Hollywood Accounting Rears Its Ugly Head Again: Fox's 'False Testimony' And 'Aversion For The Truth' Leads To $179M Fine

from the this-is-endemic dept

For years, we’ve talked about bullshit Hollywood Accounting, in which the big studios make boatloads of money on films and TV shows while declaring publicly that those works never made a dime in profit. As we’ve discussed, in its simplest terms, the studios set up a separate “corporation” for the film or TV project, which then it charges massive fees — and the sole purpose of those fees seem to be to send all the money to the studio, while claiming that the film or TV project is “losing money” and thus they don’t have to pay out any profits to the actual creative people.

Remember this the next time the MPAA goes around talking about how its mission is to “protect creators.”

Over at the Hollywood Reporter, Eriq Gardner has the latest bombshell example of Hollywood Accounting, which has resulted in Fox being told by an arbitrator to pay $179 million for repeated and obviously intentional dishonesty in reporting on the profits of the TV show Bones:

In coming to a decision, Lichtman describes how some of Fox?s top executives, including 21st Century Fox president Peter Rice and Fox TV CEO Dana Walden (soon to be top executives at Disney) plus Fox TV chairman Gary Newman (leaving Fox) ?appear to have given false testimony in an attempt to conceal their wrongful acts.? According to the ruling, Fox has taken a ?cavalier attitude toward its wrongdoing” and exhibits a “company-wide culture and an accepted climate that enveloped an aversion for the truth.”

What is clear in reading through the details is that this scam works because everyone at the studio is on it. This is not some scam that came out of nowhere. This is the standard operating procedure used by the big Hollywood studios to screw over the people who were actually behind the creative aspects of the show, who were promised a cut of the profits that never arrive.

In this version of the scam, Fox also roped in Hulu, the online streaming platform it owns 30% of. In this case, it used Hulu to suppress the money coming in for the show, so it could show lower income for the sake of hiding profits.

In arbitration, Fox attempted to justify the low license fees that Fox Broadcasting, Hulu and Fox?s foreign affiliates were paying its studio division for rights to air the series.

?Bones was a middling show with middling ratings,? wrote Fox?s lawyers in an opening brief, adding that a higher fee from the $2 million per episode paid would have led to the show?s cancellation.

As Lichtman discovered in the course of the arbitration, though, Fox?s studio executives were never really interested in finding out the series? fair market value.

?We were not allowed to get that information from the network,? testified Walden, who at the time ran the Fox studio but not Fox Broadcasting, when asked about the possibility of finding out what the network paid for similar shows in their middle seasons.

Given that the profit participants had self-dealing protection in their contracts that ?deals must be as good as marketplace deals,? the arbitrator found Walden’s lack of knowledge to be ?either shocking if true, or disingenuous if false,? adding, ?Interestingly, both Ms. Walden and Mr. Newman testified that they engaged in tough negotiations and fought for the [Profit] Participants. However, the evidence belies these assertions. How could they fight if they were not properly armed with the requisite information? What negotiations were there if the information mandated by the contract was not examined, called for or even investigated??

It also comes out that Fox threatened to cancel the show unless those who contractually were supposed to get a cut of the profits signed a special agreement promising not to challenge the self-dealing licensing fees that Fox negotiated. As the story notes, other Fox actions at the time — including signing on the showrunner of Bones at an expensive new contract to continue the show — made it clear that this was a total bluff by Fox just to get the profit participants forced into a position where they couldn’t challenge the sham licensing deals. The arbitrator calls this out directly:

The answer is self-evident: The show was not going to be canceled and there never was an intent to do so. The intent was to continue with the show and at the same time bar any chance for a lawsuit to be brought.

Also, there appears to be significant evidence to suggest that Fox tried to buy off a former executive who had organized a plan to avoid paying out profit sharing, by offering him insanely lucrative “deal” right before he was set to testify about the Bones situation:

And all of this activity was coming as Fox Entertainment?s then-chairman Peter Liguori sent a memo in 2009 to Fox Broadcasting?s then-chairman Peter Chernin outlining a ?legal action plan? to avoid paying license fees covering the full cost of show production.

Shortly after sending this plan, Liguori would leave Fox and would later become CEO of Tribune Media, stepping down in 2017. The ruling reveals something new and startling: After his stint at Tribune and in the heat of this arbitration, Liguori signed a “First Look Agreement” with FX, which provided him contingent compensation far exceeding that of top executive producers in Hollywood. According to IMDb, Liguori’s sole credit is a 1996 film, Big Night. Nevertheless, and with absolutely no public fanfare whatsoever that he now has a deal with FX, he is apparently getting profit points surpassing the industry’s top showrunners.

“Why and how did this come about?” asks the arbitrator. “FX apparently issued no press release reporting its deal with Liguori. When viewed in light of these circumstances, the Liguori ‘legal action plan’ is far from innocuous. If one juxtaposes the First Look Agreement with Mr. Liguori’s testimony at the hearing (where he downplays the significance of the plan itself), it seems coincidental that Mr. Liguori disappears for nine years (from Fox’s radar) and then magically reappears with a First Look Agreement seven months before he is to testify in these proceedings with a deal in hand that most producers in Hollywood have strived to have their entire entertainment career.”

There is a lot more in Gardner’s article, which makes it incredibly clear that this was all standard operating procedure at Fox. Basically, the company appears to do anything possible to avoid an official “profit” on its works, to avoid paying out to the creatives involved in the show who signed on to participate in any profit. From this story alone, the company clearly had a detailed plan to avoid such payouts, and then bolstered it with sham deals, bogus threats, forced contracts, multiple levels of lying, and even potentially buying off a key witness.

Yeah, and Hollywood wants to paint the internet companies as bad?

Perhaps it shouldn’t be shocking that the very same people who rush to the press and politicians to whine about some kids getting a free copy of their tv show or movie online would be in the midst of a massive multi-million dollar scam to defraud actual creators — but it does seem like maybe (just maybe) we shouldn’t be so quick to take those folks at their word when they complain about the internet and “piracy.”

Filed Under: , , , , , , ,
Companies: disney, fox, hulu

Rate this comment as insightful
Rate this comment as funny
You have rated this comment as insightful
You have rated this comment as funny
Flag this comment as abusive/trolling/spam
You have flagged this comment
The first word has already been claimed
The last word has already been claimed
Insightful Lightbulb icon Funny Laughing icon Abusive/trolling/spam Flag icon Insightful badge Lightbulb icon Funny badge Laughing icon Comments icon

Comments on “Hollywood Accounting Rears Its Ugly Head Again: Fox's 'False Testimony' And 'Aversion For The Truth' Leads To $179M Fine”

Subscribe: RSS Leave a comment
That One Guy (profile) says:

'Only WE are allowed to rob creators!'

Perhaps it shouldn’t be shocking that the very same people who rush to the press and politicians to whine about some kids getting a free copy of their tv show or movie online would be in the midst of a massive multi-million dollar scam to defraud actual creators — but it does seem like maybe (just maybe) we shouldn’t be so quick to take those folks at their word when they complain about the internet and "piracy."

If nothing else it nicely exposes that the ‘moral high ground’ they’d like people to think that they are making those claims from is in fact a pit, and they’re making those claims from the very bottom of it up to the ‘pirates’ that sit above them.

Because if downloading a show/movie without paying for it(at that time) is bad, how much worse to deliberately cook the books and/or make bogus claims to avoid paying out fees you are contractually obligated to pay?

JoeCool (profile) says:

Re: 'Only WE are allowed to rob creators!'

Because if downloading a show/movie without paying for it(at that time) is bad, how much worse to deliberately cook the books and/or make bogus claims to avoid paying out fees you are contractually obligated to pay?

Now if we can just get every news outlet around the world to present this fact rather than inane puff pieces and how we need to crack down on piracy.

Anonymous Anonymous Coward (profile) says:

Are the tax dollars lost as well?

I fail to see why the IRS hasn’t taken Hollywood Accounting to task. Think of all the tax dollars left on the table by acquiescing to their perverted notions of profit. I suppose it is possible that the entities receiving those outrageous fees for doing little might pay some taxes, but I bet they have tax mitigation and profit recycling plans for those as well.

That One Guy (profile) says:

Re: Are the tax dollars lost as well?

As I understand it the taxes are still being paid by the individual studios/groups, it’s only when they are added together that the scam leads to a ‘loss’.

So for example Studio A(main studio) makes $100 million, and they’d pay taxes on that.

Studio B(the throwaway) ‘loses’ $150 million, yet still pays taxes on anything that would still be taxable, even though they are’t paying taxes on profits because they (according to the books) never made any.

When it comes to paying the creators/actors their cut of the profits however both books are added together (+100M/-150M), such that technically the studio is down $50 million, the show/movie isn’t profitable, and thereby there’s no cut to pay.

James Burkhardt (profile) says:

Re: Are the tax dollars lost as well?

Accountant here! This is in part due to a mess of things.

The big issue comes two fold. One is that due to the history in their accounting method, the IRS accepts that they have a historical accounting method and by policy accept that they deviate from accounting standards. So the choice to match the film’s revenue to the studio’s marketing and distribution expenses while seemingly strange in normal accounting practices, is accepted.

The second is that the IRS has accepted the practice of double and triple billing time by many professions (Lawyers have a history of billing multiple people for the same block of time such as making a single visit to court to handle multiple court filings and it being considered legal). The way Hollywood generates losses while still making money is by charging full billing for shared expenses between multiple films (assuming they aren’t just hallucinating expenses to bill). This leads to overbilling and questionable losses. I imagine the IRS would enjoy taking this to task. However, the legal fight would likely lead to enough political pressure that it would not make it to a resolution. This is particularly true given the long history of budget hawks cutting IRS enforcement funding and refusing to fund task forces to investigate tax fraud.

The best resolution is more cases like this one, where the practice is questioned by private parties. This sidesteps the political pressure, and might lead to enough judgements with penalties to make the practice non-profitable.

James Burkhardt (profile) says:

Re: Re:

So, outside of forced binding arbitration, the courts still refer lots of cases to arbitration (binding or otherwise) before the case makes its way to be argued in front of a judge. When the issue is not pressing (this is an issue that has been building for years that does not need immediate resolution), courts often prefer to see if the far less costly and far less crowded arbitration system can resolve the issue.

Furthermore, the statistical observation of Arbiters favoring corporations comes from the results found in forced binding arbitration, where the arbiter has a potential financial conflict of interest, as the corporation is likely to try to hire them repeatedly whereas the individual is likely to only use them the one time.

If this is court-referred arbitration on the other hand, the arbiter’s decisions may be reviewed by the court in the case that the dispute returns to the court. This leads to a possible balancing effect, where the Arbiter is aware that reputational damage can occur if and when the court reviews the case.

Thad (profile) says:

Re: Re:

This case won’t set any legal precedent because it was handled through private arbitration, but it does show that talent can sue a studio and win, so I expect to see more suits like this, whether handled through arbitration or civil litigation.

There hasn’t been any news on the Spinal Tap suit in about six months, but it’s still ongoing.

Anonymous Coward says:

I’m surprised you didn’t point out this gem from the article regarding the licensing deal with Hulu:

In his decision, Lichtman then addresses what he considers “perhaps the most shocking piece of evidence related to the Hulu issues. … Fox actually signed both sides of this agreement. Mr. Dan Fawcett signed the Fox Content License Agreement on behalf of both FEG [Fox Entertainment Group] and Hulu.”

Fox had to defend being on both sides of the same transaction.

Chernin, former head of Fox Broadcasting and now one of the most powerful producers in Hollywood, was asked how this was possible. He answered, “I have no idea.”

The arbitrator concludes, “The obvious inferences of self-dealing, conflict of interest and the lack of any arm’s length negotiations leap off the page.”

PaulT (profile) says:

Re: Re:

I’d imagine that the contracts are one-sided so there may not be a great deal to negotiate unless you’re a grade A celebrity and it’s take it or leave it. Also, since most shows either don’t make it out of pilot or past the first season, they’re probably looking more at the up front income rather than how the back end will treat them on the rare occasion it becomes a massive decade-spanning hit.

Anonymous Coward says:

Hollywood has writers’ and actors’ guilds, plus very strong unions, who are paid extremely high wages UP FRONT, and don’t have to worry about "points" since most know never to take them.

The professionals (the ones who look good, act well, and draw large crowds) demand to be treated and paid that way, and Hollywood delivers that. Just look at the mansions they are able to purchase.

Anonymous Coward says:

Arbitration means nothing will change, because none of this was established in a court of law.

Tune in tomorrow when another crew tries the same thing and the arbitrator says "Nope. Favor to the studio."

It’s widely known arbitrators do side with the defense at times. The creators behind Bones got the lucky dice roll.

Anonymous Coward says:

Just as an example of how insane the crooked bookkeeping can get: About 10 or 15 years ago, J. Michael Straczynski the creator of late 90’s SF hit Babylon 5 said that although he produced produced 110 TV episodes for under $1m each and a half dozen TV movies for a few million each, and the series had grossed >$1bn for the studio it was so deeply in the red that there was essentially zero chance that he or anyone else involved would ever see a cent of royalties.

Add Your Comment

Your email address will not be published. Required fields are marked *

Have a Techdirt Account? Sign in now. Want one? Register here

Comment Options:

Make this the or (get credits or sign in to see balance) what's this?

What's this?

Techdirt community members with Techdirt Credits can spotlight a comment as either the "First Word" or "Last Word" on a particular comment thread. Credits can be purchased at the Techdirt Insider Shop »

Follow Techdirt

Techdirt Daily Newsletter

Techdirt Deals
Techdirt Insider Discord
The latest chatter on the Techdirt Insider Discord channel...