Film Financing Scams: The Toronto Scam

I came across a recent scam that took me a little while to figure out and I thought I'd share because it's clever and targeting film production companies. It's similar to the Turin Group Scam in many ways, but different enough to be its own kind. I chose the Toronto Scam as a name solely because it is another "T" city, not because the participants are Canadian or come from Toronto - far from it.

Here are the characters:

A broker acts as the inside man; its his job to rope in the mark and to take as much time as is needed to get the mark primed. The broker may or may not be a witting participant in the scam itself, but the broker is at least promised compensation for his role. The outside man is in fact a company, a financing company, looking to get into a new field - film production, asset financing, etc. The outside man has had some experience that requires them to be a little guarded and secretive - a bad experience in the past, some potentially shady third world dealings, etc. The company will be a recently established, but not too new entity (e.g. 1 year old) whose ownership structure is opaque and probably foreign. The inside man, the mark and, if there is such a person, the mark's escrow money investor, form a joint venture for the division of the profits from the project. The inside man will require no creative or directional control, but will have some control over the disbursement of funds.


Here's the pitch:

The mark needs $10MM. The outside man can provide the full $10MM provided the mark can raise 30%. The 30% is held in an escrow account by the mark's own escrow agent. The escrowed funds will not be invaded for any reason whatsoever. As the outside man has had some problems in the past, in addition to this earnest money, the mark will also need to provide certain compliance information - no different than the information that is required by any business opening a bank account under the anti-money laundering provisions of the Patriot Act. Escrowed funds have to be held for 41 banking weeks, which amounts to a year.

Here's what I suspect happens:

The mark puts up the money in an escrow account and a JV is established between the parties. If it wasn't already agreed to, the inside man will come up with a reason as to why he has to tranche his payments. Then to the extent any funds from the inside man have been received, they will stop. The inside man, assuming he was in on the game will no longer be reachable.

Meanwhile, the outside man has opened up a bank account at a small unsophisticated bank in the JV's name. They perform some small transactions on the account and then get a line of credit for 1/2 of the escrowed amount, using the escrow as collateral. They may even make some interest payments while they soak up money from other marks. The mark has no knowledge that this account exists or that the inside man has tapped the line of credit. Then one day the outside man vanishes, taking all the money with him and leaving the marks and their escrow investors on the hook for the lines of credit established in the JV's names.

Here's why it works:

Of course there's the usual trappings of a real business - Delaware incorporation, people who have worked in the industry before as both inside and outside men, and some paperwork that might seem legit. They cite the right language of the Patriot Act and dress everything up in formality. But most importantly, is the amount of attention that they give to the escrow account and escrowed funds. They realize that it's anomalous, but it's part of their financing structure and it's how they have to prove earnest money. You spend all your time trying to figure out how they can get to the escrow account (at least I did). But you have to be looking at the JV structure to see where the scam is.

Of course, there's all the standard language - this is an "alternative" investment vehicle, and you have to be "open" to its "innovative" ways. The outside man is someone who wants to make great films. All transactions will be conducted between attorneys and with reputable financial institutions. (If this has to be said, it's probably not true.)

This scam seems to be making its way around the film production world right now, so I thought I'd put this out there. This is not based on a personal or client experience. But there was a offer of a similar nature made, which caused some wheel spinning and I thought I'd save anyone else some time and effort.