On Thursday, April 22nd, hearings were held on Capitol Hill concerning the proposed virtual box-office futures markets and how these may effect the American film industry. A panel consisting of Richard Jaycobs of Cantor Fitzgerald (CF), Robert Swagger of Media Derivatives, Inc. (MDI), Robert Pisano of the Motion Picture Association of America (MPAA), Scott Harbinson representing both the International Alliance of Theatrical Stage Employees (IATSE) and the Directors Guild of America (DGA) and Prof. Schuyler Moore of UCLA. Moore is the author of the 2003 book, “The Biz” and made the claim before Congress that he was the originator of the concept of box office futures trading. However, as those who read my interview with Max Keiser may recall, Max claims that he invented the concept, as well as the technology which Cantor is using for this exchange. Keiser points to an 1996 interview he gave to CNN to verify his claim. Furthermore, his HSX website was also the subject of an article by the Village Voice in 1999.

Needless to say, Jaycobs, Swagger and Moore all testified to Congress that the new box office exchanges would be a benefit to Hollywood as a source for funding. Meanwhile, Pisano and Harbinson argued that these exchanges would cause chaos and ruin the TV-Film industry. Pisano told Congress, “This is nothing but synthetic speculation that helped destroy the financial industry.” Harbinson added, “it’s just gambling”, concurring that such an exchange would harm entertainment similarly as the mortgage industry. Swagger countered that only the six largest studios oppose the new exchanges. Jaycobs points to a document from Lionsgate studio that supports box office futures and claims that smaller and independent studios would benefit. Pisano punched back that over 150 small and independent studios have joined the MPAA in their opposition. Interestingly enough, Keiser has recently obtained a video which he claims shows a top executive for Lionsgate discussing insider trading and their relationship with HSX/Cantor. Max will be airing the video this week on his show at MaxKeiser.com.

Professor Moore attempted to conclude that the box office future exchange was merely a natural development. He pointed to the practice of ‘slate financing’, a method of raising capital for producing films. Moore told the House Agriculture Committee, which overseas the Commodity Futures Trading Commission (CFTC), that such financing takes into account a wide range of futures-type conditions, such as potential overseas and DVD sales, when seeking funding for productions. However, as Max Keiser pointed on in my interview with him, there is a high likelihood of insider trading on such an exchange.

While CEO of HSX, Keiser was being asked to manipulate prices. In the 1999 Village Voice article, Max described that some of his fellow board members, who had outside interests with studios, were manipulating prices and then reported those prices to NBC’s “Access Hollywood” in order to impact opening weekend box office results. Keiser resigned from HSX in protest over this, saying “My fellow board members, who were not working in the interests of HSX share holders but associates working at film studios, could not tell the difference between marketing and market manipulation.” Pisano echoed this with the MPAA’s concerns this past Thursday, that such speculation could torpedo film projects even before they go into production.

The CFTC is poised to rule on Cantor’s and MDI’s exchanges soon, as early as this coming week. Critics believe that such exchanges have the potential to become ripe with fraud. Pisano pointed out that a box office receipt is merely that, a receipt given to a consumer, who had no stake in the film’s actual production. His calling the Cantor and MDI products “synthetic speculation” refers to the Wall Street mortgage securities of synthetic CDO. A normal Collateral Debt Obligation is backed by a ‘tranche’ of actual mortgages held by a bank or financial institution, such as Fannie Mae or Freddie Mac. If a hedge fund takes out insurance in the form of a Credit Default Swaps (CDS), the hedge fund is making a speculative bet that the CDO will fail. Using the CDS itself as collateral for a CDO is known as a ‘synthetic CDO’. One can easily see how such products can influence, and destroy a market. These are bets on a bet, plus they a bets for a product to fail. Industry insiders could use such synthetic products to attack a company and force a film production to be halted even before it makes it to the big screen.