Hollywood Hoax: Investors reach settlement in alleged Hollywood Ponzi scheme while FBI probe looming

CHICAGO (WLS) -- The Hollywood investment dreams for some North Shore residents may end better than they began after they say they lost tens of millions of dollars to a big marquee film producer.

Court filings on Tuesday show the investors have agreed to a $60 million settlement in their lawsuit against Jason Cloth, a prominent producer and Sanford Schmidt, a metro Chicago investment advisor, who they accused of cheating them in the investment swindle.

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The settlement agreement only pertains to defendant Schmidt, as the case against Cloth continues to move forward, attorneys representing the investors told the ABC 7 I-Team.

Investors describe it as a "Hollywood hoax:" Cloth allegedly claimed their tens of millions were going to bankroll big name films including "Joker," "Babylon" and an upcoming "Mission Impossible."

But the investors have alleged in court filings that their money ended up gone with the wind.

The I-Team first reported on the proposed class action lawsuit in March.

For Cloth, the man who produced blockbuster films including 2019's "Joker," the lawsuit is no laughing matter.

Attorneys say more than 130 investors, mostly from Cook and Lake counties, had agreed to Cloth's investment proposal; a chance to step into the glitzy film world and secure a slice of Hollywood, based on the film project's box office success.

But the investors say it turned out to be a house of horrors.

"Investors were promised that they would be paid if the project was profitable and accepted the risk that they would not be paid if it was not profitable," the investors' Tuesday court filing reads. "Contrary to the promises made, Cloth paid whatever he felt like whenever he felt like it regardless of the success or failure of the project invested in. A significant portion of the money invested was consumed by Cloth and never actually invested in film production."

Court filings claim a Ponzi-style investment scheme, with Cloth paying existing financiers with money collected from new ones.

"They were significant motion pictures they're investing in," said Chicago attorney Alex Loftus, who is representing the investors. "He took money promising to do one thing with it, and he didn't do that and took and kept the money."

Loftus says the case now has the attention of federal authorities, who contacted him the day after ABC 7's initial report.

"The very next day, after the reporting aired [in March] I got a call from the local FBI office asking for information," Loftus said. "There's an ongoing federal investigation, and it came right on the heels of ABC's reporting on this."

FBI officials declined to say whether they are now investigating Cloth, who is a Canadian citizen.

On Tuesday, class action investors filed their intent to settle with Schmidt. The lawsuit claims Schmidt negligently relied on information from Cloth when recommending the investment to his clients. The plaintiffs are now settling with Schmidt's insurance company for $60 million.

Schmidt's attorney David Baugh told the I-Team his client "was not a partner with Jason Cloth" and "was equally a victim of Cloth having invested and losing several million dollars of his own money."

"Schmidt denies the allegations of negligence but he put his clients first with this settlement that enables his clients to recover from available insurance," Baugh said. "Schmidt continues to cooperate with investors in pursuit of other sources of recovery."

Loftus said Schmidt did the right thing by his clients.

"With every investment like this, there's the fraudster and there's always a gatekeeper," Loftus said. "And in this instance, we settled with the gatekeeper. And if the gatekeeper didn't let it flow into Chicago, then none of this would have happened."

Brian Haussmann, the Chicago attorney who has represented Cloth, tells us the allegations in the complaint are "demonstrably false."

"Mr. Cloth denies the allegations of the complaint, which are demonstrably false," Haussmann told the I-Team. "Mr. Cloth looks forward to defending the action."