I’ve written about fraud in the entertainment industry before. Last time it was Broadway, this time it’s Hollywood.
The government recently indicted four employees of a California-based movie production company, Gigapix Studios Inc. (“Gigapix”), on charges of mail fraud, wire fraud, and the sale of unregistered securities. One of the defendants was Gigapix President David Pritchard, a former executive producer of The Simpsons.
Before joining Gigapix, Mr. Pritchard had been very involved in the animated entertainment world. Over the course of his career he was the executive producer for a number of successful television programs, including The Simpsons, King of the Hill, and Family Guy.
So, what happened?
In 2006, the Founder/CEO of Gigapix, Christopher Blauvelt, invited Mr. Pritchard to help Gigapix produce films and television programs. Two years later, Mr. Blauvelt and Mr. Prichard began raising money to produce and market an independent film called OZ3D.
To complete this project, Mr. Blauvelt founded a Nevada corporation called OZ3D LLC. In its indictment, the government suggests that Mr. Blauvelt used fundraising for the film as a pretext for setting up OZ3D LLC. He allegedly used the LLC to carry out wire and mail fraud and to intentionally mislead his investors.
From my admittedly unscientific review of recent federal indictments, the government takes particular offense when it believes that you set up an entity to commit a crime. This case is no exception.
The indictment suggests that with the help of Mr. Prichard and co-defendants Cherie Brown and Gregory Pusateri (who are described in the indictment of two of OZ3D LLC’s “closers”), Mr. Blauvelt was able to fraudulently raise and then misuse more than $22 million.
How The Alleged Fraud Worked
According to the government, the defendants’ scheme was a relatively straightforward one: lie to the investors. Starting in 2008, the company’s “closers” began to make aggressive cold-calls to potential investors from lead lists. Once on the line, they would follow a script that contained misrepresentations about everything from the relative risk and urgency of the investment to the portion of investor money that would be used to increase the company’s value.
If they were successful, the closers would earn a substantial commission. OZ3D LLC and Gigapix would then invest a tiny portion of the funds back into the company and spend the rest on salaries and additional leads.
Among the alleged misrepresentations contained in the scripts were:
- Gigapix was a financially successful company when the defendants knew that it was struggling;
- Gigapix was comparable to the animation powerhouse Pixar, when there was no assurance that it would approach Pixar’s popularity or success;
- Investors would realize large returns on their investments in Gigapix or OZ3D at little to no risk;
- A minimum of 65% of the money invested in OZ3D LLC would be used to produce and distribute the OZ3D film, while in reality only 5% of the money went to production and distribution;
- Gigapix and OZ3D LLC were taking the necessary actions to carry out an initial public offering; and
- Most investors realized a return on their investments within 18 months.
The indictment also maintains that the “closers” failed to disclose the fact that the securities they were pushing were entirely unregistered.
Parallel Regulatory Action
The defendants’ failure to register their securities had proven troublesome to them far before the current indictment. In 2008, the Oregon Division of Finance and Corporate Securities issued a cease-and-desist order and levied a civil penalty against Mr. Blauvelt and Gigapix for selling unregistered securities in the state. This order was followed by a number of similar orders from the California Department of Corporations in 2009 and the Alabama Securities Division and the State of Washington Department of Financial Institutions Securities Division in 2010.
The government now alleges that the defendants’ failure to disclose these regulatory actions was a further misrepresentation to their investors.
It’s Only the Early Stages
This case is in its early stages, so it’s not yet clear how vigorously it will be defended and what the defenses will. We also don’t yet know who, if anyone, will turn on another. We don’t know if the government already has a cooperator. It’s just too early to tell.