Hollywood Studio Claims ‘Audit’ Was a Set-Up

LOS ANGELES (CN) - Hollywood Studios International, a media holding company that produced the Oscar-nominated film "The Kids Are All Right," says a firm that claimed it wanted to do an audit for potential investors was actually trying to undermine the studio by acquiring, and misrepresenting, confidential information.

Hollywood Studios sued Squar, Milner, Peterson, Miranda & Williamson LLP, and accounting and financial services group, and Paul Byles, one of its own managers and a managing director of (nonparty) Focus Consulting & Corporate Services, in Superior Court.

The studio says that it believed, "based on Byles' verbal and written representations, that he was acting on behalf of and as an agent for certain current and future investors in Hollywood Studios, including individuals owing fiduciary obligations to plaintiff by virtue of their position in the company, and possible future investors. At all relevant times, Byles was involved in the management of the Hollywood Studios, in that he made certain business decisions on behalf of the company."

The studio says Byles called its CEO in December 2010 and said he was "acting on behalf of a potential investor in plaintiff Hollywood Studios." Byles said he needed to learn more about the studio "to determine future investments by defendant Byles and his principal."

Byles met with the studio's CFO Marcia Allen in December 2010. During the meeting, Allen told Byles that the studio was preparing to hire an auditor "so that plaintiff Hollywood Studios could be taken public in an initial public offering ('IPO') as soon as possible."

Allen told Byles that the studio "was in advanced negotiations with a local audit firm" to do the work, the complaint states.

Byles later told the studio's CEO that he would "need to review the part three years audited financials of Hollywood Studios," and also "suggested plaintiff use an audit firm, defendant Squar Milner, which Byles had used in the past in connection with other businesses. Defendant Byles therefore encouraged plaintiff to cease negotiating with the local audit firm," according to the complaint.

Byles told the CEO that "once the audit was complete, defendant Byles would facilitate further investment in plaintiff's business on behalf of the investor," the complaint states. It adds that in reliance upon Byles' offer of investment, the studio provided him with confidential financial information, "including but no limited to, future film development projects."

In February this year, the complaint states, Byles told the studio's CEO and CFO that he had reached an agreement with Squar Milner for it to do the audit. In March, the studio hired the firm to audit its books for 2008 through 2010. The studio claims it paid more money to Squar Milner than it would have paid the local audit firm.

The studio says that "Byles selected and induced plaintiff to retain defendant Squar Milner not in order to perform an audit for the purpose of ensuring that the companies [sic] books and records were in order in preparation for, among other things, an initial public offering, but to funnel information regarding the company to Byles and those upon whose behalf Byles was acting in order to undermine the value of the company to permit certain current and possible future investors to assert the mismanagement of the Hollywood Studios. This was done in order to permit defendant Byles and/or those he was working on behalf of to further leverage their position and ownership of the company and gain greater control over Hollywood Studios."

In fact, the studio says, after Squar Milner began its alleged audit in March 2011, the studio "learned that members of the 'audit' team were not in fact auditors. Rather, the supposed audit team was in fact a fraud investigation and forensic analysis team focusing solely on plaintiff's cash and equity accounts under the guise of performing an audit."

Despite this, the studio says, "the only communications plaintiff actually received from Squar Milner were very positive and designed to prove to plaintiff that an actual audit was being conducted - telling plaintiff that everything appeared to be in order and that they were not finding any major issues or concerns with plaintiff's financial or bookkeeping and other records.

"Notably, defendant Squar Milner never provided to plaintiff or, to plaintiff's knowledge, even prepared any formal draft or interim report or final audited financial statements.

"Nevertheless, and in spite of the assurances plaintiff received from defendant Squar Milner, in or about June 2011, defendant Byles informed plaintiff that he believed that plaintiff Hollywood Studios had been mismanaged over the past two years. Accordingly, defendant Byles stated that no further investment in plaintiff Hollywood Studios would be made. Byles and those he was working on behalf of refused to provide promised future investments until their 'concerns' regarding the mismanagement of the company were addressed.

"Further, defendant Byles proposed a plan by which he and the investor(s) would gain greater control over plaintiff Hollywood Studios without investing any further money in plaintiff Hollywood Studios. As such, defendant Byles and other would, in effect, take over control of plaintiff Hollywood Studios in order to help 'rebuild' the company going forward.

"Defendant Byles' allegations of mismanagement of the company were knowingly false and made possible by the distortion of information he utilized, which had been improperly funneled to him by the 'audit' team at Squar Milner, which was in truth and in fact a forensic investigation.

"Defendant Byles' withholding of financial support to plaintiff prevented or hindered plaintiff from, among other things, funding existing and future film development projects as initially planned."

The studio claims the allegedly phony audit was made so Byles and those for whom he was working could "manufacture various false and misleading mismanagement allegations."

It claims that its plans for an IPO "have been thwarted or otherwise delayed by virtue of not having had the audit conducted as plaintiff believed Squar Milner would."

The studio says it fired Squar Milner in June.

It seeks punitive damages of more than $10 million for negligence, fraud, aiding and abetting fraud, fraud in the inducement, and breach of fiduciary duty.

It is represented by Michael Avenatti of Newport Beach.

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