Company Town : Carolco Under Scrutiny, Sources Say

Carolco Pictures, producer of the hit 1993 film “Cliffhanger,� has a new cliffhanger of its own: Sources say a federal grand jury in Los Angeles is looking into financial transactions and tax issues surrounding the company.

Sources said subpoenas were served to Carolco’s West Hollywood offices shortly before Christmas seeking an extensive list of documents, including information on family trusts of former partners Mario Kassar and Andy Vajna. The two men founded Carolco in 1976, and rank today among Hollywood’s best known movie producers.

The documents are being sought on behalf of the grand jury by Assistant U.S. Attys. Monica Bachner and Patrick Fitzgerald, whose names appear on the subpoenas, according to sources. Federal officials declined comment, citing policy on grand jury matters.

It is unclear exactly what transactions or individuals the government is probing. But other public documents filed by Carolco with the Securities and Exchange Commission show that federal tax officials have a long-standing interest in transactions arranged by Carolco executives, as well as the convoluted web of offshore companies set up in tax havens such as the Netherlands Antilles.

However, the subpoenas are the first sign that the probe has evolved into a criminal investigation by a grand jury.

Vajna didn’t return calls. One of his lawyers, Ronald L. Blanc, declined to comment on the grand jury subpoenas, referring calls to Brad D. Brian, a noted defense attorney whom Blanc said represents Vajna. Said Brian: “I’m not going to confirm I represent him, and I’m not going to make any comment at all.�

Neither Kassar nor his lawyer, Brian J. McCarthy, returned calls. Carolco declined comment.

Vajna and Kassar pioneered the use of foreign financing to fund such big action films as the “Rambo� series. Vajna left Carolco in 1989, and currently heads the publicly traded Cinergi Pictures. He produced the controversial film “Nixon� now being distributed by Walt Disney Co., and is best know for producing the “Die Hard� series of action films.

Kassar, producer of such hit films as “Terminator 2: Judgment Day,� “Total Recall� and “Basic Instinct,� resigned from Carolco in November. Last week, he agreed to a three-year production deal at Paramount Pictures.

Documents Carolco has filed with the SEC describe a long list of complicated offshore transactions at the company, some of which involve Kassar and Vajna.

In one series of transactions, for example, Carolco documents say a company called New CIBV--an entity Kassar and his family trusts controlled through an Aruba-based company called Clorenda Corp.--transferred 6 million shares of Carolco stock in 1992 to a company called Valdina Corp. The documents say Valdina is controlled by Vajna, along with the descendants of the late Hong Kong investor Mong Hin Yan.

The transfer, the papers show, was made to settle an obligation originally agreed to in 1989, the year control of Carolco changed when Vajna left the company.

The grand jury problems aren’t the only troubles for Carolco, which struck a tentative deal in November to sell the bulk of its assets for $50 million to Twentieth Century Fox Film Corp. The company entered bankruptcy proceedings that same day, and Kassar resigned as chairman.

Sources said the Internal Revenue Service is continuing its audits of the company, and is investigating whether the company owes millions in back taxes and penalties related to the offshore companies. Documents filed with the SEC show the IRS has been auditing Carolco’s books back to 1988, and the state has been auditing them for the years 1988 and ’89.

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Carolco executives dispute the IRS claims, according to the documents. Sources say the company has estimated the maximum liability at about $15 million.

Documents filed with the SEC and interviews with people familiar with the dispute say it boils down to this: The IRS wants Carolco to revise its books to reclassify some advances and foreign distribution fees it received on films from unprofitable years when it didn’t pay taxes to profitable years when it did.

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The IRS, for example, argues that Carolco should have booked as taxable dividends money it received to fund films from Carolco-organized companies in various tax havens, sources say. Another area of conflict, sources say, is whether Carolco should have immediately treated as income money it borrowed using as collateral funds promised through the foreign sale of film rights.

The IRS probe isn’t expected to affect the sale of the company’s assets, which include its film library, a stake in development rights to such film projects as “Spiderman,� and sequel rights to such movies as “Total Recall.� Carolco bondholders have filed an objection to the sale, and two other potential bidders, France’s Canal Plus and European entertainment giant PolyGram, are expected to decide if they will make an offer.

If the investigations and tax problems weren’t enough, the company’s “Cutthroat Island� starring Geena Davis and Matthew Modine, which cost more than $80 million, is turning out to be one of Hollywood’s biggest turkeys ever.

The movie, which has yet to earn $10 million at the box office domestically, is likely to lose about $50 million total, sources said.