Hollywood celebrities, becoming financially gun-shy after a variety of troubles, are investing their wealth more conservatively than they did just a couple of years ago.
A major impetus has been the revision of the income tax laws, which turned many much-abused tax shelters into dead ducks. Many have seen their tax writeoffs reversed when the principals were found to be concocting tax frauds.
Another factor has been a pervasive attitude of caution toward the stock market since the crash in October, 1987, and toward such tarnished high-risk investments as second trust deeds and limited partnerships.
Also, a parade of criminal cases against business managers and investment handlers for actors and actresses accused of defrauding their clientele continues to serve as an object lesson on the subjects of trust and greed.
A large cast of celebrities was prominent among the investors in the infamous Home-Stake Production Co., an oil drilling tax shelter that went sour in 1974, as well as in a variety of similar ventures in the ensuing decade.
They involved an assortment of investments--cattle feeding and breeding, vineyards, commodities, computer leasing and theatrical productions. Lower U.S. taxes, in effect, subsidized the investments by sheltering the other income of investors and resulting in a lower tax bracket.
In the quiet wake of all that hurly-burly, real estate now stands out as an investment in vogue.
Purchased Costly Homes
Despite eye-popping prices, Southern California real estate is considered in Hollywood circles to be a prudent investment. Buying a personal residence in Malibu, Beverly Hills, Bel-Air, Brentwood or some other preferred locale is top priority for many of the glitterati.
Some celebrities who recently purchased homes with multimillion-dollar price tags in the Los Angeles area include actors Tom Selleck and Eddie Murphy, producers Norman Lear and Giancarlo Parretti, singer Pia Zadora and her husband Meshulam Riklis and the friends who bought a house for former President and Mrs. Ronald Reagan.
The action is not limited to Southern California. Actor Sylvester Stallone, who has a Malibu house and also invests in fine paintings, built another home on Hawaii's island of Kauai. Actors Michael Douglas and George Hamilton have bought extra homes in Aspen, Colo.
Commercial real estate has long been a popular investment for entertainers. For instance, legendary actress Greta Garbo is said to have bought business property on famed Rodeo Drive in Beverly Hills decades ago. In recent times singer-producer Lionel Ritchie bought an office building on Rodeo.
Selleck, who himself is a principal in a Los Angeles real estate business with his brother and father, teamed with comedian Richard Pryor in a group that bought 50% of a new office building in Pasadena not long ago.
The stars invest in other things, too. Some of their well-regarded professional business advisers put special emphasis on liquidity these days. They say they lean toward Treasury bills, as well as blue chip stocks and tax-free municipal bonds, to conserve their clients' assets.
Fail to Report Fraud
Nevertheless, plenty of prominent personalities still gravitate to business managers who go the riskier route in search of splashy gains. Some of these clients end up losing big.
A long history of criminal prosecutions and civil lawsuits is a reminder that the entertainment scene is replete with business managers who are not careful about what they put their clients' money in. Sometimes it is their own pockets.
Now and then one of them ends up in the criminal courts. Just this month, business manager Mick Schneider pleaded guilty to bilking actor Tom Hanks and three other show business figures out of more than $500,000.
Robert Youngdahl, who for years has run an entertainment task force for the Los Angeles County district attorney, said show business people often fail to report fraud.
"You will find a group with the same business manager and none will tell anyone (of being victimized) until someone breaks the code of silence," said Youngdahl, a deputy district attorney. "When they are taken, it deflates their ego. They want to move on. They go out and get another business manager the same way. How? Intuition."
The typical victim, he said, is the person whose income comes in spurts, which has major tax consequences. He tells his manager to run out and "get me an investment," which leads to abuse, Youngdahl said.
Hollywood luminaries who have lost big in tax shelter and other frauds--or who had business managers who were convicted of cheating them--make up an impressive list. It includes:
Doris Day, Johnny Carson, Steve Allen, Woody Allen, Dick Cavett, Bill Cosby, Mort Sahl, Shirley Jones, David McCallum, Norman Lear, Bill Murray, Sidney Poitier, Henry Mancini, the late Elvis Presley, Andy Williams, Walter Matthau, Alan Alda, Candice Bergen and Buddy Hackett.
The backdrop of Hollywood investing is a widely held view that performers are mostly a naive bunch, unwilling and unprepared to handle their own money. Some actors put the most trivial financial housekeeping duties in the hands of managers--even to the extent of having a weekly allowance doled out to them.
"Business managers wave a wand and, for 5% they save you time and they say that with the savings in taxes it won't cost anything," prosecutor Youngdahl noted. "It's hard to beat that pitch."
Attitude of Pessimism
Business managers for entertainment celebrities commonly decline to talk on any basis to the press. However, Arnold Bernstein, a Hollywood business manager whose former clients include John Travolta and the late Truman Capote, agreed to talk about investing on condition that none of his present clients be identified.
"All of our clients have the same general attitude of pessimism, compared to the optimism of 1 1/2 years ago," Bernstein said. "Most stock market investments have gone incredibly conservative. Clients have gone from entertainment stocks to bond portfolios. If we were having this conversation then, we would be talking about high-flying stocks."
Bernstein is enthusiast about Los Angeles area real estate, despite "outrageous" prices.
Another business manager, Ralph Goldman, said he believes in plenty of liquidity in an entertainer's account, with higher-yield T-bills and other instruments providing flexibility.
"From the the long-term investment point of view," Goldman said, "I am still very strong on Southern California real estate and only Southern California real estate."
Recent tax law changes have made the old freewheeling tax shelter investments "basically nonexistent," Goldman commented.
Meet With Accountants
Charles Balis, a New York investment manager for Hollywood types, said his clients "sit down with their accountants and lawyers just like any other person" and determine how much to put into stocks and bonds. He said he represents Mel Brooks and his wife Anne Bancroft, as well as Robert Blake and "some of the top news broadcasters."
Entertainers tend to spend big when they earn big money and keep on spending when income goes down, Balis said.
Many creative people are highly intelligent--"we are not dealing with gorillas," he said--but they are often emotional and not business-minded. "It is not the business of actors to make these kinds of judgments. Our work involves a lot of trust."
That, say others, is where many actors come a cropper.
"They are right up at the top of the sucker list," said Los Angeles entertainment lawyer Bruce Jeffer. "They are known as prize pigeons. They coo all the way to the bank."
The wide range of those who manage their affairs includes extremely professional business managers who "do a lot of due diligence" in checking out investments; but there are "unfortunately a lot" of another kind, said Jeffer--who wryly calls them "the guys who do investments out of a phone booth."
Jeffer said too many performers do not check out the credentials of their business aides and wind up with "the happy boys who congregate around stars and get them into very trendy investments."
Needing shelter for great floods of income, actors used to get into highly leveraged deals so they could get tax writeoffs, the lawyer said. Many make no provision for saving, he added. If they make $1 million, they spend $1.2 million.
"Some have no net worth at all," Jeffer said. "It's amazing."