American Greed

Real Life Drama: How Investing in Showbiz Can Leave You Starstruck

When Max Bialystock and Leo Bloom were cooking up the ultimate Broadway scam in Mel Brooks' movie and musical The Producers ("Step one: we find the worst play ever written. Step two: we hire the worst director in town. Step three: I raise two million dollars…"), the result was pure hilarity. But whether on stage or on screen, there is a cavalcade of real scams out there that are anything but funny.

The long-running saga of Rebecca, explored in the latest episode of American Greed, is a prime example.

The musical adaptation of a gothic English novel and an Alfred Hitchcock film, Rebecca was already playing to sellout crowds overseas, so it seemed like a surefire Broadway smash. Bringing the production to the Great White Way became producer Ben Sprecher's dream.

But staging a Broadway musical is a much bigger undertaking than putting on a show in Vienna. So in order to raise the last $4.5 million of the $15 million or so they needed to carry it off, Sprecher turned to New York investment broker Mark Hotton, who seemed to have it all together.

"You couldn't meet this guy and not think that he was an entrepreneur," Sprecher's attorney and friend Ronald Russo tells American Greed. "He had the $40,000 watch, he had the handkerchief, he had the cufflinks. He was a guy who presented himself as a major player."

More important, Hotton said he had connections. He claimed that one in particular, Australian investor Paul Abrams, might just have the money Sprecher needed to make his dream a reality.

But when Abrams suddenly "died," and other investors Hotton supposedly lined up inexplicably backed out, the fraud was unmasked once and for all. There was no Paul Abrams, or any other investors. The expense money Hotton had collected in order to arrange the financing was just the latest in a long line of frauds for which he is now in federal prison.

With his funding dried up, Ben Sprecher had no choice but to shut down the production of Rebecca the day before rehearsals were scheduled to begin.

"Ben told us that the money that was going to allow us to start rehearsals was pulled. And he had no choice but to cancel," says Karen Mason, a lead actress who thought she was on the verge of a breakout role.

"Here it is close enough to touch it and it wasn't going to happen. It was just heartbreaking," says actor Nick Wyman.

Mason and Wyman were among 130 people put out of work, while Ben Sprecher forfeited millions in potential revenue and saw his Broadway dreams scuttled—maybe for good. The surefire smash became a flop even before the curtain went up.

Despite cautionary tales like Rebecca, investors large and small are sucked in year after year by the lure of show business. Some scams are sophisticated—like Mark Hotton targeting an established Broadway producer at his most vulnerable moment. Others target individual investors through direct mail solicitations, e-mails, even telemarketing.

Experts say the schemes have one thing in common: they appeal to our thirst for glamour.

"It's a glamour industry. So they're trying to play this card," says Abraham Ravid, a professor of finance at Yeshiva University in New York and an expert on the economics of the entertainment industry. "You'll be invited to parties. A star is attached."

Hollywood producer Bart Slanaker helped raise millions of dollars from unsuspecting investors for movies that would never be made. In one case, he and his partners used telemarketers to raise hundreds of thousands of dollars for a film called "There for Hope," starring Britney Spears, Harry Connick, Jr., Nick Nolte, and Jennifer Hudson.

Of course, hope faded fast. There was no movie, and none of the stars were signed.

That case helped federal authorities uncover a broader, $25 million scam selling bogus investments in movies like "Eye of the Dolphin" and "From Mexico with Love."

Slanaker is serving a 12-year federal prison sentence for his crimes. He is among 16 people—including a former CIA agent—who were convicted in the investigation. But investors, by and large, were out of luck.

Even investing in legitimate productions can be tricky. You think you are signing on for a share of the profits, but so-called "Hollywood accounting" can make even a smash hit appear to be a money loser.

In one of the most notorious cases involving Hollywood accounting, humorist Art Buchwald sued Paramount Pictures over the 1988 Eddie Murphy hit Coming to America. Buchwald successfully argued that the movie was based on his idea and that he was entitled to a share of the profits. But Paramount claimed that despite the film's $288 million in revenues, it didn't make any money.

A California judge ruled in Buchwald's favor, calling Paramount's profit formula "unconscionable." Eventually, the studio agreed to pay Buchwald $900,000 in an out-of-court settlement—as long as the court vacated its ruling about Paramount's formula.

Ravid says individual investors in a film or production have far less leverage, and much less chance of seeing any money than the writers or actors.

"The equity investors are the ones who get paid last," he tells American Greed. "You get the brochure that says, okay, invest in this film. But when you read through it you see that the chances that you'll ever get paid are really slim."

In other words, get the stars out of your eyes and read the fine print.

If you're still determined to make your mark as a Broadway or Hollywood impresario, Ravid suggests a more conservative means: the stock market.

"If you really want to invest in movies and get a return, you invest in studio stocks," he says. "Because the studios have a portfolio of films, and they know what they are doing."

Not glamorous enough for you? Then, to paraphrase Bette Davis, fasten your seatbelts. It's going to be bumpy.

"If you're investing because it's your daughter's film and you just want her to get it done, that's fantastic," Ravid says. "If you invested because you want to make money, you have to really read the contracts very carefully."

Or just put down some money and buy a ticket. If you like what you see, that's a return on your investment with a lot less risk upfront.

See how Mark Hotton's greed dashed dozens of Broadway dreams on an ALL NEW American Greed, Thursday August 11 at 10p ET/PT on CNBC Prime.