Judges Freezes Mario Kassar’s Carolco Shares : Entertainment: The film studio chairman, who bought the stock at a premium, was rebuked for enriching himself at the company’s expense.
A Los Angeles judge froze 2.2 million Carolco Pictures Inc. shares owned by company Chairman Mario Kassar and rebuked the executive for enriching himself at the expense of the highflying independent film studio.
Kassar was also limited in his ability to draw funds other than salary from Carolco or to exercise warrants to purchase an additional 1 million shares under a preliminary injunction issued Thursday by Superior Court Judge John Zebrowski.
The action came at a hearing in a shareholders’ suit challenging Kassar’s sale of 3.4 million shares to Carolco last October for $13 a share, or about $45 million. The price was more than 60% higher than the approximately $8 a share that Carolco stock commanded on the open market at the time.
In issuing the injunction, Zebrowski said there was “no remotely plausible justification” for Carolco’s buying Kassar’s shares at a premium.
Labeling the transaction a likely “case of self-dealing” and “breach of fiduciary duty,” he said there was a high probability that Kassar would be forced to disgorge the equivalent of $20 million in profit when the suit eventually comes to trial.
In a statement, Carolco said: “This preliminary action has no effect on the company and its operations. Because the transaction . . . was approved by the independent committee of the board of directors of Carolco, as well as the full board, and because the company has received support in this matter from . . . holders representing an overwhelming majority of the shares not owned by the Kassar interests, we believe that its view of this case is correct and that the courts will agree once they have had the opportunity to review all the facts.”
Kassar controls about 15.1 million, or about 50%, of Carolco’s 30.2 million common shares through a foreign holding company. In freezing the 2.2 million shares, Zebrowski said: “We need to get a sufficient amount of Carolco stock into the U.S., held by someone we can trust.” The judge initially indicated that he planned to freeze all of Kassar’s holdings, but lawyers for both sides agreed to a more limited order.
Beirut-born Kassar, 39, has been called Hollywood’s Billion Dollar Man, in reference to his free-spending ways. He is chauffeured around town in a stretch limousine, favors fine wines and lives in a Beverly Hills compound patrolled by security guards. Kassar, who is also a high-stakes gambler, prided himself on having the biggest yacht at this year’s Cannes Film Festival.
Carolco is in many ways a reflection of its owner. The independent company is best known for producing high-budget action films, such as this summer’s “Total Recall,” which reportedly cost $60 million. It is also known for paying huge sums for talent.
Arnold Schwarzenegger received nearly $10 million, plus a significant share of the profits, to star in “Total Recall.” Sylvester Stallone is another highly paid member of the Carolco stable. He earned $16 million for “Rambo III.” Directors and screenwriters are also well paid.
Kassar was paid $1.25 million last year, according to a company report to the Securities and Exchange Commission. But papers filed with the court by William Lerach, a lawyer for Carolco shareholders in the suit, say Kassar has also regularly drawn interest-free loans of $1 million or more from the company.
Under Thursday’s injunction, which took immediate effect, Kassar is required to notify Lerach of any compensation or loans paid him by Carolco, beyond his normal salary and expenses. Kassar could sell the 2.2 million frozen shares under the injunction, but only if Lerach is notified and gross proceeds of the sale are held in trust pending outcome of the suit.
Several analysts said they didn’t expect the ruling to have any negative effect on Carolco and might even benefit the company.
“If the transaction is reversed, the company will get back (any lost funds),” said Jeffrey Logsdon of the Los Angeles brokerage Seidler Amdec Securities. “How is that a negative?”
Others, however, said the judge’s ruling could be interpreted as a warning. “This could be quite significant from an industry standpoint, in that a lot of these smaller public entertainment companies that started in the 1980s have been run like private fiefdoms,” said one analyst who asked to remain anonymous. “The shareholders really were subjected to some abuse. This could be an important case if it throws up a caution flag.”
Carolco’s stock has traded from a low of $5.125 to a high of $13.875 this year. It closed unchanged, at $8.625, in New York Stock Exchange trading Thursday, though some analysts speculated that the judge’s ruling might cause the stock to fall off a bit today.
The company has tried without success to branch out into more mature films. After “Music Box” and “Mountains on the Moon” failed at the box office, Carolco Chief Executive Peter Hoffman said of the movie-going public: “They want crap. Every time people tell you they don’t, it’s bull. They want crap.”
At the same time, the company is credited with making smart moves into other areas. Carolco owns 47% of Live Entertainment, the company that holds the video distribution rights to “Teenage Mutant Ninja Turtles--The Movie.”
The disputed transaction arose after Kassar last year bought 11.2 million Carolco shares for $9.60 a share, or about $107.5 million, from Andrew Vajna, who had co-founded the company with Kassar. In purchasing the stock, Kassar relied partly on loans from investment banker Bear, Stearns & Co. and others.
As Carolco’s stock dropped below the purchase price last August, Bear Stearns and another lender called for repayment of the loans. Kassar raised the funds to repay the loans by selling 3.4 million shares to the company in a transaction that was approved by a committee of Carolco’s outside directors.
According to court documents, the outside committee was made up of two directors, one of whom was a managing director of Bear Stearns. An attorney representing Bear Stearns in the case didn’t return a call seeking comment. The injunction appeared not to affect the investment banking firm.
Attorneys for Carolco and Kassar had argued that Kassar was entitled to a premium because of the role he played in persuading a Pioneer Electric Corp. subsidiary and Canal Plus, a French TV concern, to invest $90 million in Carolco earlier this year. But Zebrowski said that and other defense arguments “essentially supported the plaintiff’s case.”
The 2.2 million shares frozen by the court pending a trial represents the number of additional shares Kassar would have been forced to give up had he attempted to raise $45 million by selling stock at $8 a share, the market price in October.
Lerach said he might ask the court to let Carolco consider purchasing some or all of the shares that Kassar bought from Vajna, if it appeared that Kassar had bought the shares for less than their true value, and had thus usurped a “corporate opportunity.”