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.

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.

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."

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.

Filed Under: goodfellas, hollywood accounting, irwin winkler, movie industry
Companies: warner bros.