While we're generally for keeping all-around courtroom bore Brad Grey out of Hollywood's legal spotlight in the future, a source tells Defamer that the Paramount boss and his Viacom overlords could face mutiny from hedge-funders unhappy with the way their studio investment is shaking out. Specifically, we hear the money men behind Melrose Partners — which joined the 'Mount in 2004 under the Sherry Lansing/Jonathan Dolgen regime — may take legal action challenging the underperformance of its $231 million equity fund after Grey came aboard in early 2005.
We can hear the legal saber-rattling from here, but we also know there's precedent — and it favors Wall Street.
In a nutshell, the two-phase Melrose fund underwrote up to 20% of net production costs on films like Mean Girls, War of the Worlds and even The Stepford Wives — titles with wide-ranging but ultimately profitable gross performances based on factors beyond box office (product placement, television licensing, toy deals and more). The Melrose group said that results for Melrose I "collapsed" after Dolgen and Lansing left, with even successful films failing to turn a profit for the investors.
Making matters worse, a source close to the situation tells Defamer that spending on P&A went up almost 50% under ex-Paramount COO Rob Friedman and nearly doubled under Grey; an advisor to the group describes Grey's takeover as "[o]ne of the most stunning exercises in spending (he's) ever seen in his thirty-five years."
A studio source said the results of Melrose II "make Melrose I look like investing in Google pre-IPO," while an investor said: "Since we had no say in what movies were being made, what [we] were backing was Dolgen's conservative risk management strategy which had proven successful in the past. Once he was gone, fiscal controls began to deteriorate and when Brad Grey took over they went out the window altogether."
With Melrose II still in force and Grey apparently tightening the reins of late, we hear the investors reportedly want Paramount to credit a "retroactive reduction in P&A spending" to its account — like, yesterday. Again, this isn't necessarily new: Sony agreed to something similar earlier this year for investors in its Gun Hill Road fund. But Melrose's financial terms aren't specific, and best of all, even Viacom CEO Phillippe Dauman reportedly has told the investors to stand down or face a counterclaim.
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