2/2/2011 4:32:00 AM,
LOS ANGELES (CN) - Merrill Lynch and Bank of America claim they were scammed for $90 million by a director of the Regent Group of Entertainment Companies, who used bogus movie license and distribution agreements to get loans. Merrill and BofA claim that Stephen Jarchow and his string of companies falsely represented they would use the money to buy film rights and advertising, but funneled it into Jarchow's pockets.
The Regent Group "finances, produces and distributes theatrical and television motion pictures," according to the 57-page Superior Court complaint.
In 2005 and 2006, Merrill Lynch advanced $50 million on two loan agreements to Regent's affiliates, for them to acquire film rights and "to finance the print and advertising costs in connection with the exploitation" of the film rights, which were considered collateral, the complaint states.
Regent's entities promised to sublicense the film rights to get licensing fees, which would be used to pay back the loans, according to Merrill and BofA.
Merrill says it based its loans to Regent on licensing contracts with third parties. But it claims that Regent and its affiliates "conspired to create sham license and distribution agreements to give the appearance that the films being financed were contractually entitled to a fixed revenue of a certain amount."
To create the façade, Jarchow "formed undercapitalized shell entities" which were used as parties in the bogus agreements, according to the 57-page complaint.
From April 2008 through September 2009, Regent's affiliates "knowingly created unreasonable, inflated - and possible fake - release strategies, financial projections, marketing strategies and film distribution budgets," which they sent to Merrill and a former collateral agent, Wells Fargo, to support its funding requests, the complaint states.
It continues: "Defendants knew that these marketing and release strategies and distribution budgets would never be adhered to or executed and that they were inappropriate for the scope of the, more often than not, low-quality straight to DVD film titles, but submitted them to Plaintiffs anyway."
Merrill and BofA add that Regent's affiliates may have submitted funding requests for the same films under both loan agreements.
Regent's affiliates managed to finagle tens of millions in loan proceeds, which they used to line their own pockets, Merrill and BofA claim.
Regent's entities also licensed a substantial amount of the film rights to a cable company called Here!, of which Jarchow is chairman of the board, then extended its payment obligations from 18 months to up to 20 years, without Merrill's authorization and despite the fact that the company was in default on payments, according to the complaint.
Merrill and BofA say that Regent's affiliates did not pay back the loans, and that Merrill and Wells Fargo commenced foreclosure proceedings on the collateral. In October 2010, Jarchow and other Regent executives "attended and participated in the foreclosure sales and submitted a bid on behalf of Here!" according to the complaint. Merrill ultimately bought the collateral with "two separate $3 million credit bids," it says.
Merrill Lynch and BofA demand damages from Convergent Funding, Studios Funding, Regent Releasing, Regent Studios, Regent Worldwide Sales, Here Networks, Family Media Home Entertainment, and Liberation Productions International, and from Jarchow, for fraud and breach of contract.
Jarchow, of Los Angeles, is described as owning "a substantial portion of WEH LLC, a holding company that was the ultimate parent of each of the corporate defendants except Here!" Jarchow also owns "substantial equity interest in the parent of Here! Here Media Inc.," of which he is chairman of the board, and was an officer of and the "substantial equity owner" of Family International and Liberation International," and "a substantial equity owner of the Regent Group," according to the complaint.
Plaintiffs' lead counsel is Daniel Murphy of Loeb & Loeb.