More Creative Hollywood Accounting Revealed In Goodfellas Lawsuit
from the what-do-you-mean-these-books-look-funny? dept
For years now, we've discussed the somewhat creative nature of Hollywood accounting and how things get set up so that almost no movie ever technically makes a profit. We've shown how a Harry Potter film that brought in nearly a billion dollars still showed an accounting loss, just like Return of the Jedi -- one of the most successful movies of all time. Now, apparently, we can add Goodfellas to the list. The movie, which just had the 25th anniversary of its release, is widely considered a true classic -- one of the all-time greats in film history.As creative as the movie may have been, it appears the accounting may have been even more creative -- at least according to one of the producers of the film, Irwin Winkler, who is wondering what happened to his promised cut of the profits. While the specifics vary, here's a quick explanation of the usual way in which Hollywood Accounting works. Each film -- even when it's a major Hollywood film studio producing it -- is actually set up as its own independent "company." This company really serves no purpose other than to lose money. The film studio gives the specific film "company" a chunk of money as its budget, which is then spent on the production. But, on top of that, the studio "charges" the film company a "marketing and distribution fee." This is not actual money that changes hand (it's all still the same company). It's just a way to create a huge cost to make sure the "company" doesn't have any profits, and thus never has to pay anyone promised royalties that are based on "net profits." As some film producers have noted, you're better off asking for a ham sandwich in your film deal than a piece of the "net" profits.
In this lawsuit, Winkler claims some of that happened... but then says even more happened on top of that:
Plaintiffs produced a hugely successful film for Warner Bros. called "Goodfellas." By contract, plaintiffs were entitled to 50% of its net profits plus 5% of its gross receipts after "breakeven." "Goodfellas" took in more than $275 million at the box office and from other revenue sources. It cost less than $30 million to produce. Yet, Warner Bros. claims that "Goodfellas" made no net profits and actually lost money. Warner Bros. even charged $40 million of "interest" on its $30 million cost of production. But that was only the tip of the iceberg. This was "studio accounting" on steroids. It was also fraud. What Warner Bros. represented as receipts of "Goodfellas" were really only a fraction of the actual receipts. Warner Bros. concealed more than $140 million of its actual receipts. In fact, "Goodfellas" made very substantial net profits. But Warner Bros. quietly pocketed Winkler's share of those profits, plus years of unearned interest on Winkler's money. Winkler only discovered the truth in 2014.It does seem weird that this would only come to light 24 years after the movie came out. The lawsuit notes that WB sent periodic reports to Winkler, but those reports "intentionally misrepresented the receipts of Goodfellas such that he only just found out about the $275 million number. More specifically, the lawsuit alleges that WB only shows 1/5 of the revenue from the home video market -- thus concealing approximately $140 million in revenue. The trick, according to the lawsuit, is that Warner used the fact that it also owned Warner Home Video to move money around, playing a series of accounting games. From the lawsuit:
Warner carried out its scheme by exercising its complete and absolute control over Warner Home Video, its wholly owned home video subsidiary. That total control gave Warner the ability to determine, in its own sole and controlled discretion, what part, if any, of home video receipts from "Goodfellas" Warner would elect to withdraw from its subsidiary and what part, if any, of such receipts it would elect to retain in its subsidiary's bank account, subject to Warner's complete and continuing control. If Warner had simply instructed its wholly owned video subsidiary to pay over to Warner only 20% of the home video receipts from "Goodfellas" and not pay Warner the remaining 80%, in order to exclude from plaintiffs' contingent compensation the 80% of receipts that Warner voluntarily rejected, Warner's conduct would have been a violation of the implied covenant of good faith and fair dealing inherent in every contract.Basically, this is a similar trick to the classic "marketing and distribution fees" paid to the parent studio, but here, the wholly owned "home video" division effectively is charging an 80% fee on all revenue, even though it then turns that money over to the studio anyway. As the lawsuit points out, since it was a wholly owned subsidiary and WB was taking all the money anyway, it could "negotiate" whatever percentage it wanted the home video division to "keep."
But Warner's scheme was even more cynical and devious than that. Warner didn't reject the 80% balance. Quite the contrary. After drawing down the first 20% of home video receipts, Warner subsequently took the 80% balance as well, but tried to disguise and conceal that subsequent receipt by calling it something else. Warner actually withdrew from its wholly owned home video subsidiary 100% of the receipts from the home video distribution of "Goodfellas," less home video costs. But, seeking to deprive plaintiffs (and others with the same contract) of any benefit from most of the home video revenue it received, Warner withdrew that revenue from its subsidiary in separate intercompany transfers and tried to disguise its transfers by giving them a different label. As the home video revenue from "Goodfellas" was received by its subsidiary, it was commingled with other funds, and Warner withdrew from its subsidiary an amount equal to 20% of that revenue, which it reported to plaintiffs as the "total" such revenue. Later, having complete and absolute control of its wholly owned subsidiary, Warner withdraw from that subsidiary an amount equal to the remaining 80% balance of such video revenue, less video costs. That balance, although received by Warner, was concealed and went unreported.
Oh, and then it added insult to injury (or fraud to scam?) by charging additional fees on the 20% for distribution -- which it didn't even do:
And, in computing what it falsely reported as net losses, Warner further reduced the twenty percent of home video revenue it disclosed to plaintiffs by improperly charging and deducting from that twenty percent of home video revenue, substantial "distribution fees," despite the fact that Warner claims it was not even the home video distributor. And Warner even kept all such distribution fees for itself, rather than paying them over to the wholly owned subsidiary that it represents was the home video distributor. In all of their interactions alleged herein, Warner treated its wholly owned home video subsidiary as simply another division of Warner that did, in every respect, as it was told. And Warner treated the home video receipts of its wholly owned subsidiary simply as money to be paid over to Warner after deduction of home video costs.Eventually, Warner allegedly told Winkler that the film was so far in the red that it would no longer even bother to send updated reports, because "there was no realistic chance of 'Goodfellas' ever achieving 'breakeven' or net profits...." That was in 2009. In 2014, Winkler's (new) accountant requested the latest report anyway, and it's in that report that WB revealed the fact that only 20% of the receipts were being counted. As Winkler's lawyers note, this certainly suggests that WB directly misrepresented the earlier reports.
There have been a number of similar suits over the years (hence some of the earlier stories), and they continue to reveal examples of really, really sleazy Hollywood accounting practices. These lawsuits have actually done fairly well in the courts, so it's likely more will be revealed if WB doesn't come up with some way to settle with Winkler to get him to shut up and stop revealing the details of how it makes some of its most successful movies look like they're losing money.
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Filed Under: goodfellas, hollywood accounting, irwin winkler, movie industry
Companies: warner bros.
Reader Comments
The First Word
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Taken straight from the Ford Pinto playbook.
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My hats off to Warner Bros, King of Pirates.
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According to copyright law penalties of $0.25 million/work, pirating $140 million is only 560 works. If we assume HD quality works, that's ~5-6GB an hour. Call the average work 2.5 hours to be generous, so that's 560works*2.5hr/work=1400 hours of content to pirate. 1400hr*6GB/hr=8400GB=8.4TB. With some patience, that should be easily achievable on even a modest broadband connection. Buy a few TB sized drives and you could even keep it all on local storage.
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Warner Bros, King of Pirates.
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If they only have to pay when the get caught and someone bothers to file a suit, they have no incentive to stop this behavior. If executives start going to jail, it stops fairly quickly.
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Same Warner?
If it is, color me shocked!
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As an accountant myself all I can say is they must be employing some shady people if they even think it's a little bit okay to try this.
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Re: Re:it's a thing
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A: Hollywood contracts tend to define "profits" in an artificial and non-intuitive way for purposes of these revenue games. See, e.g., the Nash Bridges lawsuit.
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Assuming the actual profit is still going through proper legal processes (ie taxation) somewhere, nobody has ever picked up on it as a civil matter, but the principals are fundamentally the same as transfer pricing.
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Debt of Gratitude
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Re: Re:"The Wolves of Hollywood Blvd."
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This is one of the reasons that I don't watch movies. They seem to be the product of very organized crime.
Because it gives all appearance of being a standard practice, a RICO investigation would most seem to be most appropriate action for the DOJ to take. Not just against the movie industry, but the music groups as well. Not likely though.
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Knowing what is being done is not the same as having enough evidence to bring a lawsuit.
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Law Abiding Citizen
Seems to me he finally stumbled onto some evidence he could use thanks to his new accountant.
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Suspected? Almost certainly. Had evidence to prove his suspicions were not only correct, but by such an order of magnitude? Possibly not.
"This is one of the reasons that I don't watch movies. They seem to be the product of very organized crime."
Not all movies, just the ones produced by major corporations who are buying laws to make sure people are forced to pay them more money even if they don't watch their products.
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Response to: Anonymous Coward on Sep 23rd, 2015 @ 1:16pm
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Citation? I'd be most interested in seeing figures for how many times the videos have been played (sorry guys, you don't get royalties if nobody plays a video) and how they expect to collect the money (sorry guys, if your label, studio or collection agency are sent the money and get nothing, that ain't Google's fault).
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Should be - sent the money and YOU get nothing (obviously)
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You can google your own citations from here on out.
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That's not how it works, genius. You make the claim, you provide the citations.
So, let's see... an article from 6 years ago. CTRL-F Youtube - 0 results. CTRL-F Google - 0 results. Did I misinterpret your comment as being something to do with Google when it didn't mean to address them specifically?
If so, I apologise. of course artists have been screwed by the music industry as often as they have by the movie industry. That's without question.
But, Google have no place in this conversation other than from the idiot troll above you (who misses no chance to derail the conversation away from his criminal heroes).
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IRS
ALL this paper work to hide money, and the odds are, NO TAXES were paid..
The IRS needs better computing power to TRACK all this stuff, as well as Better programming to decipher, ALL the paper work that HIDES this stuff..
THE IRS was CUT 30% this year..
Working with Old computers, and OLD programs...
They REALLY cant do their job..
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It's still bullshit though
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Join the independent movie/ments.
Instead they're pushed onto vod when a city (or dozen) for what ever reason, doesn't show that movie in theaters.
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Fascism 101 - public communications forbidden
Of course, nobody saw that coming.
Apparently, fascism is just plain invisible to the typical civilian making less than 6 digits annually, and a neon lit oasis in the desert to those making more than 6 digits annually.
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