What do investments and film business have in common? They both thrive on good stories. A film becomes a box office hit when it has a convincing, heart-warming plot. It’s a similar story with various forms of investment. The only difference is that the end isn’t necessarily happy.
This has been the case with a number of media funds. At the turn of the millennium, and even more so after the dotcom bubble burst, they sold like hot cakes. However, these were not mutual investment funds, which invest in publicly listed securities and are therefore very transparent. Rather, they were closed-end funds, a type of entrepreneurial investment. Investors’ money is raised for a fixed period of time for specific projects. Media funds were used for film projects – from romantic comedies to exciting crime thrillers.
The story:
first save taxes, then get rich
Such media funds were sold in abundance to wealthy German investors. The story sounded tempting: a film project is initially very expensive, because the filming of a good script gobbles up millions. Those who put up the necessary money as part of an entrepreneurial investment were to be rewarded by the German tax authorities with an attractive tax saving. The magic word was ‘loss allocation’.
Stupid German money
The film would then make a multiple of the investment, so in addition to the tax savings, there would be a fat profit. Save taxes! With this sales pitch, German investors didn’t hesitate for long. They invested in droves. The film industry was only too happy to take the money, and it wasn’t just in Hollywood that people were amazed at the gullibility of media fund investors. The phrase ‘stupid German money’ was coined. Unfortunately, it turned out to be true.
No happy endings
The most innocuous of media and film funds simply never turned a profit. The expensively produced films flopped instead of becoming the hoped-for box-office hits. In the more serious cases, the tax authorities initially recognised the losses claimed, but then retrospectively disallowed the loss deduction. Finally, there were a number of media funds that had only pretended to produce films with the investment money.
When the fraud was discovered ...
In reality, the money ended up in the pockets of unscrupulous profiteers. Or exorbitant fees were withheld from the fund initiators, leaving only modest funds for the film. When the scam was exposed, there was widespread outrage, and not only the funds, but also several banks that had been involved in the distribution, were hit by a flood of compensation claims.
Lessons from the debacle
Why are we reporting on this 20 to 25 years later? Because the story of becoming a millionaire overnight is still being used to market dubious financial investments. You would be wise not to believe it, especially if it is seasoned with the fairy tale of huge tax savings. Film and media funds may be passé. But other closed-end funds, such as sustainability funds, are still being sold this way to inexperienced retail investors. Don’t make the mistake of confusing stories from the dream factory with reality. If it seems too good to be true, it usually is not true. In other words, stay away from opaque closed-end funds!
TEXT Judith Engst und Rolf Morrien
Judith Engst, MBA, born in 1970, is a business and financial journalist who mainly writes advice articles. She has written several books on the topics of the stock market, investment, law & taxes and communication, including “Geldanlage für Dummies”.
Rolf Morrien, born in 1972, studied history, economics and politics in Münster and Vienna and then trained as a business journalist in Bonn. Since 2002 he has been editor-in-chief of the stock market service “Der Depot-Optimierer” (among other things with a focus on “sustainable investments”).