MGM Deal Made Without Title to Stock, Suit Says : Studios: Giancarlo Parretti is accused of not owning 10 million shares he traded to acquire film company.

In the frantic final days leading up to his acquisition of MGM/UA Communications Corp., Italian financier Giancarlo Parretti signed an agreement trading 10 million shares of studio stock he didn’t yet own for an insurance bond that allowed him to close the deal, according to documents filed here in support of a lawsuit.

Parretti assigned the MGM/UA shares to Cook Islands-based Century Insurance Ltd. on Oct. 29, three days before the studio purchase was consummated, according to an agreement signed by Parretti and contained in the court record. The MGM/UA stock was valued at $17.50 a share, the same price that Parretti later paid investor Kirk Kerkorian and other stockholders.

Parretti was chairman of Pathe Communications Co. at the time, the company that later merged with MGM/UA. In a letter to Century that has been introduced as court evidence, he wrote: “Pathe declares that it owns clear and unencumbered title to the stock and is capable of making this assignment and of delivering scrip for the stock hereunder.”

If Parretti completed financing for the faded MGM studio with shares he didn’t own, as the suit implies, there may have been irregularities in the deal. The case also suggests that Credit Lyonnais Bank Nederland, Parretti’s chief lender for the MGM/UA deal, may have financed the final part of the acquisition with an unsecured loan.

Parretti has denied any wrongdoing in the case. The Century Insurance plan was one of several he allegedly devised to obtain the last block of money needed for the $1.4-billion buyout. The Cook Islands court case suggests that Parretti attempted to put together a series of last-minute deals to complete the purchase as the clock wound down on the payment deadline.

The file is rife with puzzling references to mysterious European money men, international financing plans and the high-stakes legal maneuvers of Washington lawyers hired to facilitate matters. Behind the scenes, the agreement with Century unraveled weeks after the acquisition occurred. It appears to have become a key problem in Parretti’s continuing struggle to hold the studio together.

The court file indicates that Parretti met Donald A. Davies, Century’s chief executive, in October. The two men struck a deal shortly afterward in which Davies would issue a $175-million insurance bond in return for a $1.75-million fee, according to filings. Davies charges that Parretti also agreed to sign over 30 million shares of stock in various companies he owned as collateral, including the 10 million MGM/UA shares, which are interchangeably referred to as MGM-Pathe Communications Co. stock in court documents.

The insurance bond was issued just before Parretti acquired MGM/UA in November, according to Davies. He contends that Parretti subsequently broke his agreement to pay the $1.75-million fee and that Credit Lyonnais refused to release the shares pledged to Davies.

Davies sued Credit Lyonnais over the disputed stocks Jan. 15, maintaining that the European banking giant is illegally holding the Parretti shares in an escrow account. The insurer also charges that the stock gives his firm ownership of as much as 35% of MGM-Pathe.

An MGM-Pathe spokeswoman has called Century’s claim “bogus.” The studio maintains that Century never posted a legitimate bond on its behalf. In a letter included in the court file, an attorney for Parretti says that there is no valid bond because Century didn’t provide satisfactory financial statements, bank references or guarantees from its parent company.

But the Cook Islands court record contains numerous letters and documents that allude to the bond and the Parretti-controlled shares that allegedly were put up as collateral.

In a Dec. 24 letter to Davies, Credit Lyonnais Bank Nederland executive Dallis Radamaker wrote that he had “sent an urgent fax to Mr. Parretti to obtain an explanation of non-payment of the premium due to Century for the guarantee bond.”

Concurrently, in a letter characterized as “extremely urgent,” Radamaker told Parretti that failure to pay the premium “may result in immediate cancellation” of the policy.

Credit Lyonnais has challenged the jurisdiction of the Cook Islands court to hear the case. And the bank has told Davies that his dispute is properly with Parretti. Patrick Bastin, head of entertainment lending for the Rotterdam-based bank, has declined to comment on the suit.

Chief Justice Clinton Roper of the Cook Islands, a group of small islands 2,000 miles northeast of New Zealand, has put a restraining order on the shares pending movement in the case.

Meanwhile, Parretti--who triumphantly declared that he would make the famous MGM lion roar again when he acquired MGM after several delays last fall--finds himself surrounded by hungry predators. Century is seeking delivery of the 30 million total shares in Parretti companies that it says it owns, about $120,000 in damages, court costs and any further relief the judge deems appropriate in the Cook Islands case.

At the same time, a group of creditors including Century is trying to force Parretti’s MGM-Pathe into involuntary bankruptcy in Los Angeles federal court. The petitioners say they are owed more than $10 million. MGM-Pathe has disputed the validity of some of the claims but reportedly is engaged in discussions that could result in an out-of-court settlement.

A long-delayed 10K annual report from MGM-Pathe, now scheduled to be filed Monday with the Securities and Exchange Commission, also should shed new light on studio finances.

In his Cook Islands affidavit, Davies maintains that Parretti contacted him about the insurance bond in the final days before the deal was set to close. There is no explanation of how Parretti came to Davies, but people close to the two men say that they met in New York.

Davies said his company had never written a completion guarantee for a takeover bid, even though it had “substantial experience in insurance.”

People familiar with the deal have said Credit Lyonnais, which already had hundreds of millions of dollars in loans committed to Parretti on the MGM/UA deal, was reluctant to loan any more to Parretti without an insurance bond. The bond was to guarantee sales of future television and movie rights negotiated with various companies.

Time was very short to complete the deal, Davies’ affidavit states. Parretti had to close it by the end of October or “lose the whole deal and many millions already spent.” Davies said Century agreed to write the bond in return for three blocks of stock that were to be held in lieu of payment. Parretti also promised him a lot more insurance business, Davies said.

An agreement letter in the court file, dated Oct. 29, identifies the Parretti blocks of stock assigned to Century as 10 million Pathe Communications Co. shares, valued at $50 million; 10 million shares of Melia International NV, a Dutch travel company, with a value of $60 million, and the 10 million shares of MGM/UA, valued at $175 million. A notation on the letter said MGM/UA’s name would be changed to MGM-Pathe Communications Co. after the merger.

Parretti executed three separate agreements signing the stock over to Century as “tangible security,” according to Davies. The insurance man said the deal was completed on Oct. 29, while he was staying at Parretti’s Beverly Hills home.

Davies said he became worried when he didn’t receive his promised fee after the MGM/UA deal closed, especially since Century faced a possible liability of $175 million. Davies said Credit Lyonnais eventually told him it was launching its own investigation of Parretti’s finances. In February, after repeated conversations with Credit Lyonnais proved fruitless, Davies contacted Continental Transfer Co., the registrar for the shares, and said he had serious doubts as to the validity of the Pathe share certificates, the court record shows.

“From my personal observation of Parretti, I am convinced that he has little regard for regulators or legal procedures if they stand in his way,” Davies said in his affidavit. “The bank has an unscrupulous customer in Parretti who is a practiced if not talented liar. . . . He has a primitive approach to documents, which he does not like. He shreds them and did so in my presence at his Los Angeles home, to my amazement.”

Michael Cieply reported from Rarotonga and Alan Citron from Los Angeles.