Not just in the movies

Con artist David Pritchard defrauded hundreds of people in one of Hollywood’s largest movie scams.

It should come as no surprise that Hollywood, a place where illusions are often sold as reality, should be fertile ground for fraudsters.

Con artists are well aware that many people desperately want to become part of the magic that Tinseltown appears to offer. One way for outsiders to achieve that goal is to invest in a movie, to become producers in an industry where a major hit can bring in a lot of money — and access to the stars, glamorous parties and the big lights that slash through the sky on opening night.

In February, two Los Angeles men who exploited those fantasies were sentenced to federal prison for defrauding more than 700 people out of US$21 million in a movie scheme that sounded like a surefire hit. Christopher Blauvelt, 59, got eight years behind bars and David Pritchard, 67, was given five years after they were convicted on charges that included mail and wire fraud and offering for sale unregistered securities.

The men owned an animation company called Gigapix Studios. The two principal fraudsters employed telemarketers to raise money over a seven-year period for an IPO for the studio.

As part of the scheme, the telemarketers — known as fronters — "used lead lists purchased by the defendants to find potential investors and then used scripts touting the supposed merits of Gigapix," an FBI release said. "When investors expressed an interest, materials about the investment were mailed to them. At that time, the potential investors were turned over to closers, who collected their money [two closers also received jail time]." The callers compared Gigapix to Pixar Animation Studios, whose films had grossed US$8.6 billion as of the end of 2013.

The cherry at the top of this potential opportunity was the announcement that Gigapix was developing an animated version of The Wizard of Oz, called OZ3D. Callers told potential investors that, if they got in on the ground floor, the money they’d make would reach to the ceiling.

Their pitch was essentially, "You’re going to make so much money that your kids and grandkids won’t want for anything," FBI special agent Eric Potocek, who investigated the case, told the court.

Unfortunately, that boast was, like Dorothy’s time in Oz, basically a dream. An overwhelming amount of the US$21 million was spent on the list of spoils common to fraudsters: fat salaries and commissions, fancy offices and other assorted trappings. Almost nothing went toward the production of a film. "Less than 20% of [the raised] funds were spent on the production of movies or television shows," the FBI noted.

Some of the victims were savvy investors, Potocek said, but many were not wealthy people. "They were teachers and secretaries and folks who worked 30 or 40 years to save for retirement." He added that Gigapix "took money from older people and from others who clearly could not afford to lose it. People lost their homes and had their dreams of retiring evaporate."

The Gigapix scam was by no means an isolated example of movie investment fraud.

In late April, an attorney, who was one of six people indicted by the US Justice Department a year earlier in relation to a scam that took 150 investors for more than US$5 million, was sentenced to seven years and three months in federal prison. Samuel Braslau, 54, was also ordered to pay restitution of US$1.6 million upon his release. He was found guilty of multiple charges of mail and wire fraud and one count of making false statements to the US Securities and Exchange Commission.

CBS News (which had gone undercover to investigate the fraud) reported that the scam, which also employed boiler room tactics, centred on a film called The Smuggler, which the fraudsters claimed was to star John Cusack and Joaquin Phoenix. Victims were falsely told that 64% of investor money would be used to produce the film and that investors would be first in line to receive any revenue, according to federal prosecutors. They were assured it was one of the "safest and surest investments" they could make.

The film was never made, no script was completed and not one of the actors was ever approached to participate.

"The people thought they were investing in the making of a movie. In reality they were funding the criminals’ lifestyle," FBI special agent Tim Delaney said. He added that this type of fraud is not uncommon in Hollywood. "We’ve had subjects in these types of cases that have Rolls-Royces, Bentleys, that lived in the Hollywood Hills, that dined at Chateau Marmont and they were living the lifestyle with the money they collected from these investment scams."

As part of its investigation, CBS aired an undercover interview with a man calling himself Gene Richards, but who was actually Gene Cabanas. He tried to get a CBS producer, posing as a potential investor, to put US$30,000 into a film called Corbin’s List.

CBS: What if the movie flops? I mean, will I get anything back?

CABANAS: Yeah. Even if it flops you’ll — you double your money.

CBS: Wow. And you say I can meet [actor] Ray Liotta?

CABANAS: Yes.

CBS: Would you arrange for that?

CABANAS: Yes ... absolutely.

A representative for Ray Liotta told CBS News that Liotta is "most certainly not connected to this film nor has he ever heard anything of this project."

April was a busy time for courts dealing with Hollywood investment frauds. That same month, Christopher Eberts, 49, a former Hollywood studio executive and independent producer, pleaded guilty to 10 counts of fraud and three counts of money laundering charges brought by the US attorney in Peoria, Ill.

"The government claimed that Eberts — who got producing credits on several movies between 1999 and 2009, including [Lucky Number Slevin], The Punisher and Lord of War — took over US$615,000 from a retired firefighter, Jeff Elliott, of Normal, Ill., with the promise he would get a movie made," The Hollywood Reporter said. Elliott wanted a movie based on his book, Rebounding From Death’s Door, about how his son had battled and survived brain cancer.

But Eberts, the son-in-law of construction magnate Ronald Tutor and the nephew of the producer of the movie Gandhi, Jake Eberts, "never made the movie and Elliott was unable to retrieve his investment," the Los Angeles Times reported.

"I found pictures of [Christopher Eberts] on Facebook — in Greece, Spain, St. Barths — and that’s where you really get upset," Elliott told the Times in January. "He’s out vacationing all over the world."

Elliott won a civil lawsuit against Eberts in 2011 and was awarded US$651,753 in compensatory damages and US$500,000 in punitive damages. As part of Eberts’ guilty plea in the criminal matter, the producer has paid back Elliott US$400,000, according to a March 24 court filing, which also said that the producer made restitution.

But it’s not just starry-eyed investors who fall victim to fraudulent investment deals. In March, The Hollywood Reporter told the story of producer Steven Kaplan, who had signed two deals in 2010 for a total of US$300 million from foreign investors to finance 10 films for his company, Rainstorm.

When the investment deal fell through, "Kaplan later learned the foreign company, Fortnom, with which he’d dealt, didn’t exist. Ever since, he’s pursued the investors... who claimed to be Fortnom’s representatives, in a legal conflict that has spanned four years and two continents," The Hollywood Reporter said.

"I feel like I’ve been in a frickin’ war," he told the publication. "There were a lot of days I just wanted to stop, it was so painful."

In March, he won a victory when a California appellate court affirmed the opinion of a trial court that the parties’ private arbitrator had rightly decided in 2012 that the investors owed nearly US$27 million in damages to Kaplan’s company.

Kaplan’s ordeal began when he connected with João Vale e Azevedo, the former president of Portuguese football club S.L. Benfica, in respect to raising money for his production company. Kaplan didn’t know at the time that Azevedo had been convicted in 2002 of embezzling from the iconic club.

Azevedo introduced Kaplan to the men who said they were part of Fortnom. The so-called investors signed performance bonds with Kaplan, which, he said, they later tried to change to their benefit. "They basically were going to blackmail me."

The lengthy legal process cost Kaplan considerably, he told The Hollywood Reporter. "He paid much of his own money and lost films he worked with to other production companies."

It also took a very personal toll. "I would say it had a pretty big impact on my getting divorced," Kaplan said. But, he added, the battle was worth fighting. "There are so many people who think they can screw over filmmakers because we’re following our passions and our dreams. They think they can throw their money around and mislead us. They didn’t count on us."

These cases are but a few examples of the investment frauds that have been part of Hollywood since its earliest days. And as long as Hollywood holds people under its glamorous spell, they will keep occurring. Interestingly, when Blauvelt, the main perpetrator of the Gigapix fraud, was arrested, the man who had shared in US$21 million of ill-gotten gains was living as a transient. That’s an ending Hollywood could turn into a movie.

About the Author

David Malamed


David Malamed, CPA, CA•IFA, CPA (Ill.), CCF, CFE, CFI, is a partner in forensic accounting at Grant Thornton LLP in Toronto.

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