Lawsuit to Block Sale of Studio Could Hurt Weinstein's Victims

It seems like a noble pursuit: Eric Schneiderman, New York’s attorney general, filed a lawsuit over the weekend against the Weinstein Co. over the “toxic” environment it created that allowed its co-founder Harvey Weinstein to harass and abuse dozens of women.

But is it a wise pursuit?

Schneiderman said all the right things about compensating the victims, protecting current employees and assuring “that neither perpetrators nor enablers will be unjustly enriched.”

And the lawsuit was timed perfectly for maximum impact: just hours before the company was to be sold Sunday to a group of investors led by Maria Contreras-Sweet, who had said she planned to set aside at least $50 million for a victims’ fund and start a new female-led movie studio.

If Schneiderman’s goal was to upend the deal and make headlines, he succeeded. The sale of the company was quickly put on hold.

But if Schneiderman’s goal was to help Weinstein’s victims, he may have actually hurt their chances: If no sale goes through, the Weinstein Co. may be forced to file for bankruptcy protection.

In bankruptcy, the victims wouldn’t jump to the front of the line. Quite the opposite: The victims would be treated like any unsecured creditor, which means there would most likely be no funds for them — no matter how much abuse and misconduct they could prove in court.

It is now likely going to be harder, not easier, for victims to receive compensation for enduring years of harassment and abuse.

“Question No. 1: Is there enough money?” said Kenneth Feinberg, the lawyer who administered funds for the victims of the Sept. 11 terror attacks, the BP oil spill and the faulty ignition switch at General Motors. That, he told me, is always the single most important issue when trying to redress victims.

Feinberg said that protecting the value of a company in crisis is paramount to supporting the cost of paying victims. “These funds only get set up when there is sufficient money to forgo all the litigation,” he said.

In each of the major victims’ funds Feinberg administered, the funds were backed by either large companies or, in the case of the 9/11 victims, U.S. taxpayers.

Feinberg’s position was echoed by Gloria Allred, the California lawyer who is representing a group of Weinstein’s victims. Allred was in favor of the sale to Contreras-Sweet and advised her to voluntarily create a victims’ fund.

She said she was furious with Schneiderman.

“The only clear pathway to truly helping victims, many of whom I represent, is to allow this deal to proceed,'’ she wrote in an email. “I have worked with Maria’s team and they are 100 percent committed to helping victims. That is why I unequivocally support their deal.'’

She added, “If the Weinstein Company is allowed to slip into bankruptcy, which is what may happen due to this lawsuit by the A.G., I have grave concerns there will not be any funds left for victims.'’

Allred knows that if the proposed sale went through, the company would be funded by a group of investors that includes Ron Burkle, the billionaire investor and philanthropist. And if Allred decided to sue the company, her clients have a better chance of being paid than if the company remains independent. (She also takes a hefty fee — usually a third of proceeds — so she has personal incentive to succeed as well.)

Schneiderman made clear during a news conference broadcast on YouTube on Monday that he intended to scuttle the deal. He said he was unhappy that the Weinstein Co. still had much of the same management team — run by men, not women — and that he wanted an “independent monitor” for the victims’ fund.

In her original bid letter to the Weinstein Co. board Nov. 8, Contreras-Sweet specifically outlined a “litigation fund” that she said would “help compensate victims who may not qualify for insurance settlements, but still deserve compensation.”

But Schneiderman said he didn’t consider that a victims’ fund because it could be used for other litigation costs.

Whether or not the victims’ fund is funded properly or not in this instance is almost beside the point — it still better for victims to have an opportunity to sue a well-capitalized company than a bankrupt one.

After I contacted Schneiderman’s office with these concerns, another explanation emerged.

“The deal we reviewed would have stripped the Weinstein Company of essentially all its productive assets, saddled it with millions in liabilities, and forced victims to take their claims to a broke, judgment-proof, shell of a company,” a spokeswoman for Schneiderman said. “That structure would have all but guaranteed that many victims would get next to nothing — that outcome is unacceptable to anyone who believes the victims of Harvey Weinstein’s harassment and abuse deserve to be compensated.”

That’s not to say that Schneiderman should not have come forward with the results of his investigation. Nor should he have backed off from suing the Weinstein Co.

But a sale wouldn’t have precluded a lawsuit, and he would probably have had more leverage after a sale than before. He could have worked behind the scenes with the buyer — while holding over them the threat of a lawsuit. (He says the buyer refused to talk to him, though the other side appears to dispute that.)

Instead, he sued the company knowing that it would make the deal harder to complete.

Of course, there is always a chance that the deal will be resurrected, and maybe Schneiderman will be able to claim victory and say that this was all part of a negotiation.

Still, when Schneiderman held his news conference Monday, he spoke at a lectern with the words “Justice for Victims” written across it. It remains to be seen if he has made getting that justice more difficult.