ 5,000 to $ 10,000 on legal bills, accountants, investigators, etc., as well as $ 10,000 to $ 30,000 on expense advances to the financier to find out? I think not.
However, it’s certainly not in a producer’s nature to turn their back on the potential to finance a film, or make a quick buck. Every bunco cop will tell you that a con job relies on this human trait.
Eventually, the producer will find that the financier either needs seed capital from the producer to show good faith to the investors, needs expenses advanced, or that no reputable bank will participate in these transactions for fear that the scheme is either a kiting scheme, laundering of drug money or other illicit activity. At this point, count your losses and move on.
Greg S. Bernstein is a partner with the Los Angeles headquarters of the law firm of Gipson Hoffman & Pancione.