But instead of running for the hills, Stark continues to invest with Kavanaugh. According to people close to the hedge fund, it has bought into several other ventures he's championed, including a $700 million fund he set up last year to finance 19 films with Sony and Universal. In fact, Kavanaugh helped persuade Stark to buy in at the equity level—the riskiest slice of the investment.

To understand that risk, think of a movie's revenue as a waterfall. The studio, sitting on the highest ledge under the torrent, is compensated first, for marketing and distribution. Then gulps are taken by top actors, directors, and the guilds. Near the bottom of the waterfall sit investors like the ones Kavanaugh brings in, who typically kick in half the financing but drink only if there is enough water trickling down. First come the lower-risk investors, who commonly earn an 8 percent return on their money; then the "mezzanine" level, who are promised about 15 percent; and at the very bottom, the equity level, who own a piece of a movie's ongoing revenue, if any. For a blockbuster, this can mean a flood. For a bomb, it means they lose everything.

The risk is increased by the fact that studios have traditionally kept their most lucrative franchises off the table. Warner Bros. won't let investors in on the Harry Potter movies, Sony holds back the Spider-Man franchise, and Disney keeps its Pirates of the Caribbean series for itself. Of the major studios, only 20th Century Fox allows investors to participate in all its films.

So why would Stark executives keep pouring their money into Hollywood? Are they gluttons for punishment, or is Kavanaugh the greatest huckster since P.T. Barnum? In fact, according to several people with knowledge of the deal, Virtual's performance problems were due to Stark, not Kavanaugh. He had advised them to invest in only one movie—300, an astute pick that broke box office records when it debuted in March. Instead, Stark wanted to invest in more pictures and approved a group Warner Bros. proposed that, despite 300's success, has so far lost money. (Two more of the Virtual films with Warner Bros.—Nancy Drew and the Brad Pitt western The Assassination of Jesse James—have yet to open.) A spokesperson for Stark declined to comment.

Furthermore, insiders say, Warner Bros. has agreed to make Stark happier by sweetening the terms for Nancy Drew and Jesse James; Sony will likely do the same for its outside investors. "Before, when Wall Street's investment was a couple of hundred million here, a couple hundred million there, it could come or go," explains Kavanaugh. "But now it's such an integral part of the business, [studios] can't let it fail."

Movie industry folks seem to have the same feeling about Kavanaugh. Some of the same 500-odd investors from his early financial misadventures—many of them big Hollywood names—are doing business with him again, though this time, instead of writing him a check, they're getting him to raise the money. They include Canton, now a producer, whose company owes its initial financing to Kavanaugh; Jim Wiatt, C.E.O. of the William Morris Agency, which has several clients working on films backed by Kavanaugh; and producer Charles Roven (Batman Begins, Scooby-Doo), who is making a heist picture largely financed by Kavanaugh's company.

In Hollywood, ''not half a dozen men have ever been able to keep the whole equation of pictures in their heads," F.Scott Fitzgerald wrote in The Last Tycoon. Richard Saperstein, the president of production for the Weinstein brothers' Dimension Films, is one who puts Kavanaugh in that elite group.

"He's just about the quickest person I've ever seen in a room," says Saperstein, who recently sought Kavanaugh's help in resolving a deal that had been at a stalemate for months. "Within a few minutes of hearing where everyone was coming from, he created an equation in front of us. I'm not idealizing the guy, but it was like he was doing a higher math."