Viacom: Disappointed in Investors Suing Paramount

The movie industry is renown for being inconsistent and opaque. But now Viacom's (VIA) Paramount Pictures is being sued by a numbers of investors for allegedly misrepresenting the films in which it invested $40 million. Allianz Risk Transfer, Marathon Structured Finance Fund LP, Munich RE Capital Markets New York, and NewStar Financial filed the lawsuit in Manhattan federal court.

The investors claimed they decided to make the investment based on "specific risk mitigation techniques" that the studio said it used but then abandoned. The group now expects to lose its $40 million investment, saying the reason they're not getting their money back is because Paramount didn't, as promised, employ risk-reduction strategies including international pre-sales and what's called insurance wrap co-financing, which transfers the risk of a poor-performing slate of films to insurers.

The $40 million was invested in a series of movies, part of the studio's "Melrose" slate. Studios group films together into "slates" to try to spread out risk, reassuring investors that they're not investing in a single film which could be a hit or a bomb, but rather a broad basket of diverse films, which together have a better chance of success.

Paramount's response to the lawsuit denies the claims, saying that these investors knew exactly what they were getting into: "We are disappointed that these sophisticated investors, who agreed to accept the widely known risks of investing in a slate of motion pictures, are attempting through litigation to undo the bargain they struck in 2004...We intend to establish in court that these allegations are entirely without merit."

So no settlement here. Forty million won't make or break Viacom, but in this economic environment, neither side is going to let this one go.

Disclosure: None