Is Marvel a Villain?

If a recent Barron's article is correct, Marvel Entertainment (NYSE: MVL  ) could owe millions to a bankrupt company originally co-founded by Spider-Man creator Stan Lee.

Trouble is, the Barron's article, written by Bill Alpert -- one of my favorites for his normally spot-on detective work -- assumes too much and misses pertinent facts about a key player in the case.

Meanwhile, back at the Hall of Justice ...
The lawsuit hinges on whether an October 1998 intellectual property rights assignment between Lee and his former company, Stan Lee Media (SLM), included a financial interest in characters Lee co-created while working for Marvel.

Alpert puts it plainly, early in his story: "In 1998, [Marvel] ... used bankruptcy procedures to reject Marvel's $1 million-a-year lifetime-employment contract with Lee. That voided Lee's exclusive assignment to Marvel of his rights in characters like Spider-Man." [Emphasis added.]

Sounds ominous, doesn't it? A bankrupt entity siphoning tens (hundreds?) of millions from Marvel for its productions with News Corp. (NYSE: NWS  ) for Fantastic Four and X-Men, Sony (NYSE: SNE  ) for Spider-Man, and General Electric's (NYSE: GE  ) Universal for Hulk, among others.

That's what James Nesfield, who's leading the lawsuit against Marvel on behalf of himself and other SLM shareholders, including convicted felon Peter Paul, asserts in this SEC filing. Quoting:

July, 1998 -- [Marvel CEO Isaac] Perlmutter and [Avi] Arad use Chapter 11 Reorg Plan to void Stan Lee's 1994 ... exclusive Employment Agreement with Marvel. (Unknown to Perlmutter and the public, and never disclosed to the SEC or through public filings, the 1994 Marvel-Lee Employment Agreement ... included ... 10% of movie and TV profits a Rights Assignment and Forbearance Agreement that effectively paid Lee a royalty for his co-creator's rights and thereby secretly quieted title to Stan Lee's Marvel character co-creations, including Spider Man, X-Men, etc.) [Emphasis added.]

There's just one problem: Documentary evidence seems to back Marvel. Excerpts from Lee's 1976 and 1980 employment agreements, provided by the company via its investor relations representative, show that Lee transferred rights to his creations to Marvel decades ago.

To be fair, Alpert didn't have access to Lee's old contracts. And he maintains that his story is also based on documentary evidence, including a 1999 BrandWeek interview with Lee and Paul.

"I've always had a lifetime contract at Marvel Comics and about a year and a half ago, in their bankruptcy, they rejected everybody's contract. So for the first time, I had a chance to do whatever I wanted," Lee told BrandWeek.

It's the phrasing "do whatever I wanted" that's troubling. It could mean, "do whatever I wanted with the characters I created" or "do whatever I wanted because I was locked into working for Marvel and only Marvel."

The context of the interview, to me, suggests the latter. "We are establishing a studio dedicated to the development of compelling original content," Lee and Paul told BrandWeek when asked about the purpose of SLM. [Emphasis added.]

Excelsior no more?
Interestingly, that would jibe with the contents of a November 1998 contract Lee signed with Marvel. In it, the comic book king asserts Lee's right to work for other entities and only claims rights to work produced by Lee for Marvel.

But the agreement also makes assertions as to who owns Spider-Man, Hulk, the X-Men, etc. as brands. "You may, for publicity, advertising, public relations, historical and any related purposes ...  refer to or hold yourself out as founder and/or creator of whatever characters and images you created or founded on behalf of Marvel,  provided such uses do not confuse ownership or source of origin," the document reads. [Emphasis added.]

Clear, right? Yes, but in a 2002 lawsuit, Lee claimed he assigned Marvel "conditional rights" to characters he co-created -- even if the substance of the case was a provision of the November '98 contract that provided Lee a 10% cut of the TV and movie income derived from his characters.

The judge's ruling in the case doesn't speak to creator's rights. The closest you'll find is a reference to pre-1994 profit participation:

The parties entered into an agreement granting Lee a share of Marvel's profits. In 1995, pursuant to this agreement, Marvel paid Lee a 10% participation, which was based on revenue received by Marvel under an arrangement with Danchuk Productions. Under this arrangement, Lee received a percentage of gross receipts. The payments to Marvel were characterized as "profit participation."

That and other evidence compelled the judge to grant most of Lee's claims in January of 2005. By April, the case had been settled.

Today, Lee says, in a suit filed against Nesfield, that he didn't own rights to Marvel characters and, thereby, couldn't have assigned them to SLM.

Meet Mr. Mayhem
Ultimately, legal experts will decide this case, which is proceeding in two phases. First, a trial to determine liability. Then, if necessary, a trial to determine damages. Discovery is to be completed by October.

So, we won't know the outcome for months. Perhaps years. Still, as investors, I think it's important to study cases like this -- if only to understand what the plaintiff has to gain. By "plaintiff," I don't mean Paul, who at one time controlled 27% of Stan Lee Media. I mean Nesfield.

Known best as a whistleblower in the mutual fund market-timing scandal, Nesfield has been a player in bankruptcy investing as well. Here's his bio from a 2002 filing in which his former company, Nesfield Capital, proposed to acquire the assets of Freerealtime.com:

Mr. Nesfield is a specialist in the art of investing in distressed companies, primarily companies in bankruptcy. Mr. Nesfield has worked in the financial service field since 1978 in various capacities such as trader of government bonds, corporate bonds, market maker, and analyst. [Emphasis added.]

That's in stark contrast to how he bills himself in his later filing for the Marvel case. "Mr. Nesfield is in the investment business with a special interest in corporate governance," the document reads.

Perhaps so. Trouble is, Nesfield and his partners attempted a 2006 reverse spilt and recapitalization that would have given them more than 95% of the outstanding shares of SLM.

Nesfield defended the proposal -- which was never enacted and remains void -- in an interview with me last week, claiming that the reverse spilt was arranged to establish a quorum capable of acting to keep the company out of bankruptcy, a move that he said Lee blocked repeatedly. "We took extreme measures to protect the assets of the company," Nesfield said. "Everything we did was for a purpose."

The strategy worked: a Colorado state court judge awarded control of SLM to Nesfield in May.

And today? Nesfield has plenty to lose. According to a copy of an SLM shareholder list, Nesfield owned 500,000 shares as of February 2007. He confirmed by phone that his holdings remain at or near that total today. I'd love to believe that Nesfield's operation is a rescue, but to me, it looks too much like reclamation.

Yet I, too, have a bias: I am a Marvel shareholder.

My research doesn't necessarily disprove Nesfield and Paul's claims. Marvel could be perpetrating a fraud, as the lawsuit asserts. If so, it would likely forfeit hundreds of millions of dollars' worth of intellectual property.

To me, the context and facts of the case -- too much of which the Barron's article skipped over -- suggest a very different outcome. That's why I say Marvel is the hero here.

Fool contributor Tim Beyers had positions in Marvel shares and LEAP options at the time of publication. He still very much believes that the company, though officially a Stock Advisor selection, is the sort of multibagger-in-the-making that he and his rebellious colleagues search for daily at Rule Breakers. Try either service risk-free for 30 days.

Don't make The Motley Fool's disclosure policy angry. You wouldn't like it when it's angry.


Read/Post Comments (8) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2008, at 6:54 PM, inqwizitor wrote:

    Tim's valiant efforts to untangle the biggest web of lies, frauds and hidden assets in the history of the entertainment industry on Wall Street resulted in his honest conclusion.

    "My research doesn't necessarily disprove Nesfield and Paul's claims. Marvel could be perpetrating a fraud, as the lawsuit asserts. If so, it would likely forfeit hundreds of millions of dollars' worth of intellectual property."

    The public record presents the inescapable conclusion that the venerable pop icon creator of the greatest entertainment franchises in the world today emulated Zero Mostel's role in The Producers- when he sold more than 200% of his rights in his co-creations- and now his own namesake company is demanding justice from him and Marvel. Stan the Man not only assigned everything he owned in the creative universe to Stan Lee Media in October, 1998, after Marvel effectively reverted all Stan's rights to him in Chapter 11 in August, 1998, but a month later he did the same thing with Marve! Stan Lee Media heralded its agreement with lee as its primary asset in its 10K in 2000, Marvel hid its agreement from shareholders and the FEC from 1998-2002 when Stan sued Marvel on the Marvel agreement- the problem is the Marvel agreement was void because Stan warranted to Marvel that he never made any other assignments of any rights he owned to anyone else- 30 days AFTER he assigned everything he ever owned to his namesake dot com.

    When the due diligence is finally completed in an honest and professional way- the inescapable conclusion will be that Marvel has engaged in the biggest cover-up of claims to 50% of its multi billion dollar character franchises since October, 1998 - and Stan Lee Media will be entitled to its share of all profits Marvel has derived from 2003- for teh future of the copyrights it has.

  • Report this Comment On July 07, 2008, at 10:09 PM, gettothetruth wrote:

    Tim, don't be shy about reporting that Stan Lee does not have clean hands in this whole matter. You hold Marvel stock; I hold SLM stock. It is criminal what was done in the SLM bankruptcy. Stan never asserted any of the rights and assets of the company that were worth tens of millions of dollars. The company didn't have to be destroyed.

    Stan has been reported to the FBI, and we hope they will get to the bottom of his BK fraud. For anyone who wishes to check the record, the BK judge approved a transfer of assets during the BK free and clear of liens. Stan was supposed to develop certain properties for the benefit of creditors and shareholders with a company he was to form, SLC LLC. Judge Lax signed that order, and Stan signed the agreement as president of SLC LLC. The problem was that he never formed that company. Instead, he had the debtor in possession, Junko Kobayashi, an officer of his new company, POW, transfer THE ACCUSER and THE DRIFTER to a subsidiary of his company through another insider, Gill Champion, also an officer of POW. Before the BK was dismissed for cause, Stan looted it. While in BK and without knowledge of the judge, the trustee, the creditors' committee, or the secured creditor, he made a deal with the stolen assets with Vidiator.

    It is not difficult to believe that Spiderman would be conspiring with Marvel to screw SLM shareholders. Not difficult to believe at all.

  • Report this Comment On July 07, 2008, at 10:30 PM, gettothetruth wrote:

    Here are the documents that recorded the transfer of THE ACCUSER and THE DRIFTER, while in bankruptcy, to QED Productions LLC, a subsidiary of POW. This was done in broad daylight, but I guess Stan thought no one would notice.

    http://i27.tinypic.com/v404ns.jpg

    (For larger picture, open them in a picture program and enlarge them.)

  • Report this Comment On July 08, 2008, at 7:58 AM, inqwizitor wrote:

    The public record of how Marvel and Lee hid Lee's ownership and then assignment of his rights to his mega creations, while Bill and Hillary Clinton destroyed the credibility of the leading witness to come forward and expose these frauds, is found at www.stanleemedia.net; www.paulvclinton.com and www.peterfpaul.com

  • Report this Comment On July 09, 2008, at 12:50 AM, gettothetruth wrote:

    How can Lee now make public proclamations that what he did was a work for hire? When he sued Marvel, here is what he said:

    14. Under the Agreement the Defendants were given the right and assumed the obligation to commercially exploit Mr. Lee's characters, as well as his name. In order to facilitate these rights and obligations, Defendants received a conditional assignment of Mr. Lee's rights in his many world famous and hugely popular characters, and Mr. Lee was entitled to share in the profits from any live action or animation television or movie production based on these characters and other Marvel characters, as well as profits from the exploitation of any ancillary rights associated with such film or television productions, including toys.

    15. Throughout his relationship of more than sixty years with Defendants, during which Mr. Lee permitted Defendants to exploit his superhero characters on the understanding that they would share in the profits derived therefrom, Mr. Lee reposed trust and confidence in Defendants to, among other things, deal with him fairly and in good faith, and to pay over to him a portion of the profits derived from such commercial exploitation.

    =======

    As you see, the "Defendants were given the right and assumed the obligation to commercially exploit Mr. Lee's characters." Defendants received a "conditional assignment of Mr. Lee's rights."

    Mr. Lee "permitted Defendants to exploit his superhero characters."

    Are you kidding, Stan? You asserted then what you deny now after getting paid off by Marvel. How convenient for you after you got your payoff. More of your statements are going to come back to haunt you during discovery and trial. Neither you nor Perlmutter are going to like what is exposed. You can't hide the truth forever.

  • Report this Comment On July 09, 2008, at 6:20 PM, abbeymoney wrote:

    Here is Marvel's reply to the article: http://news.google.com/news?btcid=335a1f6ceccb6c3a

    Thanks Tim for your research and article.

  • Report this Comment On July 10, 2008, at 11:19 AM, gettothetruth wrote:

    to TIM BYERS:

    re: "To be fair, Alpert didn't have access to Lee's old contracts."

    Tim, why would that matter, when the Nov. 1998 agreement superseded any and all previous contracts?

    “This Agreement will constitute the entire understanding between the parties in connection with Stan Lee’s relationship with Marvel from the date hereof, shall supersede any and all previous agreements and may not be amended or modified except by a writing signed by the party to be charged.”

  • Report this Comment On July 10, 2008, at 2:11 PM, slade15342 wrote:

    I just posted an article that said you are better off buying comic books over the next decade, but Marvel hasn't been a bad performing stock either. The idea of great movies from a comic based company really sparked their growth, and I remember swing trading that stock a few years ago with some success. Stick with the comic books, an investment you can actually hold. Check out their staggering return in this post and you might replace your whole portfolio.

    http:www.thegearedinvestor.com/comic_books.shtml

    Cheers,

    Caps: slade15342

    aka: thegearedinvestor.com

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