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Trial Over Paramount Flops Kicks Off in NYC

MANHATTAN (CN) - Lawyers for Paramount appeared in court Tuesday to deny that deception played a role in the box-office flops such as "Mission Impossible III" that cost Paramount $67 million 10 years ago.

"If it had done had done as well as 'Mission: Impossible IV,' none of us would be here today," Paramount's lawyer Richard Kendall, of the Los Angeles-based firm Kendall Brill & Klieger, told the court during his opening arguments.

Setting the stage for the court, Kendall noted that "MI3" was part of a bold plan by Paramount executive Sherry Lansing to end the studio's two-year cold streak in 2004.

Lansing's star at Paramount had risen in the early 1990s with a series of successes starting with "Forrest Gump," winner of six Academy Awards, and rounding off with the first "Mission: Impossible," "Titanic," "The Truman Show" and "Saving Private Ryan." Between 2002 and 2004, critics began accusing her of being stingy and avoiding star vehicles.

The Wall Street Journal quoted Lansing in early 2004 as vowing to make "more big event movies" and "move away from mid-range movies unless they're target specific."

Merrill Lynch set up a funding vehicle for other banks, insurance companies and hedge funds to invest in 25 films, and named it Melrose LLC after the avenue where Paramount's Hollywood studio is located.

Despite the arsenal's inclusion of "Mean Girls," a "surprise hit" that would define Lindsay Lohan's career, Kendall said, the more poorly performing films on the slate cost the studio $67 million.

"Mission: Impossible III," which lost $40 million, was the biggest flop among such flops as "Stepford Wives," "The Manchurian Candidate" and "War of the Worlds."

Allianz Risk Transfer, Munich Re Capital Markets New York, Marathon Structured Finance Fund and Newstar Financial estimated in their complaint that they lost $40.1 million.

James Janowitz, who represents the companies for the New York-based firm Pryor Cashman, attributed the losses to the studio's failure to secure foreign presales on the films.

"It's the absence of presales that's key in this case," Janowitz said this morning.

He returned to this point throughout opening arguments.

"We can't control domestic," Janowitz said later. "We could control foreign pre-sales."

For Paramount, the refutation came in the documents that the insurance companies signed.

One submitted to the court came with the disclaimer: "There can be no assurance that Paramount will implement the same techniques or achieve the same results in the future as it has in the past."

Janowitz argued that such a warning was not enough because the studio misrepresented its "risk-mitigation strategy."

Kendall countered that disclaimers such as these could not have escaped the notice of the insurers' team of lawyers.

"These are not penny stocks, and these are not widows and orphans buying these," he noted. "Everyone understood what the structure of the deal was supposed to be."

For roughly three hours of arguments, the attorneys traded blows before U.S. District Judge Katherine Forrest, who is hearing the case without a jury.

U.S. District Judge Thomas Griesa had previously handled the case but reassigned it to Forrest on Monday in an eleventh-hour pretrial turnabout, and denied the insurers' motion for a jury trial.

The switch left both parties with colorful Powerpoint presentations prepared for a jury of their peers, but they tweaked their arguments for a judge more attuned to the dry, contractual details that the case presented.

Kendall nevertheless commented that the case came down to a more fundamental truth about the film industry.

"This business is an unpredictable business because, as any movie executive well knows, you can think on Thursday that you've got a hit and on Friday night, when you get the returns, find out that you were wrong," he said.

The team of insurers plans to call Philip Fier, who provides financial and strategic consulting through his company Focus Advisory Services, to support their argument that Paramount's foreign investment strategy hurt investors.

Paramount contends that Fier twisted the historical data the studio provided investors.

"If we did exactly what we did in the historical dataset, we would have lost more," Kendall said.

Speaking of the investors, Kendall said: "They did the deal. They took the risk. They're going to have to live with the risk that they took."

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