BRON Studios’ Bankruptcy Begs Serious Questions

The Extraordinary Bankruptcy of BRON Studios

The last thing Hollywood bosses want at this moment is a financial scandal.  Yet that is what may be needed to make room for truly professional investors to rid the industry of “Hollywood Accounting” and the unscrupulous money it attracts.

On July 19th, BRON Media Holdings (USA) Corp filed for federal bankruptcy protection in the US Bankruptcy Court’s Northern District of Georgia under Chapter 15 of the US Bankruptcy Code.  Chapter 15 deals with recognition of creditor protection orders from other countries.  In this case, Canada, where BRON was founded and where it concurrently obtained protection from the Supreme Court of British Columbia from its creditors there.

BRON, also known as BRON Studios, is no ordinary petitioner.  And this is no ordinary bankruptcy.  The petition seeks protection from creditors for the quite large number of companies under the BRON Media group umbrella for reorganisation being undertaken from Canada.

What’s happening in Canada, and what’s actually being protected, are questions that make this case interesting.

BRON was founded in 2010 by Aaron Gilbert in Canada, and grew to become the much celebrated film financier to Hollywood’s indie scene.  From infamous private parties in the South of France to much feted coverage in the Hollywood tabloids, BRON was considered the perfect intermediary between the Studios who did not want to finance films and film-makers who needed money to produce them.  BRON’s rise culminated with its credited role as one of the Producers of Joker, the 2019 Todd Philips-directed adaptation of DC Comic’s most infamous villain. 

Clever machinations for ill-gotten gain is what made that particular fictional character so delightful for fans of the DC Comic’s Gotham City dramas.  By hook or by crook, the villains of Gotham City pursued their destructive ambitions for money, control and fame in the shadow of the Batman and his quest for justice. 

Comic books are often a parody play as art imitating life.

What Goes Around …

Karma may be the right expression for what could be happening to Aaron Gilbert and the BRON Media group of companies.                    

In a letter released by BRON on July 19th, CEO Gilbert cites the Covid-19 pandemic and recent Hollywood strikes for having, “made BRON’s ability to continue its existing business impossible.”

Gilbert also wrote that, “BRON had no choice but to take this step in light of its financial circumstances.”

Aaron Gilbert, Founder of BRON
Aaron Gilbert, Founder and CEO of BRON (Image: Courtesy of IMDb.com)

What Gilbert fails to mention is any connection with another nebulous group of companies called Crystal Wealth Management.  In 2017, Crystal Wealth Management had been exposed by the Ontario Securities Commission in Canada for defrauding 1,265 Canadian investors out of hundreds of millions in invested capital.  Crystal Wealth Management was founded by Clayton Smith, who single-handedly ran a fraudulent group of investment funds, the largest and most notorious being the Crystal Media Fund.

According to the Offering Memorandum for the Crystal Media Fund, Clayton Smith appointed a specialist media finance company to source and arrange all of the Fund’s investments.  That company was called Media House Capital, owned and controlled by Aaron Gilbert.

Over the course of several years, Media House Capital arranged a series of loans to BRON group companies that were intended to finance the development and production of film and television content.  These loans were structured between Media House Capital and BRON as commercial, arms-length debt instruments backed by collateral in the form of “unsold territories” and “tax credits” that may, or may not have existed at the time the loan documentation was executed.

Clayton Smith admitted to the charges of fraud and the Canadian courts placed Crystal Wealth Management into Receivership.

According to a report by Grant Thornton, acting as the Court appointed Receiver for the winding down of the Crystal Wealth Management organisation, “Gilbert had some involvement in the films which are investments of the Media Fund.  Gilbert is listed as a producer or executive producer on 19 of the 25 film productions for which Media Loans have been purchased by the Media Fund.  For five of the productions, he is a director or officer of the production company (the underlying borrower)”. 

Those loans were then sold to the Crystal Media Fund and money flowed from the Fund to Media House Capital and to BRON.  According to further reports from the Receiver, Aaron Gilbert’s Media House Capital then provided millions in loans to the personal businesses of Clayton Smith and his wife. 

This process of transferring investor money from the Fund, through Media House Capital and into the pockets of Clayton Smith is detailed in an exposé published on-line on April 23, 2023 by the American Bar Association. 

The exposé is unsubtly entitled, Anatomy of a Multimillion-Dollar Film Fraud: the untold story and aftermath of one of Canada’s largest Ponzi schemes that bilked over a thousand investors out of millions predicated on a fraudulent portfolio of film loans.  Its author, James Huddleston, is a highly experienced litigation consultant and independent fraud investigator.

Read the full exposé here.

Sleight of Hand

The inherent confusion between a finance provider and the nebulous Hollywood term, “Producer” is at the heart of a much larger systemic shell game designed over generations of lawyers, accountants and clever media executives to divert content revenues out of the pockets of the creatives and into the bank accounts of the Studios.

The lack of transparency behind what has become known as “Hollywood Accounting” helps to disguise who is siphoning off the gross revenue streams generated from paying audiences before the production company or the “Talent” sees a penny.

Hollywood Accounting is no secret.  It does not comply with internationally recognised accounting standards that companies must adhere to.  There have been dozens of high-profile lawsuits against the Studios for the manner in which they obtain contractual control over a film’s finances without ever taking equity in the company that owns it.  Some of the industry’s highest grossing films and television shows have earned the Studios billions of dollars in revenues while they declare that the underlying production companies have earned no net profits.

By calling themselves “Producers”, the Studios can declare that they themselves have no profits, or that they (the “Producers”) have incurred losses.  But as service providers to the production company, having signed distribution agreements that give them full control over exhibition terms and marketing costs, they declare billions to their parent companies and shareholders.

Bohemian Rhapsody (2018).
The Freddie Mercury biopic, Bohemian Rhapsody (2018) was directed by Bryan Singer and starred Rami Malek. (Poster image courtesy of IMDb.com)

Distributed by 20th Century Fox, the film earned US$911 million from the Box Office against a budget of US$50 million. Studio accountants have reported that the film suffered a US$51 million loss.

Challenging the Studios in court can be daunting.  Highly complicated contracts and convoluted networks of inter-related companies require lengthy trials and most plaintiffs are unable to persevere in the face of the world’s highest-paid lawyers.  On the rare occasion when the Studios are brought to trial they almost always loose.  But over the years, the hundreds of millions of dollars spent deterring legal action and paying off those able to pursue it has been worth every penny.

Insanely Profitable

According to PwC, which has been tracking Media & Entertainment industry revenues for decades, those in control of the distribution and delivery of content are on par to generate an incredible US$2.5 trillion this year alone.  For decades, such revenues have funded a system designed to perpetuate a myth that only the Studios are capable of producing, marketing and distributing commercially successful entertainment content. 

The Media C-Suite estimates that total spend on content production budgets in 2022 was US$250 billion.  That includes video games, advertising, music videos, television shows and feature films.

Some might consider that a lot of money.  It is a lot of money.  But as a product, entertainment content will generate revenues from consumers who pay for access to it and from advertisers who pay for access to those consumers.  So one might guess that those who receive the US$2.5 trillion in annual revenues from the sale of the product turn around and invest that money back into the US$250 billion production costs for the next year’s content. 

Not quite.

For the most part, the recipients of that US$2.5 trillion in industry revenues this year will be the publicly-listed media conglomerates, which own the Studios.  And, for the most part, the Studios outsource production of content to independent producers, who have to finance those production budgets themselves.

Distribution agreements offered by the Studios are valuable contracts that enable financing of production budgets when independent producers borrow money against them. The downside for producers is in the fine print; unfair commercial terms that effectively divert resulting revenues to the Studios and, often, companies affiliated with them. This complicated system generates massive profit for the Studios without the corresponding risks (which are passed on to production companies and their investors). 

As with many comic book villains, a belief that they are so clever and so powerful creates a delusion that they will get away with it forever.

Myth Busting

In 1947, the US Supreme Court approved a series of arguments from the US Department of Justice that the Studios had created a cartel-like system of vertically integrated companies that stifled competition for both consumer audiences and independent movies in violation of US Anti-Trust laws.  Rather than argue that it wasn’t true, the Studios of the time (which includes most of the Studios today) agreed to break up the monopolies rather than face prosecution in what became known as the Paramount Consent Decrees.

The Studios re-structured, ensuring that production of content would be undertaken by independent production companies and sold their cinemas to independent owners.  But they did retain their distribution businesses, which became a required connection between producer and audience.  That connection is key.

Under the Trump Administration, the US Department of Justice suggested that the Paramount Consent Decrees should be lifted.  Times had changed, they argued.  The internet provided an ability for any company to compete with the “Studios” and delivery content from independent producers to a global audience.  The Supreme Court agreed.  From January 2022, the Studios have been free to own cinemas and to employ their own creatives. 

But what the lifting of the Paramount Consent Decrees actually did was give the US Department of Justice a new lease to consider violations of US Anti-Trust laws from different angles.  The prevalence of Hollywood Accounting and the number of legal cases alleging similar unfair or illegal practices by most, if not all of the Studios, provide considerable motivation. 

However, finding a legal pathway into the highly confidential commercial agreements between Studio distributors and content production projects is not simple.  Federal justice department lawyers need to find a crack in the façade.  A regulatory investigation that reaches out from an admitted illegal Ponzi scheme and into the pockets of Studio bosses is just the thing they need.

The Joker

In poker, the Joker can be a wild card that changes everything. 

For the Hollywood Studios, it may turn out to do just that. 

Which brings us back to BRON and its unusual Bankruptcy.

How could a professional finance group, and one of the Producers of a feature film that grossed over a billion dollars, find itself broke?  Common parlance would assume that a “Producer” helps create the value of a film project and participates in the net profits of that film by means of equity.

The complex contracts and convoluted arrangements between companies that is inherent in Hollywood Accounting would likely change that common perception into carefully defined terms that transform the words, “producer” and “net profits” into something else.  Those defined terms would never be known unless a lawsuit is filed, and then known only to the Court.

Under normal circumstances, the carefully written confidentiality provisions of those contracts would prevent anyone from knowing the full picture. 

Joker (2019).
Joker (2019). (Poster image courtesy of IMDb.com).

According to an analysis by Deadline in 2020, the net profits from Joker at the time amounted to an estimated US$437 million after production, marketing, distribution and participation costs were deducted from worldwide gross revenues.  BRON is reported to have earned as much as 25% of that net profit. 

See the full 2020 Deadline analysis here.

But that seems unlikely.

BRON provided finance.  This is also reported in the same analysis.  Details are, of course, illusive.  Perhaps BRON financed 25% of the production budget for Joker under terms of its own deal with Warner Bros.  Due to the confidentiality provisions of most Hollywood contracts, the world may never know.  But that is not equity.  That is not participation in net profits. 

What BRON likely received was finance fees and repayment of principle from provision of debt capital to the project’s production company, Joint Effort (a company set up by Bradley Cooper and Joker director Todd Phillips) in service of a larger deal with Warner Bros to distribute their films.  The debt capital for Joker was likely backed in part by the distribution agreement from Warner Bros. as collateral for a loan from BRON.

Where BRON found the money to finance 25% of the production budget is an open question. 

The answer to that question is now under a microscope within the bankruptcy proceedings that started a few days ago. No doubt, Studio bosses are nervous about what questions might be asked. They should be. Questions are what Federal Court judges both invite and demand direct answers to.

One glaring question about this entire set of circumstances is what murky connections exist between the massive fraud undertaken by Clayton Smith’s Crystal Wealth Management, the dubious film finance deals with Aaron Gilbert’s Media House Capital and the commercial relationships with Studios that led to BRON’s petition for bankruptcy protection.

One overt connection is that the Receiver of the Crystal Wealth Management fraud case and the Administrator of the Bankruptcy proceedings seem to be one and the same:  Grant Thornton.

Other questions are, no doubt, being carefully considered by the Batman-like lawyers of the US Department of Justice.

Note: Neither Aaron Gilbert nor representatives of BRON have responded to the Media C-Suite’s requests for comment on this story as of the date of publication.

3 Comments

  1. Great piece. Things are happening behind the scenes and I like to be kept up to date, especially as I have not seen an analysis of this situation anywhere else.

    Keep up the good work !!!~

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