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Marathon Structured Finance Fund, LP v. Paramount Pictures Corp.

Second Circuit affirms dismissal of fraud claims against Paramount Pictures, finding that defendant has always used wide mix of co-financing strategies in release of its motion pictures, and plaintiffs, who are sophisticated investors, cannot have been misled as to riskiness of venture.

Plaintiffs, a group of motion picture investors, appealed the dismissal of their suit against Paramount Pictures Corp. for federal securities fraud, common law fraud and common law unjust enrichment. The two-judge panel in the Second Circuit affirmed the dismissal after determining that the district court had made no clear errors in its findings of fact.

The case stems from a motion picture finance agreement in which the investors agreed to fund, via Melrose Slate Melrose Investors LLC, the production and distribution of 25 Paramount films released between 2004 and 2006. This slate of films was known as the Melrose Slate. Despite including the surprise hit “Mean Girls,” the Melrose Slate — which also included the films “War of the Worlds,” “Mission Impossible 3” and “The Stepford Wives” — was largely unsuccessful and saddled the investors and Paramount with millions of dollars in losses.

The investors alleged that Paramount said it would continue certain film financing practices that would present lower risk to the investors, including using split-rights deals (Paramount would split the costs of production and distribution of a picture with another studio) and foreign presales (Paramount would license foreign distribution rights for a fixed up-front fee), but abandoned these practices in releasing the Melrose Slate. The investors argued that, because Paramount employed these risk-mitigating practices to a lesser degree than they expected, Paramount had fraudulently misrepresented the riskiness of their investment.

The district court noted that the 25 films in the Melrose Slate did, in the aggregate, utilize split-rights deals and foreign presales to a lesser extent than the average of the 65 films included in the data that was distributed to the investors prior to the investors making their investment. However, the data also showed that Paramount varied its use of these financial practices widely from year to year, the district court pointed out. The district court also noted the investors are sophisticated businesspeople and their claims that they were misled as to the risk of the unpredictable movie business were untenable. Having found no proof of any misrepresentation by Paramount, the district court dismissed the complaint.

On appeal, the Second Circuit affirmed the district court’s dismissal. The court first stated that the investors’ claims for federal securities fraud and common law fraud both required a showing of a misstatement or omission of material fact. The equitable claim of unjust enrichment required a showing of wrongdoing on Paramount’s part, with the only alleged misconduct being the supposed misrepresentation of the investment’s riskiness. The Second Circuit agreed with the district court’s findings that Paramount had often “relied on a mix of co-financing strategies.” In addition, the Second Circuit agreed with the district court that Paramount had engaged in split-rights deals and foreign presales “opportunistically” and “selectively,” which the studio stated, in the offering documents provided to the investors prior to the deal, that it would continue to do. The Second Circuit concluded there had been no fundamental change in Paramount’s business strategy for the Melrose Slate and, therefore, there had been no material misrepresentation made to the investors.