the MGM affair

non e ben trovato, e vero

summer reruns period, and while going through my bottom drawer for things to post, I remembered that when “Lying for Money” was published in Italian (in an absolutely gorgeous looking edition by Il Saggiatore press, under the title “L’arte della Trufa”, I was asked to write a couple of extra bits for an Italian audience. The following story hasn’t appeared in English before, but it might have been one of my favourite examples ever of a control fraud.

---

While Charles Keating was dividing his time between his financial frauds and his public puritanism, two Israeli filmmakers were operating on the opposing side of the culture war, while progressively making a worse and worse name for themselves. Cannon Films attracted a bad name in artistic terms, due to the plethora of ludicrous, poorly acted films they put out, classics like “Enter The Ninja” and “Electric Boogaloo” which tended to feature either copious female nudity, Chuck Norris or both. And they attracted a bad name in financial terms too, for their sharp accounting practices, and their habit of pre-selling distribution rights at high-pressure sales meetings in Cannes on the basis of an outline script or a poster, then delivering a film significantly worse than promised because they ran out of money. If you were around in the 80s and ever wondered why Superman IV: The Quest For Peace was so bad, that’s why. But this is not the story of Yoram Globus and Menachem Golan. It’s the story of the man they eventually sold their failing film company to, Giancarlo Paretti.

Paretti was a minor player in the tangentopoli scandals of the period; if you are ever tempted to believe stories of how aggressive and cynical Hollywood people can be, recall that they sold one of their crown jewels to a fraudster who was not even a second tier player by Italian standards. In fact, Paretti was not just a bag-carrier, but a bag-carrier of the second order – he was the junior partner of Florio Fiorini who was himself, although a board director of ENI and a conduit of money to the PSI, basically a bag carrier to the real political and financial players. Before he got into the film business, Paretti’s main media industry experience was running “Diario”, a series of newspapers run as partnerships with the PSI which had tiny circulation, but significant revenues from selling advertisements to businessmen who wanted political favours.

But even a relatively minor player can do a lot of damage if he manages to get control of a corporate vehicle through which large amounts of finance can be raised; that’s the nature of control fraud.

And Hollywood filmmaking, as an industry, was particularly vulnerable to control frauds, because the relationship between lenders and borrowers is unusually skewed. Movies – even really bad ones – cost a lot of money to make, and once started they are hard to close down or take possession of. It is much more difficult to separate the borrower from the business; a half-built office block can be finished by another contractor, but it’s much more difficult to remove a half-shot film from its producer and director. And time is rarely on the lender’s side; films have shooting schedules and realease dates, so if you delay a decision you might destroy all hope of getting your money back. For this reason, film financing is a specialised business and not one for the faint of heart. In the 1980s, the king of Hollywood bankers was the man who invented the pre-selling distribution rights trick, the Californian representative of French bank Credit Lyonnais, a Dutchman called Frans Afman.

Hollywood is also a people business. Personal relationships are vital, and as the song goes, “There’s No People Like Show People” when it comes to having complicated relationships with one another. People give each other gifts all the time to demonstrate how important they are to one another. Sometimes quite valuable gifts, if they want to really emphasise a point. It is, or was in the 1980s, a place where things might happen that would be regarded as obvious and massive conflicts of interest anywhere else. As Michael Ovitz, the super-agent who founded CAA, used to put it, “no conflict, no interest”.

Paretti and Frans Afman first met at the Cannes Film Festival, where he immediately made an impression. First, by blatantly staring at Afman’s female colleague while pointing to his groin, and second by offering to “triple your salary” if Afman were to work for him while also remaining as head of film finance at Credit Lyonnais. It was an extraordinary approach; apparently it took Afman several minutes of conversation to realise that this was an attempt at a bribe. To his credit, he turned down both the offer and the proposal to finance Paretti’s acquisition of Cannon Films. This proved to be a good career move in the long term, but a bad one in the short term – Paretti met his boss the next day to overrule the decision and subsequently got Afman fired.

Georges Vigon, the global head of lending at Credit Lyonnais, had performed heroically during the Algerian War, but did not live up to the same standards as a banker. Despite commissioning a report into Paretti’s background which detailed his previous convictions for fraud (among other things, crudely adding zeros to a cheque to convert a $3,000 deposit into a $3m one), he allowed the Italian financier to take control of Cannon Films, a company which Lyonnais already had such a large exposure to that the regulators were telling them to reduce it.

Perhaps he saw something in Giancarlo Paretti that inspired trust. Perhaps that something was the copious flow of trips to Bora Bora and gifts of Picasso sketches which Paretti lavished on him. Perhaps it was the time that Paretti took him aside at a party, into a room with Jacques Griffault (Afman’s replacement) and gave them each a share certificate in “21^st Century Distribution”, a company he owned and whose debts were guaranteed by Cannon Pictures^[1]. Or perhaps it was the way in which Paretti hired Vigon’s ultimate boss, Jean Naville, and turned him into a lackey forced to negotiate with his former colleagues. Whatever it was, Vigon’s judgement was quickly and thoroughly corrupted.

Paretti’s first act as the new owner of Cannon Films was to change its name to Pathe Communications, in preparation to make a takeover bid for the venerable French company of that name. This move caused mighty and possibly intentional confusion^[2], as the bid was blocked by the government, probably more out of national chauvinism than any real appreciate of what the bidder was like.

Despite this failure, the now misleadingly-named Pathe was still in the mood to buy more assets. And after appointing Alan Ladd Jr as the local executive face of his operations (son of the cowboy actor famous for saying in the film Shane that “a gun is a tool ... as good or as bad as the man using it”), Paretti set his sights on one of the most famous studios in Hollywood, the roaring lion of MGM.

Why MGM? Partly because it was available; a marginal financial performer, it was known that Kirk Kerkorian, the corporate raider who owned it, was willing to part with it at the right price. But Paretti needed to buy something big and unprofitable. It had to be big because as we have seen, a control fraud relies on the size of the asset base you control. And it had to be unprofitable, because people don’t tend to sell big and profitable operations.

The lack of profitability did not concern Paretti because a control fraudster profits by draining the asset base and pumping a company full of debt, rather than by diverting its profits. And drain the asset base was what Giancarlo Paretti did; even when all he owned was the relatively small Cannon/Pathe, he had it pay for his family to live in a mansion in a wealthy LA suburb, and for three models on “acting” contracts whose theatrical talents extended only to pretending that they enjoyed sexual intercourse with a short, fat, vulgar criminal. He did business out of the former offices of legendary director Dino De Laurentiis whose troubled film company he helped; this friendship earned him an entry into the Hollywood social scene. It also earned him a punch in the balls from De Laurentiis’ daughter when he tried to grope her thigh at a party.

Credit Lyonnais was, from the outset, under pressure to reduce its lending to the film industry in general and to Cannon/Pathe in particular. Griffault and Vigon had already begun to use the accounting tricks discussed in our section on Parmalat in Chapter 5 to conceal debts, lending to companies like 21^st Century Distribution which were legally separate but actually controlled by the same party. They did not necessarily want to lend any major proportion of the US$1.25bn that Kirk Kerkorian wanted for MGM. So they encouraged Paretti to be creative, and to raise money elsewhere. This turned out to be a mistake.

Paretti did not have much of a way with investors. One of his deals fell through after he referred to the oil billionaire Marvin Davis as “a big, fat, rich, dumb Jew” while on a drive to the airport, unaware that Davis’ driver spoke Italian. But he managed to raise half of the purchase price by pre-selling the television rights to the MGM library to Time Warner, easing the passage of the deal by another gift of a Picasso sketch to Time Warner’s chairman, Steve Ross. The other half of the deal was to be financed with an investments from Paretti and Florio Fiorino’s other companies, including the giant hotel chain Melia.

There were numerous problems with this financing structure. For one part, although Paretti was fond of waving around a Melia brochure listing all its hotels and real estate to show what a rich man he was, he didn’t actually own them. Years before, Paretti and Fiorino had acquired the Melia company, but had financed the deal by pre-selling all the real estate to another hotel operator. Five minutes after the paperwork was signed, all they owned was the Melia name (which itself was licensed to the hotel purchaser), and a near-bankrupt travel agency. The money that Credit Lyonnais lent to Melia to finance its investment in the MGM deal was as good as gone the moment it was lent.

And for the other part, Steve Ross was a cautious man who liked to insure his valuable artwork. In the course of the insurance appraisal, he found out that the Picasso that Giancarlo Paretti had given him was a fake. So were most and possible all of the Miros, Picassos and other priceless artworks with which Paretti had bribed the Californian film and finance communities. Time Warner pulled out of the deal, so Credit Lyonnais had to pick up that half too. The total lending, including sums already advanced to finance Cannon/Pathe, was getting toward $2bn, well beyond the approval limit of any one manager or team, and so Vigon had to refer the loan to head office.

But Paretti, a lifelong bag-carrier for crooked PSI financiers, was also able to refer things to his own head office. It is not clear and has not been proven exactly what happened, or what money changed hands, but in later court testimony, Florio Fiorino stated unambiguously that the Italian foreign minister at the time, Gianni DeMichelis, made representations to the French government which linked Credit Lyonnais’ support for the MGM deal to a large purchase of equipment for the Italian railway system from a French manufacturer. Whatever happened, Credit Lyonnais financed the deal and its then chief executive, Jean-Yves Haberer, got himself significantly more personally involved in the transaction than was good for his subsequent career.

When the deal was completed in 1990, just as the walls were closing in on Charles Keating, Alan Ladd Jr^[3] was sent on a charm offensive to reassure Hollywood that the new Italian owner was a man of substance, and the matter of his having been found guilty in absentia and sentenced to three and a half years by a Naples court over frauds related to the Diario bankruptcy was in some way technical or trivial. This confidence building work was somewhat undone by the decision to appoint Valentina Paretti, the owner’s 21-year old daughter with no relevant experience, as the chief financial officer of MGM and to fire most of the audit and accounting staff responsible for monitoring the studio’s outgoings. It is not a difficult deduction to guess why Giancarlo might have done this; however, it breaks one of the key principles of the control fraud and he paid the price for failure to respect this principle.

That principle is that a control fraud needs to be a theft carried out by honest means. The payments themselves made to the fraudster are made through legitimate commercial transactions; salaries, bonuses, dividends, mansion rentals, contracts for actresses who never act, and so on. It is always the overall scheme, and particularly the financing and growth of the controlled entity, which constitutes the fraud. If you start simply grabbing the money, then two things happen. Firstly, it becomes easier to spot you, as you are behaving less like an executive and more like a criminal. And second, by removing your attention from the actual business, you start to lose the vital dimension of control.

It was the second issue that sunk him. As it went into the final phase of Paretti’s looting, MGM started getting sloppy with making its payments. Dustin Hoffman and Sean Connery failed to receive their fees on time. The film labs began to refuse to process the negatives of Thelma and Louise until their bills were settled. And eventually someone, probably an agent, decided it was time to get an aggressive lawyer involved.

As we said in Chapter 2, if you have a payment come due and you fail to make it, then you are bankrupt, in the legal sense, and somebody can take you to a bankruptcy court. Hollywood lawyers do this all the time, without necessarily meaning any great harm by it or intending to see the process through to its conclusion – in a town where people are always alternately kissing and screaming at each other, it’s one of the few ways to unambiguously indicate that you want to be taken seriously this time.

The trouble is that things tend to come out in bankruptcy filings; in particular, lists of creditors are compiled, and lists of assets, and lists of the previous and current fraud convictions of principal actors. It rapidly became apparent that Credit Lyonnais had lent many times the legal limit on its exposure to a single borrower, and had done so to a financier who was currently a fugitive from a prison sentence, and to a company which had made very large unauthorised payments to investment vehicles of doubtful provenance but suspicious ownership.

Credit Lyonnais realised that they had to do something, and called in their loans, effectively removing Paretti from control and repossessing his film studio. Alan Ladd Jr, presumably reflecting on his father’s famous line about a gun being as good or bad as the man that uses it, immediately turned on his old boss and denounced him, joining with enthusiasm the litigation which was to consume the next five years over who actually owned MGM and who had the rights to Cannon/Pathe’s global assets.

It ended badly for everyone; the sooner you got out of this story, the better your reputation survived. Paretti and Fiorino went to jail, Credit Lyonnais went bust and Kirk Kerkorian ended up owning MGM once more.As Michael Ovitz said, reflecting on the affair thirty years later, “In Hollywood, when somebody shows you a Picasso, it’s either worth a lot more than they say it is, or a whole lot less”.

---

^[1] In later litigation, Vigon and Griffault tried to claim that they thought the stock certificates were joke party favours.

^[2] There was at least some pretext for doing so. One of the reasons Cannon Films was in such bad financial trouble was that Golan and Globus had overextended themselves buying a chain of cinemas in England. One of the assets that came with the cinemas was the rights to the film library of Pathe’s English-language output over the previous century.

^[3] Having been a loyal employee at Cannon/Pathe, Ladd was made the chief executive of MGM, responsible for its operations and for maintaining a good facade about town. The job had previously been tentatively offered to Ronald Reagan, but was decisively turned down.