Munich police have jailed Andreas Schmid, head of leading German film fund VIP, as part of a fraud investigation of the company. The Munich state prosecutors office said Wednesday in an interview that


COLOGNE, Germany (The Hollywood Reporter) -- Munich police have jailed Andreas Schmid, head of leading German film fund VIP, as part of a fraud investigation of the company. The Munich state prosecutors office said Wednesday in an interview that Schmid has been taken into custody because of fears he might leave the country before the investigation is concluded.

Schmid, along with VIP executives Andreas Grosch and Eduard Wallner, is under investigation for corporate fraud and tax evasion.

Prosecutors allege that VIP deceived tax authorities and its investors by shifting around private capital in what amounted to a multimillion-dollar shell game.

VIP, the most successful of Germany's many private equity film funds, had a familiar business model. The company persuaded German high-end earners to invest in supposedly low-risk film financing funds. VIP would then invest the private equity capital in various film projects. Last year alone, VIP funds raised €411 million ($496 million).

VIP promised a miserly rate of return but implied that investors would still come out on top because VIP's funds would qualify for major tax breaks. Germany allows risky investments in cultural goods like films to be written off in the first year of taxation, even if the return on the investment stretches over several years.

The state prosecution office claims that instead of investing in film production, as it claimed on its tax returns, VIP used the money it amassed for its funds as security for major banks, which took over VIP's debt responsibilities to film producers.

Prosecutors claim that VIP never intended to make a profit off its funds or took any financial risk that required conditions to qualify for tax breaks. Instead, they allege, VIP funds were set up as a zero-sum game: Producers got cash to finance their films, which the banks loaned out on back of the funds' capital, with no one taking any risk. VIP managers took a healthy cut off the top in "operating expenses," and investors played along on the promise of a big tax write-off.

The prosecution argues that investors would never have put their money into VIP had they know the real risks involved.

If the prosecution can prove its case, VIP could face fines equal to the investment in the funds. That would almost certainly bankrupt the company. VIP managers Schmid, Grosch and Wallner could potentially receive prison sentences.

VIP declined comment Oct. 5 on Schmid's arrest. Cologne-based publicity firm Bruno Media, which has VIP as a client, said that it had not been told of the arrest and learned about it from the media.

Just hours before Schmid's arrest was made public, the executive released a statement saying he was relinquishing all his duties at VIP for the duration of the criminal investigation against him and the company. Schmid added that he would stay on as an advisor to VIP and would cooperate fully with state prosecutors.

The case against Schmid and VIP focuses on film funds VIP 3, which backed such pictures as Jonathan Hensleigh's "The Punisher," Andrew Niccol's "Lord of War" and Mike Binder's "The Upside of Anger," and VIP 4, which bankrolled upcoming projects that include Paul McGuigan's "Lucky Number Slevin," Tom Tykwer's "Perfume: The Story of a Murderer" and Roland Emmerich's "Soul of the Age."



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