Swindler’s List: Seven Tips for Avoiding the Scam in Hollywood

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Mistake Five: Falling for an apparently indecipherable, complex loan

Fans of Popeye are familiar with Wimpy’s classic con, in which he obtains free meals with a promise to “gladly pay you Tuesday for a hamburger today.” An age-old film loan scam applies this same tactic. Many a desperate filmmaker has fallen prey to the lure.

The representative of a private lender tells you, the producer, that they want to lend you all of the money necessary to produce your film, but you need to first contribute $X into an escrow account that can only be controlled by the private lender. Often the escrow term includes an escrow fee that isn’t refundable, even if the money is returned for reasons unrelated to the producer’s failure. In any event, the private lender tells you that this transaction needs to occur immediately; you have little time to consult lawyers or negotiate terms.

The rushed closing is always blamed on some hard-to-understand banking principal or tax deadline—so if the lender does not immediately invest the money, they will lose the money. Often they haven’t even read the script or required a detailed budget breakdown vetted by their own experts. These lenders do deals that no other well-established film lender will make, but they claim to have a different business model. Also, they give you the name of five other producers who are currently being funded this same way, and if you don’t sign the deal now, the fund may have to withdraw their offer to you because their money is in such high demand.

Sometimes the money received from one filmmaker is used to make good on the money the lender promises to another filmmaker—a classic Ponzi scheme— allowing these lenders to have temporary credibility while enlarging the amount of money they take in.

Another variation has the loan racking up high interest rates with a payback due sooner than the normal time period for which revenue returns from the film’s distribution could be expected. If payback on a portion of the loan is not made to the lender, even while the film is still in pre-production, then the lender need not make any further disbursements of the loan and, in fact, can call in the entire outstanding amount and take over the copyright of the producer’s film before production even begins.

Mistake Six: Eschewing a completion bond and not assigning an educated executive to monitor investor money

Completion bonds may be costly, but there’s a reason why every sophisticated investor demands them. Completion bond companies ensure that each film has a bona fide properly funded budget. They also ensure that producers and key crew members are qualified and capable to produce the film on time and on budget.

In the event a completion bond simply cannot be obtained for the budget size or other reasons, a smart investor will insist on having a trusted key person on set for the sole purpose of monitoring the production and protecting the investor’s investment (in much the same way that a completion bond company would monitor the production).

Mistake Seven: Skimping on the services of a competent attorney and accountant

Spend maximum time and effort to research the people hired to be line producers, production accountants and production counsel. Saving a few dollars on these key positions is a recipe for disaster. A weak or non-observant individual in any of these three positions is likely to wreak havoc on the production in terms of cost overruns. Some conniving line producers will intentionally render the lines on the budget for legal counsel and production accountants so low that the production can only afford sheer novices in those positions, instead of astute watchdogs. History teaches that these productions are prone to being ripped off by those very same line producers, who are all too happy to have their misdeeds go undetected. Consider losing pricey music before going without a streetwise and well-educated lawyer and accountant, looking to protect your film and your investors’ money.

The vast majority of people in the film industry honestly want to make quality films and live up to their contractual commitments. But no industry is immune from conmen. Legitimate producers need to be ever-vigilant to protect both their investors’ money and their own work. Both can be vulnerable to fall in the wrong hands. Be diligent, alert and surround yourself with intelligent, trusted people. MM

Feature Image: Robert Shaw, Robert Redford and Paul Newman in George Roy Hill’s 1973 The Sting. Photo courtesy of Universal Pictures/Photofest.

This article appears in MovieMaker‘s Winter 2017 issue.

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1 Comment

  1. Ritz Tampos

    June 20, 2017 at 4:16 am

    Scam is everywhere nowadays. No matter how careful we are, they are there. This, however, is very helpful in avoiding being scammed. Great article!

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    Thanks.

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