Weinstein Co. fell victim to $ 130 million fraud lawsuit for bankrupt company (exclusive) – The Hollywood Reporter


On Thursday, a trustee at a bankrupt home video company filed a lawsuit against The Weinstein Company, accusing the mini-large film and television studio for committing fraud and demanding the return of more than $ 130 million that has allegedly been siphoned off from the company since 2007.

The lawsuit was filed in California bankruptcy court as part of the ongoing dispute of Genius Products, LLC, which distributed works of ESPN, Discovery, IFC Movies, Sesame Workshop and others through big box retailers like Target and Wal-Mart. Genius was forced into involuntary bankruptcy in 2011 by World Wrestling Entertainment and two other companies with over $ 8.5 million in debt.

But according to the Chapter 7 admin’s new complaint Alfred Siegel obtained by Hollywood journalist, in 2011, Genius was already insolvent thanks to “onerous and unilateral” agreements imposed on it by TWC. The trial essentially accuses Harvey Weinsteinto treat Genius as his personal piggy bank and to turn the other licensors of ESPN, Discovery and Genius into unsecured creditors.

“We believe that the claims of the trustee are seriously flawed and will not succeed”, replies Alain friedman, attorney for The Weinstein Company, who claims his client lost tens of millions of dollars on Genius. “The story the trustee is trying to tell in the complaint does not match what actually happened.”

Weinstein formed Genius in 2005, according to bankruptcy papers. That year, he obtained the exclusive rights to distribute Weinstein’s home videos in the United States. In 2006, Genius will reform into an independent company and, under an operating agreement, TWC held at 70 percent.

Independence, however, was a “sham that was intended to and misled others,” the lawsuit says, as Weinstein would have exercised full control over Genius and dictated the terms of the distribution agreements that did not create ” no practical possibility “that Genius could operate profitably.

As the litigation progresses, the “fictitious” charge of independence will be challenged by the defendant. Friedman says the distribution terms “were approved by Genius’ fully independent board of directors before Genius and The Weinstein Company went into business together. They were also fully disclosed in an SEC public proxy statement that was sent to all Genius shareholders, who then approved the very terms that the trustee is now challenging nine years later.

Genius earned a distribution fee of five percent of net revenue on Weinstein’s films, and according to the lawsuit, those fees are paltry compared to a market range of 15 to 17.5 percent for other distributors. If a Weinstein movie title performed better than expected, Genius’s fees were retroactively reduced to 3%, the lawsuit adds.

Friedman again underlines what Genius management has touted to shareholders. According to a 2006 proxy statement, the company wrote, “We believe the distribution agreement is a valuable and highly sought-after right and, when combined with our employees, management team and existing distribution operations. , will help transform the distributor into a large and well-recognized entertainment distributor.

If this statement was forced, it will surely be considered as the trial progresses. Genius was also said to have been at a disadvantage in other ways in his relationship with TWC, like the requirement to keep around 40 employees working exclusively on Weinstein titles at a cost of $ 2 million per year. The lawsuit also states that despite an exclusive right to distribute Weinstein titles, it was not permitted to distribute them in Blu ray and other new formats. Additionally, Weinstein is said to have crippled the home video company’s business by being allowed to review the deals Genius has made with others. According to the lawsuit, “TWC exercised its veto power to require the debtor to spend resources on unprofitable Weinstein securities instead of profitable third-party securities. “

In summary, through his control on both sides of the transaction, Weinstein dictated the terms of the distribution agreement so that almost all of the revenue from the domestic video distribution of the titles would flow to Weinstein, while the almost all of the expenses of the distribution were paid by the debtor, “the complaint states.” Weinstein’s plan had the effect of using the distribution agreement to transfer to Weinstein, due to Weinstein’s ownership of the debtor. , the debtor’s money by charging the debtor above market rates in the distribution agreement instead of the net income that might be earned if the distribution agreement reflected market conditions and industry standards.

All of this would have lasted two years, until 2008, when Genius was strapped for cash. What happened next was a purchase agreement that transferred majority ownership to the investment firm, Quadrant Management, Inc., allegedly so that Weinstein could “get out of the relationship … at a cost. minimum for Weinstein ”. Genius also signed an “onerous” modified distribution agreement, and later, a restructuring agreement that “no independent distributor would have made”.

All the while, Genius was bleeding money with nearly $ 20 million in reported net losses for 2006, nearly $ 19 million the following year, and nearly $ 90 million for the first nine months of 2008. At that time, he had $ 11 million in assets versus $ 195 million in liabilities. Genius ceased operations in September 2009 when it sold its distribution rights to Vivendi Entertainment.

Until then, according to the lawsuit, “in order for the debtor to operate at a loss to facilitate Weinstein’s scheme, the debtor needed third parties to extend credit, whose borrowed funds could be used to make transfers to Weinstein and pay the debts. overhead. “

“To obtain these borrowed funds, the debtor has entered into distribution agreements with third party licensors on market terms,” the lawsuit continues. “Under the distribution agreements, the debtor was required to pay the product on a timely basis to the licensors after retaining the negotiated distribution fee. Instead, the debtor used the proceeds to make transfers to Weinstein and pay overhead, turning third-party licensors into unsecured creditors who weren’t paid in a timely manner.

Siegel and his lawyers at Robins Kaplan have $ 130,459,452 which was transferred by Genius to TWC after December 27, 2007. Complainants now claim that the allegedly fraudulent transfers are avoidable and collectible. TWC also faces claims for alleged breach of fiduciary duties.

Friedman says the reality is far from TWC use Genius as a piggy bank.

“In fact, the Weinstein company was the biggest loser of them all,” he says. “He wrote off tens of millions of dollars owed to him by Genius under the distribution agreements. And the Weinstein Company had nothing to do with the management of Genius for almost three years before it went bankrupt and Quadrant Management controlled Genius in early 2009. ”

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