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2 GLANCY BINKOW & GOLDBERG POMERANTZ LLP LLP Marc I. Gross 3 Lionel Z. Glancy Jeremy A. Lieberman 4 Michael Goldberg Emma Gilmore Robert V. Prongay 600 Third Avenue, 20th Floor 5 1925 Century Park East, Suite 2100 New York, New York 10016 6 Los Angeles, CA 90067 Telephone: (212) 661-1100 Telephone: (310) 201-9150 Facsimile: (212) 661-8665 7 Facsimile: (310) 201-9160 [email protected] 8 Email: [email protected] [email protected]

9 [email protected]

10 FEDERMAN & SHERWOOD POMERANTZ LLP 11 William B. Federman Patrick V. Dahlstrom 10205 North Pennsylvania Avenue Ten South La Salle Street, Suite 3505 12 Oklahoma City, Oklahoma 73120 Chicago, Illinois 60603 13 Telephone: (405) 235-1560 Telephone: (312) 377-1181

14 Facsimile: (405) 239-2112 Facsimile: (312) 377-1184 [email protected] [email protected] 15

16 Attorneys for Lead Plaintiff and the Class

17 UNITED STATES DISTRICT COURT 18 CENTRAL DISTRICT OF CALIFORNIA

19 : 20 JOHN MELOT, Individually and On : No. LA-CV-13-05388-JAK-SS Behalf of All Others Similarly Situated, : 21 : : CLASS ACTION 22 Plaintiff, : : THIRD AMENDED COMPLAINT 23 : v. : FOR VIOLATION OF THE 24 : FEDERAL SECURITIES LAWS : 25 JAKKS PACIFIC, INC., STEPHEN G. : BERMAN, and JOEL M. BENNETT, : DEMAND FOR JURY TRIAL 26 :

27 : Defendants. : 28 :

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1 Lead Plaintiff Edward Donahue (“Plaintiff”), individually and on behalf of 2 all other persons similarly situated, by his undersigned attorneys, for his third 3 amended complaint (“Complaint”) against defendants (“Defendants”), alleges the 4 following based upon personal knowledge as to himself and his own acts, and 5 information and belief as to all other matters, based upon, inter alia, the 6 investigation conducted by and through his attorneys, which included, among other 7 things, a review of the Defendants’ public documents, conference calls and 8 announcements made by Defendants, United States Securities and Exchange 9 Commission (“SEC”) filings, wire and press releases published by and regarding 10 JAKKS Pacific, Inc. (“JAKKS” or the “Company”), analysts’ reports and 11 advisories about the Company, and information readily obtainable on the Internet. 12 Plaintiff believes that further substantial evidentiary support will exist for the 13 allegations set forth herein after a reasonable opportunity for discovery. 14

15 NATURE OF THE ACTION

16 1. This is a federal securities class action on behalf of a class consisting

17 of all persons other than Defendants who purchased or otherwise acquired JAKKS

18 securities between July 17, 2012 and July 17, 2013, both dates inclusive (the “Class

19 Period”), seeking to recover damages caused by Defendants’ violations of the federal

20 securities laws and to pursue remedies under §§ 10(b) and 20(a) of the Securities 21 Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated 22 thereunder against the Company and certain of its top officials. 23 2. From the beginning of the Class Period, JAKKS lacked sufficient cash 24 to fund its operations and growth prospects. To meet that financial need, JAKKS 25 began negotiations for a $75 million working capital revolving Line of Credit with 26 Wells Fargo. Those negotiations culminated in the execution of a Credit Agreement 27 on September 27, 2012. According to the terms of that Agreement, JAKKS was 28

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1 required to have a consolidated net profit of at least $1 on a rolling basis for four 2 fiscal quarters applied at the end of each quarter, and show that its total debt would 3 not exceed its rolling four-quarter EBITDA. Thus, to obtain and maintain the Line 4 of Credit from Wells Fargo, the Defendants had a motive to issue inflated guidance 5 to maintain the appearance of profitability. Defendants also duped the unsuspecting 6 investors into believing that JAKKS was a fountain of growth. 7 3. The Individual Defendants manipulated JAKKS’ internal forecast 8 numbers in an effort to portray profitability. Confidential witnesses well-placed at 9 JAKKS, including JAKKS’ former controller, the former Vice-President of Finance 10 reporting directly to the CFO, and the right-hand man of JAKKS’ former Executive 11 Vice President of Domestic Sales, corroborate that the Individual Defendants had 12 unfettered access to and doctored the Company’s forecasts. For example, CW 1, 13 JAKKS’ former controller and Executive Vice President, who reported directly to 14

15 Defendant CFO Bennett and designed the sales and forecasting system at JAKKS,

16 observed that the forecasts he/she prepared were often overridden without any

17 reasonable basis by his/her superiors, Defendants Berman and Bennett. CW 1

18 explained that while he/she had created a very detailed and accurate forecasting

19 system, based upon skews for each toy, by customer, by salesman and by region,

20 CEO Stephen Berman told CW 1 they were inaccurate and to meet again with the 21 sales team and “re-work the numbers.” “The CEO said that [his] numbers were a 22 lot higher than this,” CW1 recalled, even though the CEO never provided any 23 documentation for his higher set of numbers. Nevertheless, “the [CEO’s] numbers 24 went out to the public,” even though CW1, as the Controller, had no idea where the 25 CEO was getting the higher numbers and questioned them in emails around August 26 2012. CW 1 explained that the percentage difference between the actual numbers 27 the Company eventually reported and the numbers it provided to Wells Fargo in the 28

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1 financial covenant requiring JAKKS to show a cumulative four-quarter profit is a 2 benchmark for the difference between JAKKS’ internal forecasts and the numbers 3 that the Individual Defendants reported to the Street. CW 1 said he did not keep 4 copies of the emails confronting the Individual Defendants with these material 5 discrepancies, but he urged Plaintiff to subpoena what he called “numerous emails 6 from me and my team” about the differences between the internal forecasts and 7 the external numbers Berman and CFO Bennett reported to investors. 8 4. CW 6, Price’s right-hand man, similarly corroborated that Defendants 9 Berman and Bennett took the internal forecasts that Price provided to them and 10 exaggerated the numbers they gave the Street “by about 10 to 15 percent” for several 11 quarters. CW 6 explained that Price raised questions in emails to Berman and 12 Bennett about the discrepancies between the internal projections and external 13 numbers given to investors. In response to those emails, the CEO and CFO told 14

15 Price “they needed to sell more and it was up to management to decide what numbers

16 to release to the Street.”

17 5. CW 12 also corroborated that during the Class Period, JAKKS’ internal

18 forecasts were significantly lower than the revenue guidance CEO Berman and CFO

19 Bennett provided to investors in 2013 and 2013. For example, by about April 2012,

20 internal sales forecasts were “locked” and showed that the Company would not meet 21 the 2012 revenue guidance provided to investors. The forecasts were approximately 22 6% lower than the public guidance for 2012. According to CW 12, JAKKS’ 23 employees, including the former controller, CW 1, were raising red flags to higher- 24 level executives by April 2012 about how the Company was not going to meet its 25 guidance for that year. CW 12 has in his/her possession a screen shot of internal 26 sales forecasts in June 2012 that show JAKKS was not on target to meet guidance 27

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1 for the year. CW 12 said CW 1 provided the internal sales forecasts to CFO Bennett 2 and likely other senior executives. 3 6. The discrepancies between the internal projections and Defendants’ 4 public forecasts were material. For example, JAKKS’ July 17, 2012 public earnings 5 per share guidance for full year 2012 was inflated by at least $1.43 and its forecasted 6 sales numbers for full year 2012 were inflated by approximately $61 million, or over 7 9%. Similarly, JAKKS’ February 21, 2013 full year 2013 earnings per share 8 guidance was inflated by $1.51 to $1.56 or over 100%, and its full year forecasted 9 sales numbers were inflated by approximately $67 million, or 11%. 10 7. Defendants’ deceit is also supported by the fact that only one day after 11 obtaining the $75 million loan from Wells Fargo, JAKKS slashed its guidance. On 12 September 28, 2012, JAKKS decreased its earnings per share guidance from $1.04 13 – $1.08 it had forecasted since July 17, 2012 to $0.68 – $0.74, less than what it 14

15 needed to forecast cumulatively on a four-quarter basis to make up for the $20

16 million loss, or equivalent of $0.84 per share, it had experienced in Q4 2011, so that

17 it could report a profit. On that day, JAKKS also lowered its sales revenues guidance

18 downwards by approximately $30 million from a range of $720 million to $728

19 million to between $690 million to $700 million.

20 8. The Defendants’ fraudulent scheme is further evidenced by the fact that 21 only three days after obtaining the $75 million loan from Wells Fargo (by certifying 22 that it was profitable for the four quarters ending September 30, 2012), JAKKS 23 failed two out of the three financial covenants in the Credit Agreement, including 24 the requirement that JAKKS show a net profit of at least $1 (one dollar) for the four 25 quarters ending on September 30, 2012. Specifically, by September 30, 2012, 26 JAKKS had consolidated Net Profit of negative $5,361,000 when it was required to 27

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1 have at least $1. JAKKS also had a consolidated leverage ratio of 5.87 when it was 2 required to be not greater than 4.00. 3 9. In addition to these shenanigans, numerous confidential witnesses 4 reveal that in an effort to meet earnings projections, JAKKS routinely laid off 5 workers before the end of the quarter. Through this illicit practice, JAKKS materially 6 manipulated JAKKS’ expenses and earnings. For example, CW 9, who helped 7 supervise the design, marketing, and sales of several lines of toys at JAKKS, 8 remarked that every three months, the Company would lay off a large number of 9 workers, with the firings timed to occur several weeks before the end of the fiscal 10 quarter. Workers were sometimes rehired the following quarter to fill the same 11 positions. JAKKS carried on this illicit practice without a whisper to the market. 12 CW 6 corroborated this layoff practice. CW 6 further explained that Defendants 13 Berman and Bennett knew about the end of quarter layoffs that occurred regularly 14

15 and in fact were directing them: “Of course, [Berman and Bennett] knew about the

16 layoffs. They directed the layoffs. They had to cut their expenses to make their

17 numbers.”

18 10. Defendants’ misstatements did not stop there. Defendants further

19 misled the public regarding the success of its newly-introduced toy lines Monsuno

20 and Winx, which they repeatedly claimed were “showing strong momentum” with 21 “orders on hand and our forecast in-house through both U.S. and 22 international…growing expeditiously,” and the “sell-throughs…well beyond what 23 we ever expected.” In stark contrast to Defendants’ assurances, however, 24 confidential witnesses confirm that Monsuno and Winx underperformed from the 25 outset. For example, CW 3, who was monitoring sales at one of JAKKS’ largest 26 customers, recalls that the Monsuno toy line performed poorly from its launch, and 27 that executives at JAKKS were privy to this information. The sales performance of 28

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1 the Monsuno and Winx lines was material to investors. For example, JAKKS 2 reported that the miss in these two categories was one of the principal factors that 3 caused the Company to miss its 2Q 2013 targets and lower its full year 2013 sales 4 forecast by approximately 11% (from a range of $694 – 700 million to $620 million) 5 and earnings per share projections by close to 500% (from a range of $0.63 - $0.68 6 to a loss of $2.56). 7 11. Following Defendants’ repeated guarantees of growth, on July 17, 8 2013, after the market close, JAKKS shocked the market when it suddenly slashed 9 its full-year revenue and earnings per share forecasts, announcing that it would 10 suspend its dividend, and implement a restructuring plan involving a “substantial 11 reduction of leased space, employees and other overhead expenses.” This news sent 12 JAKKS’ shares into a tailspin, dropping approximately 39% from a close of 13 $11.48/share on July 17, 2013, to a close of $7.00/share on July 18, 2013. 14

15 12. As a result of Defendants’ wrongful acts and omissions, and the sharp

16 decline in the market value of the Company’s stock, Plaintiff and other Class

17 members have suffered significant losses and damages.

18 13. Following the issuance of the Court’s decision on June 6, 2014,

19 granting Defendants’ motion to dismiss the complaint but giving Plaintiff leave to

20 amend, Defendants have engaged in actions having the effect of discouraging 21 Confidential Witnesses from providing Plaintiff with further information related to 22 Defendants’ fraudulent conduct. For example, when Plaintiff’s investigator reached 23 CW 7 to obtain further information, CW 7 relayed that he/she received a letter from 24 an attorney at Skadden Arps (Defendants’ attorneys of record), marked 25 “Confidential.” In that letter, Defendants’ counsel informed CW7 that they had 26 reason to believe she was in fact one of the CWs to whom statements are attributed 27 in the SAC, and requested “to be present if you decide to grant any further interviews 28

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1 with plaintiffs’ counsel.” CW 7 said that he/she had many sleepless nights since 2 he/she received the letter and that he/she was scared to speak any further. CW 7 said 3 he/she was afraid of what JAKKS and its lawyers would do to him/her. 4 JURISDICTION AND VENUE 5 14. The claims asserted herein arise under and pursuant to Sections 10(b) 6 and 20(a) of the Exchange Act (15 U.S.C. § 78j(b) and 78t(a)) and Rule 10b-5 7 promulgated thereunder (17 C.F.R. § 240.10b-5). 8 15. This Court has jurisdiction over the subject matter of this action 9 pursuant to § 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331. 10 16. Venue is proper in this District pursuant to §27 of the Exchange Act, 11 15 U.S.C. §78aa and 28 U.S.C. §1391(b), as JAKKS’ principal place of business is 12 located within this District and a substantial part of the conduct complained of herein 13 occurred in this District. 14

15 17. In connection with the acts, conduct and other wrongs alleged in this

16 Complaint, defendants, directly or indirectly, used the means and instrumentalities

17 of interstate commerce, including but not limited to, the United States mail, interstate

18 telephone communications and the facilities of the national securities exchange.

19 PARTIES

20 18. Plaintiff, as set forth in his previously filed Certification, acquired 21 JAKKS securities at artificially inflated prices during the Class Period and was 22 damaged upon the revelation of the alleged corrective disclosures. 23 19. Defendant JAKKS is a Delaware corporation with its principal 24 executive offices located at 22619 Pacific Coast Highway, Malibu, California 25 90265. JAKKS’ common stock trades on the NASDAQ under the ticker symbol 26 “JAKK.” 2012 10-K at 10. 27

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1 20. Defendant Stephen G. Berman (“Berman”) has served at all relevant 2 times as the Company’s Chief Executive Officer and President, and a member of the 3 Company’s board of directors (“Board”). 2012 10-K at 77. 4 21. Defendant Joel M. Bennett (“Bennett”) has served at all relevant times 5 as the Company’s Chief Financial Officer and Executive Vice President. Bennett 6 holds a Bachelor of Science degree in Accounting and a Master of Business 7 Administration degree in Finance and is an inactive Certified Public Accountant. 8 2012 10-K at 77. 9 22. The defendants referenced above in ¶¶ 19-20 are sometimes referred to 10 herein as the “Individual Defendants.” 11 23. The defendants referenced above in ¶¶ 18-20 are sometimes referred to 12 herein as “Defendants.” 13

14 SUBSTANTIVE ALLEGATIONS

15 Background

16 24. JAKKS is a leading multi-line, multi-brand toy company that

17 principally licenses, produces, markets and distributes toys and related products. 18 2012 10-K at 2, 53. The Company has two reportable segments: (i) Traditional Toy 19 and Electronics, and (ii) Role Play, Novelty and Seasonal Toys. Id. at 53. The 20 Traditional Toy and Electronics segment includes action figures and accessories, for 21 example licensed characters like Monsuno and Batman, toy vehicles, electronics 22 products, and dolls and accessories. Id. at 2, 53. The Role Play, Novelty and 23 Seasonal Toys segment includes activity kits, dress-up and pretend play products, 24 kids’ furniture, and Halloween and everyday costumes. Id. 25 25. JAKKS sells its products, using both in-house sales teams and 26 independent sales representatives to toy and retail chain stores, department stores, 27 club stores, office supply stores, drug and grocery store chains, and toy specialty 28

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1 stores and wholesalers. Id. at 3. JAKKS also uses e-commerce sites, including 2 Amazon.com, to sell its products. Id. at 7. The Company’s sales are concentrated 3 with three customers––Wal-Mart, Target, and Toys R’ Us––accounting for 4 approximately 46.8% of its net sales in 2012. Id. at 54. “[A] significant portion of 5 all [JAKKS’] sales has been to domestic customers.” Id. at 7. 6 26. For Q1 and Q2 2012, JAKKS reported net sales of $73.4 and $145.4 7 million, and earnings per share of (0.59) and $0.06, net of financial and legal 8 advisory fees and expenses, respectively. 9 27. With respect to the Traditional Toy and Electronics segment, in 2012, 10 JAKKS launched a new line of action figures, playsets and accessories based on the 11 boys’ animated television show Monsuno, which premiered in the U.S. on 12 Nicktoons® in February 2012 and abroad in the fall of 2012. Id. at 5. JAKKS also 13 launched in 2012 a WinxClub® line of toys. Id. at 32. 14

15 The Individual Defendants Had Unfettered Access to JAKKS’ Sales Figures and Projections 16 28. Numerous confidential witnesses corroborate that the Individual 17

18 Defendants had continuous and unrestricted access to the Company’s current sales

19 figures and forecasts via its JAKKS.net system and also were apprised of all changes

20 in sales and projections in weekly meetings with its Controller. CW 1 served as the

21 Controller and Executive Vice President at JAKKS from 2010 until he was

22 terminated in October 2012. Based at the Company’s headquarters in Malibu,

23 California, CW 1 reported directly to Defendant CFO Joel Bennett. CW 1 was 24 responsible for overseeing JAKKS’ finances. CW 1 was hired to fix JAKKS’ 25 finance and forecasting systems after a massive loss at JAKKS on or about Q4 2009 26 or Q1 2010. When CW 1 joined JAKKS, the Company had no meaningful 27 forecasting controls or procedures in place. As such, CW 1 was tasked to and did 28

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1 design the sales and forecasting system at JAKKS, which JAKKS used to support 2 its projections made in its public statements and to avoid the problems with JAKKS’ 3 prior forecasts (the “Forecasting System”). 4 29. According to CW 1, to ensure accuracy, the Forecasting System 5 examined volumes and forecasted each customer’s sales by month. The Forecasting 6 System required JAKKS’ salespeople to provide confidence levels for the forecasts, 7 and the progress of anticipated sales was continuously monitored. CW 1 informed 8 management of all changes in product demand: If the sales on a product started 9 waning, CW 1 would promptly appraise management. 10 30. The forecasts were maintained in a spreadsheet format. CW 1 produced 11 an internal report on a weekly basis, which broke down the actual sales for each toy 12 line by each customer in every region of the country. The report compared the actual 13 sales to the budgeted forecast of sales. CW 1 emailed the report to the Individual 14

15 Defendants. CW 1 and the Individual Defendants met on a weekly basis to discuss

16 the actual sales against the forecasts. The weekly forecast showed the executives

17 how each toy line was performing and which customers were purchasing the

18 Company’s toys, and in what quantities.

19 31. CW 1 also explained that, to minimize losses and improve accuracy,

20 CW 1 implemented a system in which JAKKS received point-of-sale data from large 21 retailers immediately after a toy was launched. This meant that the Company and 22 its chief executives knew almost immediately after a product was launched how it 23 was performing. This way, JAKKS could promptly cease production of 24 underperforming toys. The Individual Defendants saw this detailed information in 25 the forecasts and Excel spreadsheets CW 1 provided them on a weekly basis. Thus, 26 the Individual Defendants could review sales by toy line, by store, by region, as well 27 as ascertain which toys were sitting on the shelves. CW1 observed that Defendants 28

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1 Berman and Bennett did away with this system after CW 1 left the Company, 2 because they did not want the sales force spending their time examining the sales 3 data instead of selling toys. 4 32. CW 2 worked as an executive assistant to JAKKS’ Senior Vice 5 President of domestic sales, Ken Price, from June 1999 to late June 2012. CW 2 6 worked in the New York office, which houses many of the Company’s sales 7 executives. As a long-time employee and executive assistant to a vice president, 8 CW 2 was familiar with how sales forecasts were compiled and disseminated 9 throughout the Company. CW 2 remarked that JAKKS’ sales executives regularly 10 received sales figures and forecasts of pending deals from various regions of the 11 country. Price received sales forecasts for domestic sales, and Vice President of 12 International Sales Carmine Russo received sales forecasts for international sales. 13 Price was responsible for compiling the domestic sales forecast every quarter into a 14

15 report. This report was composed of sales forecasts drawn from sales staff located

16 throughout the country. The forecasts were based upon sales figures from retail

17 stores and merchants. According to CW 2, the quarterly sales reports were sent to

18 the Company’s executives, including Defendant Berman. JAKKS’ executives would

19 also request additional sales forecasts between quarters. Carmine Russo also rolled

20 up the sales numbers from overseas and sent quarterly sales reports and forecasts, 21 for international sales, to the Individual Defendants in California. 22 33. CW 3 worked as a business analyst for JAKKS from January 2011 to 23 September 2012. CW 3’s responsibilities included receiving sales data for all of 24 JAKKS’ products from two major vendors, Amazon.com and Toys R Us, which CW 25 3 would then compile and forward to executives at the Company’s headquarters in 26 California. CW 3 worked in the New York office, which housed many of the 27 executives in the Company’s sales division. CW 3 reported to Vice President of 28

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1 Sales Dan Cooney. Every week, CW 3 sent sales data from Toys R Us and 2 Amazon.com to the executives in California, as well as most of the top executives 3 in the marketing department. CW 3 said that other business analysts received similar 4 data from all the large chain stores that sold JAKKS’ products, including Wal-Mart 5 and Kohl’s. Those analysts also sent sales data to the Company’s top executives on 6 a weekly basis. The sales data was referred to as the “R Report.” Sales forecasts, 7 compiled by sales coordinators, were produced using JAKKS’ own software called 8 “JAKKS’ VI Tool.” As a result of the internal flow of information, the CEO, COO 9 and other top executives at JAKKS knew how well all products were selling on a 10 weekly basis. The sales data was also made available to Price and Russo. 11 34. CW 4 worked as a business analyst for JAKKS from October 2011 to 12 August 2012. CW 4’s responsibilities included receiving sales data for JAKKS’ 13 products from Wal-Mart, one of JAKKS’ largest retailers, and producing forecasts 14

15 for future sales. CW 4 worked out of the Company’s office in Bentonville, Arkansas

16 and reported to Senior Vice President of Sales Bryan Shoe. CW 4 received sales

17 data from Wal-Mart and, using a number of variables, including past sales,

18 marketing, and anticipated consumer demand, CW 4 prepared forecasts for future

19 sales at Wal-Mart. These forecasts were provided both to Wal-Mart, to help the

20 retailer make decisions about inventory, and to JAKKS’ executives. JAKKS used a 21 web-based system called “JAKKS.net” to prepare forecasts. CW 4 and other 22 analysts entered their forecasts into the system as soon as they were generated. CW 23 4 added forecasts to the system on a daily or weekly basis. Forecasts for the sales 24 of JAKKS’ products were listed by product name and by the retailer in which the 25 product was sold. The forecasts on JAKKS.net were visible to large numbers of 26 sales staff, including all inside analysts, account managers and senior vice 27 presidents. According to CW 4, the numbers were “rolled up” to all levels of 28

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1 management. “Anybody had full visibility of what you were forecasting,” said CW 2 4. 3 35. CW 5 worked at JAKKS as an associate product manager from 4 November 2010 to August 2011 and as a brand manager from August 2011 until 5 March 2013. Both of these positions were in the Company’s marketing department. 6 During that time, CW 5 routinely reviewed the sales data and sales projections of 7 several products. Sales representatives obtained point of sale (“POS”) data directly 8 from major retailers, including Wal-Mart, K-Mart, Target, and Toys R Us. The sales 9 representatives then entered the sales data into JAKKS.net, the Company’s online 10 network. Sales projections were developed in collaboration between JAKKS’ 11 marketing and sales departments. According to CW 5, sales projections were also 12 placed on JAKKS.net. CW 5 noted that point-of-sale data from retailers was 13 updated at least weekly, and many individuals in both the sales and marketing 14

15 divisions had access to all or some of the data on the network through a log in system.

16 Data could also be extracted from the site and emailed to other parties in the form of

17 a Microsoft Excel document.

18 Defendants Manipulated JAKKS’ Forecasts In Order to Paint a Picture of Profitability 19 36. From the beginning of the Class Period, JAKKS was unable to fund its 20 operations from its available cash, and required additional financing. To meet that 21 need, the Company commenced deliberations with Wells Fargo. On September 27, 22 2012, JAKKS entered into a credit agreement with Wells Fargo for a $75 million 23 line of credit (the “Credit Agreement”). See Exhibit 10.1 to Form 8-K/A filed with 24

25 the SEC on September 27, 2012. Defendants Berman and Bennett were intimately

26 involved in obtaining the loan. As “conditions precedent” to the loan, the Credit

27 Agreement required, among other things, that Defendants Berman and Bennett

28 provide a “certificate” signed by both Berman and Bennett certifying that the

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1 Company was not in default of the Credit Agreement’s provisions. Defendant 2 Bennett also executed the Credit Agreement on behalf of JAKKS as the “authorized 3 officer.” 4 37. JAKKS immediately borrowed $53.4 million of the $75 million under 5 the Credit Agreement. 6 38. As a condition precedent for obtaining the $75 million line of credit, on 7 September 27, 2012, JAKKS certified that it was in compliance with three “negative 8 covenants” it was required to meet. Pursuant to Article 7.15 “Financial Condition,” 9 JAKKS “shall not permit or suffer: 10

11 (a) Liquidity, measured as of the end of each Fiscal Quarter, at any time to be less than $100,000,000. 12 13 (b) the Funded Debt to Consolidated EBITDA Ratio, measured as of the end of each Fiscal Quarter, to exceed the ratio set forth in the 14 table below opposite the applicable Fiscal Quarter end: 15 First Quarter Ending Maximum Funded Debt to 16 Consolidated EBITDA Ratio 17 September 30, 2012 4.00:1.0 18 December 31, 2012 and each 3.00:1.0 19 Fiscal Quarter ended thereafter 20 (c) Consolidated Net Profit, measured as of the end of each Fiscal 21 Quarter for the rolling four Fiscal Quarter period ending on such 22 date (calculated on a cumulative basis for the four Fiscal Quarter

23 Period most recently completed), at any time to be less than $1.”

24 39. Thus, JAKKS would not have obtained the $75 million loan unless it

25 were able to project a profit on a rolling four-quarter basis and show that its total 26 debt would not exceed its rolling four-quarter EBITDA (Earnings Before Interest,

27

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1 Taxes, Depreciation and Amortization) as defined in the Credit Agreement, by a 2 more than 4.00 to 1 as of September 30, 2012 and 3.00 to 1 thereafter. 3 40. JAKKS was required to project a profit not only in 2012, but also 4 throughout the duration of the Credit Agreement until maturity of the credit facility 5 on April 30, 2013. Significantly, because JAKKS experienced a loss of 6 approximately $20 million in the fourth quarter of 2011, JAKKS needed to forecast 7 full year 2012 earnings per share of at least $0.84 ($20,018,000 divided by 8 23,963,000, the number of diluted shares outstanding during 2012) to make up for 9 that $20 million loss and to be able to obtain the Line of Credit from Wells Fargo. 10 41. As detailed below by numerous CWs, JAKKS consistently inflated its 11 projections throughout the Class Period in order to obtain and maintain the Wells 12 Fargo Line of Credit and be suitably positioned to obtain a replacement line of credit 13 after the Wells Fargo Line of Credit would expire on April 30, 2013. 14

15 42. Defendants’ deception is evidenced by the fact that only one day after

16 obtaining the $75 million Line of Credit, on September 28, 2012, JAKKS lowered

17 its forecasts, projecting significantly lower sales guidance of $690-700 million, a

18 reduction of approximately $30 million or approximately 4% from its prior forecast,

19 and revised non-GAAP earnings per share of $0.68 to $0.74, down more than 30%

20 from its previous forecast. 21 43. Defendants’ fraudulent scheme is further confirmed by the fact that just 22 three days after obtaining the $75 million line of credit, on September 30, 2012, 23 JAKKS was already in violation of two of its three financial covenants under the 24 Credit Agreement. The two covenants violated by JAKKS were both based on 25 earnings for the rolling four-quarter period. Specifically, as of September 30, 2012, 26 JAKKS had consolidated Net Profit of negative $5,361,000 when it was required to 27 have at least $1. JAKKS also had a consolidated leverage ratio (ratio of Funded 28

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1 Debt to Consolidated EBITDA) of 5.87 when it was required to be not greater than 2 4.00. JAKKS did not disclose these covenant violations immediately. Instead, it 3 waited until it issued its results for the third quarter of 2012 on November 9, 2012, 4 to inform investors that it violated the Wells Fargo covenants. See Note 5 (Credit 5 Facility) to Condensed Consolidated Financial Statements, 3Q 10-Q 2012, filed with 6 the SEC on November 9, 2012. Thus, it is apparent that had JAKKS provided Wells 7 Fargo with accurate forecasts before obtaining the September 27 Line of Credit, it 8 simply would not have been able to procure such critical financing. And once it had 9 secured the line of credit, JAKKS needed to convince Wells Fargo that it would be 10 able to maintain profitability for the remainder of 2012 and 2013, or risk being 11 placed into default by the bank. 12 44. Defaulting on the loan had severe consequences: 13

14 In the event the Company fails to meet any of the financial covenants or any other of the original or additional covenants under the Loan 15 Agreement in the future, the lender could declare an event of default, 16 which could have a material adverse effect on the Company’s financial

17 condition and results of operations. The Company would be required to obtain amendments and/or waivers or renegotiate the Loan 18 Agreement with its lender, however there is no assurance that the lender 19 will grant any waiver or agree to an amendment or renegotiation of the Loan Agreement. Any such amendment or waiver will likely require 20 payment of a fee, result in higher interest rates on outstanding loan 21 amounts and/or impose other restrictions. If the lender does not agree

22 to a waiver and/or amendment and determine an event of default has occurred, the lender may accelerate all obligations of the Company 23 under the Loan Agreement, demand immediate repayment of all 24 obligations, and/or terminate all commitments to extend further credit under the Loan Agreement. If access to our credit facility is limited or 25 terminated, liquidity could be constrained, which might affect the 26 Company’s operations and growth prospects, and the Company might need to seek additional equity or debt financing. There is no assurance 27 that such alternative financing would be available on acceptable terms 28 or at all. Furthermore, any equity financing could result in dilution to

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1 existing stockholders and any debt financing might include restrictive covenants that could impede the Company’s ability to effectively 2 operate and grow its business in the future. 3 45. Its concerns allayed by the Company’s bullish projections for the fourth 4 quarter of 2012 and FY 2013, by a Letter Agreement dated November 7, 2012, the 5 Bank waived the Company’s non-compliance with the two financial covenants 6 identified above, and the Credit Agreement was modified to require JAKKS to 7 deliver certain additional financial reports. The Letter Agreement also limited the 8 amount that JAKKS could spend on future acquisitions without the Bank’s consent 9

10 to $10 million. JAKKS manipulation of both its earnings and sales forecasts in order

11 to obtain and maintain its Line of Credit is set forth in detail below.

12 46. Throughout the Class Period, Defendants continuously touted JAKKS’

13 financial growth and stability. For example, on July 17, 2012, for full year 2012,

14 Defendants forecasted a 6.2% to 7.4% increase in net sales from the prior year to a

15 range of $720 to $728 million, and represented that the Company is “on track for 16 meeting [its] guidance for the full year.” Even after they subsequently reduced the 17 guidance for 2012 in September, Defendants still projected profitability for 2013, 18 with “an increase in net sales of 4% to 5% to approximately $694 to $700 million” 19 on February 21, 2013. These and similar representations, however, were false and 20 misleading as the Individual Defendants continuously manipulated the Company’s 21 reported sales forecasts. Even though CW1 was hired to and did design and 22 implemented forecasting controls in order to remediate prior failures, according to 23 CW 1, the forecasts prepared by CW 1 were often overridden and manipulated by 24 the Individual Defendants. CW 1 remarked that “the salespeople would put in their 25 numbers and when it came time to designating the number on forward looking 26 statements, it didn’t jive with the system.” CW 1 emailed his superior, Defendant 27 Bennett, just before he was laid off, that CW 1’s forecasting showed sales numbers 28

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1 much lower than what Defendant Berman was forecasting. CW 1 remarked that his 2 email to Defendant Bennett describes these discrepancies in detail. CW 1 noted that 3 the email “fell on deaf ears.” CW 1 believes he was terminated because of his 4 persistence on this issue. CW 1 remarked that “the numbers I gave were accurate, 5 based on the forecasts from the sales group” but “the CEO [Defendant Berman] kept 6 telling me my numbers were wrong and that he talked to the sales guys, and the 7 numbers were wrong.” CW 1 explained that he went back to all the sales people to 8 ask if they changed their forecast numbers to the numbers the CEO had and was told 9 by the sales people that they did not change their numbers. CW 1 said that when Q2 10 2012 numbers were reported to his superiors, they were exactly as he had previously 11 forecasted. As far as CW 1 knew, Defendant Berman just changed numbers as he 12 saw fit, so there was no reason the Individual Defendants would need to get any 13 salespeople to adjust their forecasts. According to CW 1, Defendant Bennett would 14

15 not challenge Defendant Berman because Bennett and Berman were best friends

16 since they were three years old, and because Bennett did not have a very strong

17 backbone and did whatever Berman wanted.

18 47. CW 1 explained that in addition to the sales and forecast system,

19 JAKKS had a second IT/production system, which was controlled by the Chief

20 Operating Officer, John McGrath. Before CW 1 was terminated, CW 1 had been 21 working on tying the forecast system into the IT/production system. This would 22 have allowed the Company to accurately predict which products were suffering and 23 to avoid excess inventory. The IT/production system would have made it more 24 difficult for management to manipulate the forecasts as they saw fit. CW 1 believes 25 that his involvement in the IT/production system was another reason for his 26 termination. 27

28

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1 48. According to CW 1, McGrath brought in an individual with no formal 2 education named Adam Prump (spelled phonetically). CW 1 described Prump as 3 the “henchman” at JAKKS who followed the instructions of senior management. 4 Prump had control of the IT/production system, which allowed him to change sales 5 forecast on the production side. Prump had access to all the passwords needed to 6 make changes in the system. Prump pressured Ken Price, who was the senior sales 7 person and Executive Vice President for JAKKS’ core business. Price reported 8 directly to Defendant Berman. Price would typically make high-level sales 9 estimations. According to CW 1, Price had been pressured by senior management 10 to manipulate sales numbers and wrote a letter of protest to senior management.1 11 49. CW 1 explained that while he/she had created a very detailed and 12 accurate forecasting system, based upon skews for each toy, by customer, by 13 salesman and by region, CEO Stephen Berman told CW 1 they were inaccurate and 14

15 to meet again with the sales team and “re-work the numbers.” “The CEO said that

16 [his] numbers were a lot higher than this,” CW1 recalled, even though the CEO never

17 provided any documentation for his higher set of numbers. Nevertheless, “the

18 [CEO’s] numbers went out to the public,” even though CW1, as the Controller, had

19 no idea where the CEO was getting the higher numbers and questioned them in

20 emails around August 2012. 21 50. “The CEO said that [his] numbers were a lot higher than this,” CW1 22 recalled, even though the CEO never provided any documentation for his higher set 23 of numbers. Nevertheless, “the [CEO’s] numbers went out to the public,” even 24 1 CW 1 explained that high-level discussions and disagreements took place at 25 JAKKS regarding whether to list Price as a key employee of the Company in SEC 26 documents: CW 1 emailed his concerns regarding the failure to categorize Price as a key employee because Price was so highly paid. Senior management responded 27 to CW 1 in an email, informing CW 1 that they disagreed with the classification of 28 Price as a key employee.

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1 though CW1, as the Controller, had no idea where the CEO was getting the higher 2 numbers and questioned them in emails around August 2012. CW 1 said he did 3 not keep copies of the emails, but he urged Plaintiff to subpoena what he called 4 “numerous emails from me and my team” about the differences between the 5 internal forecasts and the external numbers Berman and CFO Bennett reported 6 to investors. 7 51. CW 1 explained that his internal forecasts were accurate because they 8 looked at the flash reports from the sales team regularly and re-adjusted the numbers 9 constantly to reflect what was happening with sales in the field. It involved a very 10 detailed and methodical process. “The numbers (forecast internally) were different 11 when they (Berman and Bennett) put the numbers out” to investors, CW 1 said. 12 “There was a disconnect between the bottom ups forecast (issued by CW 1 and 13 his/her team) and what people were saying at the top.” 14

15 52. CW 1 said the Company had overstated its forecasts in July 2012 when

16 it projected $728 million in sales and $1.04 to $1.08 in earnings per share. CW1

17 noted that JAKKS often readjusted its final numbers later in the year, however, as

18 they did in this case when the number came in around $666 million. “The bottom

19 line was a lot worse” than what the Company initially reported to the Street.

20 53. According to CW 1, former JAKKS Director Dan Almagor, who was a 21 member of JAKKS’ audit committee, resigned around the same time that CW 1 was 22 terminated in October of 2012. Almagor was very frustrated that senior management 23 was overwriting all internal controls at the Company. 24 54. CW 6 worked in JAKKS’ sales division from 1996 to August 2012. He 25 joined the Company as a sales analyst and was later promoted to sales manager, 26 reporting directly to Ken Price, the Executive Vice President of domestic sales, from 27 October 2001 until he left the Company. CW 6 rolled up JAKKS’ domestic sales 28

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1 each quarter. CW 6’s responsibilities included collecting sales numbers from 2 different divisions within the Company and helping Price organize quarterly 3 forecasts for domestic sales. 4 55. CW 6 would help tally the numbers from the Company’s different 5 domestic sales divisions and compile them into a report. Price sent the sales 6 forecasts to the executives at the Company’s headquarters in California. Each 7 quarter, CW 6 saw the dollar amount of total domestic sales forecasted for the 8 following quarter. After Price sent out the report to headquarters, CW 6 often would 9 listen to or read an account of the Company’s quarterly earnings call with analysts 10 and shareholders. In these public statements, the Individual Defendants would 11 present a forecast for the net sales of the company, equivalent to the domestic sales 12 plus the international sales. Based upon the report sent by Price to the Company’s 13 executives, the numbers provided by the Individual Defendants to investors and 14

15 analysts were inflated. According to CW 6, “the numbers they were giving were too

16 high.”

17 56. CW 6 explained that Defendants Berman and Bennett took the internal

18 forecasts that Price provided to them and exaggerated the numbers they gave the

19 Street by about 10 to 15 percent for several quarters. “You can do the math,” CW

20 6 also remarked. “Look at how many quarters they missed their numbers.” CW 6 21 explained that Price raised questions in emails to Berman and Bennett about the 22 discrepancies between the internal projections and external numbers given to 23 investors. In response to those emails, the CEO and CFO told Price “they needed to 24 sell more and it was up to management to decide what numbers to release to the 25 Street.” 26 57. CW 12 held several high-level positions at JAKKS from December 27 2004 to October 2014. She resigned at that time. From May 2011 to October 2012, 28

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1 CW 12 was Senior Director of Finance, reporting to the Controller (who is CW 1). 2 From October 2012 until his/her resignation in October 2014, CW 12 was Vice 3 President of Finance, reporting to CFO Joel Bennett, and was the second highest 4 employee in the finance department under Bennett. CW 12 described a June 2012 5 screenshot of the internal sales forecast that was kept on the JAKKS.net system, 6 showing that sales were not on track to meet the company’s guidance of $720 million 7 to $728 million in net revenue for the year. 8 58. CW 12 stated that JAKKS’ controller, CW 1, alerted the CFO and other 9 executives about lower sales forecasts for 2012, but the executives pushed back. CW 10 12 said he/she is confident that throughout 2012, CW1 provided the monthly internal 11 sales forecasts showing numbers lower than the Company’s public guidance to CFO 12 Joel Bennett. CW 12 believes the controller, CW 1, provided those numbers to other 13 top executives because CW 1 generally copied Berman and McGrath on his emails 14

15 to Bennett. Asked how the executives responded, CW 12 said McGrath told

16 employees that the Company would not adjust its guidance. “He said, ‘We’re not

17 going to adjust the forecasts. We told the Street X. That’s what we’re going to do,’”

18 CW 12 said, recalling what McGrath said.

19 59. In November 2012, CW 12 was instructed to report sales forecast

20 numbers to the Board that were different than what he/she was seeing internally. In 21 November 2012, when CW 12 was preparing quarterly projections that would be 22 submitted to the Board of Directors, the sales forecasts for Q4 2012 were not adding 23 up to the $180 million the Company needed to meet its new guidance for the year. 24 CW 12 said the forecasts for Q4 were closer to $146 million. Bennett and McGrath 25 instructed CW 12 to report the Q4 forecasts as $160 million. But CW 12 was unable 26 even to get to that number. When CW 12 emailed Bennett and McGrath, informing 27 them that he/she was “struggling to get to $160 million” with the existing forecasts, 28

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1 both men emailed him/her back telling him/her to leave the forecast at $160 million 2 anyway. 3 60. The internal sales forecasts proved to be much more accurate than 4 public guidance. At the end of 2012, when actual sales revenue was tallied, the 5 internal sales forecasts for the year were just two percent higher than the actual 6 numbers, CW 12 said. “For a first year, that’s not bad,” CW 12 said of the internal 7 forecasting system CW 1 designed. Despite the better accuracy of the internal 8 forecasts, “those numbers were never used in guidances,” CW 12 said. 9 61. Defendant Bennett instructed CW 12 on what to include in P&L 10 projections. At the beginning of each year, CW 12 put together a projected Profit 11 and Loss (P&L) statement for the chief executives, which was to be submitted to the 12 Board and used when determining the guidance for the year. In 2012 and 2013, CW 13 12 said he/she “prepared it as they told me.” CW 12 was given the Company’s 14

15 “Build Plan,” which was its annual revenue hopes and goals for the year, and CW

16 12 was to use that number to derive quarterly numbers, based on historical quarterly

17 results. CW 12 then looked at the previous years’ administrative costs, removed one-

18 time event items, and a few other typical calculations and submitted the draft P&L

19 to Defendant Bennett. After reviewing it, Bennett provided CW 12 with other

20 numbers for costs and revenues to put into the P&L. “At that time, I did not create 21 what I thought were the right numbers,” CW 12 said.” At the beginning of 2012, 22 when they were going through it to try to come up with the guidance . . . I would put 23 together what they told me to put together.” CW 12 said the same thing happened 24 in 2013. CW 12 said Bennett regularly told him/her what numbers to use in the 25 projected Profit & Loss statements without giving him/her an explanation of where 26 the numbers came from or if they were legitimate. “They were just numbers that 27 were pulled out of the sky,” CW 12 said. For example, Bennett would ask him/her 28

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1 to cut the travel budget by 10 percent, but there would be no plan in place to ensure 2 the Company could meet those lower budget numbers, CW 12 said. CW 12 3 suspected the instructions he/she received were intended to make the Company’s 4 profits and operating costs look a certain way. CW 12 did what was asked of 5 him/her, but in 2014, CW 12 began to push back because he/she was uncomfortable 6 with the requests. CW 12 began to ask questions about how and where specifically 7 he/she should cut the budget, in what months, or for what items. 8 62. CW 12 was also instructed not to include royalty write-offs in the Profit 9 and Loss account. At the beginning of each year when CW 12 was preparing the 10 projected profit and loss account, CW 12 took the sales forecasts he/she was given 11 by Bennett to the royalty’s manager at JAKKS. CW 12 asked the royalties manager 12 to provide a projected royalty shortfall number based on the sales forecasts. CW 12 13 said he/she then gave the shortfall numbers to the top executives, including Berman 14

15 and Bennett. “I'd give it to them, this is where we are going to shortfall,” CW 12

16 said. But Berman, Bennett, and McGrath instructed CW 12 not to include it, or at

17 least not all of it, in CW 12’s calculations. “I do recall never having to put royalty

18 shortfalls in original guidance,” CW 12 said. CW 12 confirmed this occurred in

19 2012 and 2013.

20 63. Asked where JAKKS derived its numbers released as its annual 21 guidance, CW 12 said “I have no idea.” Every January, the top executives, including 22 Berman and Bennett, traveled to Hong Kong for the annual Toy Fair. There, they 23 met with the sales and marketing teams and also with buyers. Afterwards, the 24 Company would release its guidance for the year, which it called the “Build Plan,” 25 CW 12 said. “I don’t know how they come up with the numbers,” CW 12 said. The 26 numbers, however, were always “too high,” according to CW 12. CW 12 and CW 27 1 discussed their frustrations with those numbers “a lot.” 28

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1 64. Beginning in 2013, CW 12 began emailing Bennett quarterly reports 2 that compared the Company’s Build Plan numbers to 1) internals sales forecasts and 3 2) actual orders. The comparison reports were divided by division and had columns 4 for the company’s “Build Plan” projections, the internal sales forecasts and the 5 actual sales. CW 12 said on some divisions, the comparison columns were close but 6 on many the Build Plan projections were higher than the internal forecasts. 7 65. CW 12 was aware of another email exchange that allegedly revealed 8 COO Jack McGrath knew sales were trending down in 2013 but he was not going to 9 alert investors. The email exchange occurred between McGrath and Brooke 10 Tingley, the Senior Vice President of Operations. CW 12 believes the exchange 11 took place a few days after the Q1 2013 numbers were available internally. The sales 12 numbers and forecasts were down and Tingley, who is responsible for ordering the 13 products and toys to sell, asked McGrath if they would be lowering the Company’s 14

15 guidance. McGrath told Tingley that the Company would not be lowering its

16 guidance.

17 66. CW 7 worked at JAKKS for over a decade, holding a number of high-

18 level positions, including as Director of Marketing and Licensing, Vice President of

19 Marketing and Licensing, and Senior Vice President of Licensing and Media.

20 According to CW 7, Price made a formal complaint to the Company (wrote a letter) 21 because he did not believe in the Company’s sales forecasts. Specifically, Price 22 complained that the sales numbers reported to investors were not matching the 23 Company’s internal reports. 24 67. CW 13 worked as an executive assistant to JAKKS’ senior vice 25 president of domestic sales, Ken Price, from June 1999 to late June 2012. CW 13 26 worked in the New York office, which housed many of the Company’s sales 27 executives. As a long-time employee and executive assistant to a vice president, 28

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1 CW 13 was familiar with how sales forecasts were compiled and disseminated 2 throughout the Company. According to CW 13, in the year leading up to Price’s 3 resignation in May 2012, Price began to have increasingly heated discussions, some 4 of which rose to the level of argument, with chief executives about the internal sales 5 and forecast numbers. CW 13 did not participate in the conversations, but he/she 6 was aware of them and their contentious nature due to his/her close proximity to 7 Price. CW 13 said the heated conversations always took place when the internal 8 sales and forecast numbers were submitted to the chief executives. CW 13 said the 9 conversations were mostly with CEO Stephen Berman and some were with COO 10 Jack McGrath. From the heated conversations Price had with chief executives, CW 11 13 believes that there were discrepancies between the internal sales and forecast 12 numbers and the publically released numbers. “Price was responsible for the sales 13 team and for the sales forecasts,” CW 13 said. “And I know there were some 14

15 discrepancies in the numbers, the actual numbers he was providing management,

16 and I don’t think he was in agreement with what was being put forth in terms of what

17 JAKKS put on their statement of the company forecasts and future. There were

18 discrepancies, Ken thought.” CW 13 said that in the year prior to Price resigning,

19 alongside the heated conversations, Price became increasing “uncomfortable” in his

20 job. Price did not discuss it directly with CW 13, but after working with him for 13 21 years, CW 13 had a good sense of his personality and when he was under strain or 22 bothered by something. “I think he was frustrated,” CW 13 said. “He in general 23 was not pleased with how things were being handled out of Malibu headquarters.” 24 “My impression was that he felt that the information, the forecast, that he was 25 providing (JAKKS) headquarters was not what was being put forth publically,” CW 26 13 said. CW 13 also recalled conversations Price had with his senior sales analyst, 27 Juan Oritz. Price would tell Ortiz that he got a call from headquarters with a sales 28

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1 number that did not match what Ortiz and Price had calculated internally. CW 13 2 recalled Ortiz saying, “No, that number that they are saying is not correct. This is 3 the number we’re getting from our sales people.” Asked how Price responded to the 4 discrepancies he and Ortiz saw between their internal sales numbers and the ones 5 provided by Berman and Bennett, CW 13 explained that “there were times I would 6 recall Ken contacting headquarters and saying there’s something wrong here, it’s not 7 right.” CW 13 added that “Ken Price is as straight of an arrow as you can get when 8 it comes to ethics.” “There were things I believe that were not sitting well with him,” 9 CW 13 said. “It was not a company he wanted to stay at.” When Price resigned, 10 he told CW 13 only that he needed to move on and that JAKKS was going in a 11 direction he was not comfortable with. 12 68. Accordingly, the inflated sales forecasts provided by Berman and 13 Bennett were not the result of the difference between two permissible judgments. 14

15 Rather, they were a falsehood.

16 69. On July 17, 2012, JAKKS announced that it expected its full year 2012

17 non-GAAP earnings per share to be in the range of approximately $1.04 to $1.08,

18 which was an increase over the previously announced guidance in the range of $1.01

19 to $1.07. These projections required the Company to beat full year 2011 revenues

20 of $678 million by a considerable margin, at least $40 million. If achieved, it would 21 have resulted in at least 150% increase in earnings per share from the previously 22 reported $0.41 number. JAKKS’ July 17, 2012 earnings per share guidance was 23 inflated by at least $1.43 or over 100%. JAKKS also forecasted sales for full year 24 2012 of approximately $720 million to $728 million. JAKKS’ forecasted sales 25 number was inflated by approximately $61 million, or over 9%. 26 70. As discussed supra, in order to obtain the Line of Credit from Wells 27 Fargo, JAKKS needed to project at least $0.84 per share for FY 2012, to make up 28

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1 for the loss in Q4 2011 and still demonstrate a profitability on a rolling four-quarter 2 basis. At the time of the July 17, 2012 guidance, Defendants knew that JAKKS 3 would not be able to achieve profitability, let alone the earnings per share it was 4 publicly forecasting. For example, JAKKS had experienced cumulative losses 5 totaling approximately $15.8 million for the first half of 2012, and the Monsuno and 6 Winx lines were underperforming. 7 71. By the end of the third quarter 2012, it was clear that the July projection 8 was baseless. Rather than jettisoning it altogether, however, Defendants made a 9 downward adjustment. The day JAKKS announced this revision is also telling. 10 Having previously projected a $720-728 million in net sales and diluted earnings per 11 share of $1.04 to $1.08, JAKKS revised its full year 2012 earnings per share and 12 sales revenue guidance on September 28, 2012, just one day after obtaining the $75 13 million Line of Credit. CW 1 stated that the timing of this reduction was linked to 14

15 securing the line of credit. JAKKS announced that it “currently” anticipated net

16 sales for the full year 2012 of $690-700 million, down from the $720-728 million

17 guidance it had touted since July 17, 2012, a difference of $28-30 million. The

18 Company also revised its non-GAAP earnings per share forecast to approximately

19 $0.68 to $0.74, down from its previous forecast of diluted earnings per share in the

20 range of approximately $1.04 to $1.08, a difference of at least 30%. JAKKS’ sales 21 revenue guidance was inflated by over $33 million or 5% and the earnings per 22 share guidance was inflated by at least $1.07 or over 100%. JAKKS attributed this 23 revised guidance to “disappointing domestic product sales and a slow-down in 24 product orders, coupled with higher expenses, including marketing and advertising 25 expense commitments and minimum license royalty guarantees.” Significantly, 26 with this sudden reduced guidance, JAKKS was in breach of its Line of Credit 27 covenants a mere one day after signing the Credit Agreement. 28

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1 72. This partial correction to the July 2012 projection resulted in a decline 2 of JAKKS’s price by 4% from $14.57 at the close of September 28, 2012 to $14.00 3 on October 1, 2012, on unusually high trading volume of 1.52 million shares or six 4 times the average daily volume. 5 73. But even this lower guidance significantly overstated the Company’s 6 expected 2012 earnings. When it eventually had to report full year 2012 results, 7 JAKKS reported net sales of only $666.8 million, and a loss of $0.39 per diluted 8 share (including a loss of $1.24 per diluted share in 4Q 2012). Even on October 23, 9 2012, JAKKS confirmed and failed to revise the July 17, 2012 guidance in a truthful 10 and accurate manner to reflect the Company’s utter inability to earn a profit in 2012, 11 because JAKKS still needed to convince Wells Fargo not to declare JAKKS in 12 default and revoke the Line of Credit. Moreover, JAKKS wanted to maintain 13 credibility in the eyes of analysts and investors. JAKKS’ inability to earn a profit in 14

15 2012 was known to Defendants, because JAKKS had experienced cumulative losses

16 totaling approximately $15.8 million for the first half of 2012, and the Monsuno and

17 Winx lines were underperforming.

18 74. There was even less of a basis for the revised September 2012

19 projection than the initial July projection. In order to be achieved, JAKKS’ 4Q 2012

20 sales would have to increase to at least $156 million, well above the $141 million 21 reported in 4Q 2011. 22 75. However, rather than trending upward, sales during the critical third 23 quarter of 2012 had declined as compared to a year ago. (Historically, this quarter 24 accounted for nearly 50% of the Company’s annual sales.) 25 76. Indeed, the $15 million in year-over-year revenue growth experienced 26 during the first half of 2012 was wiped out by an $18 million year-over-year decline 27

28

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1 in the third quarter. Thus, in order to achieve the revised September 2012 projection, 2 JAKKS would have to boost sales significantly. 3 77. Such a turnaround was all the more critical given that JAKKS had 4 experienced significant additional expenses related to the launch of the two new line 5 of toys, Monsuno and Winx. Given the significant $15.8 million loss experienced 6 during the first half of the year, the Company needed substantial revenue growth if 7 it was going to report a profit for the end of the year. 8 78. JAKKS’ Comptroller made clear his dissent from this revised 9 projection. Further indicative of Defendants’ mindset, rather than listening to the 10 Comptroller, Defendants forced him out. 11 79. In addition to the revised guidance issued on September 28, 2012, 12 JAKKS was in breach of two of its three financial covenants just three days after it 13 obtained the Line of Credit. Specifically, as of September 30, 2012, JAKKS had 14

15 consolidated Net Profit of negative $5,361,000 when it was required to have at least

16 $1. JAKKS also had a consolidated leverage ratio of 5.87 when it was required to

17 be not greater than 4.00. According to CW1, it was “heinous” that JAKKS missed

18 its projected numbers stated in the covenant just three days after the company filed

19 the paperwork with the bank and even though 362 days of the running four quarter

20 net profit information had already been tallied. CW 1 explained that the percentage 21 difference between the actual numbers the Company eventually reported and the 22 numbers it forecasted to Wells Fargo in the covenant is a benchmark for the 23 difference between JAKKS’ internal forecasts and the numbers that the Individual 24 Defendants reported to the Street. In other words, from the beginning of the Class 25 Period on July 17, 2012, JAKKS reported to the Street earnings per share forecasts 26 that were inflated by at least $1.43 and forecasted sales revenues that were inflated 27

28

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1 by 9%. These hard numbers are tied together: the false forecasts of inflated earnings 2 per share and inflated sales revenues. 3 80. On October 23, 2012, JAKKS released its earnings for the quarter and 4 nine months ended September 30, 2012. JAKKS reiterated the revised full year 2012 5 guidance it gave the Street on September 28, falsely and misleadingly projecting full 6 year 2012 non-GAAP earnings guidance in the range of approximately $0.68 to 7 $0.74 per diluted share, and again forecasted $690 million to $700 million in sales 8 revenues. The Defendants, once again, failed to accurately revise the previously 9 announced 2012 guidance, because JAKKS still needed to obtain the required 10 waivers from Wells Fargo and the Defendants wanted to maintain credibility in the 11 eyes of analysts and investors. 12 81. On February 21, 2013, JAKKS released its earnings for the fourth 13 quarter and full year 2012, announcing that “excluding the deferred tax asset 14

15 impairment charge and legal and financial advisory fees and expenses, the full year

16 2012 results would have been a loss totaling $9.3 million, or $0.39 per diluted share,

17 compared to earnings of $10.9 million, or $0.41 per diluted share, in 2011.” JAKKS

18 also reported that “[n]et sales for the full year of 2012 were $666.8 million compared

19 to $677.8 million in 2011.” These results were consistent with the internal

20 projections that Defendants had rejected. 21 82. Despite these bleak results, JAKKS forecasted inflated diluted earnings 22 per share guidance for 2013 in the range of approximately $0.63 to $0.68, including 23 loss per share guidance for the first quarter of 2013 in the range of $0.83 to $0.85. 24 JAKKS also forecasted $694 to $700 million in sales revenue for full year 2013. 25 The 1Q 10-Q 2013 diluted loss per share guidance was inflated by at least $0.40 26 or 48% and the full year diluted earnings per share guidance was inflated by at 27 least $1.51. The full year 2013 sales revenue guidance was inflated by 28

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1 approximately $67 million or 11%. The Defendants failed to provide accurate 2 guidance for 1Q 2013 and full year 2013, because the Company still needed to obtain 3 the required waivers from Wells Fargo for breach of financial covenants as of 4 December 31, 2013, and avoid default. JAKKS also needed to replace the Line of 5 Credit upon its expiration. 6 83. On these announcements of February 21, 2013, JAKKS’ price fell 7 $0.31 per share to close on February 21, 2013 at $12.74. The Company’s shares 8 continued to drop in the following trading session, and closed on February 22, 2013 9 at $12.06, a one day decline of $0.68 or over 5%, and a two day decline of $0.99 or 10 approximately 7.5%. The decline would have been even worse but for the fact that 11 Defendants published projections for 2013 that were, once again, significantly 12 inflated. 13 84. During the Class Period, Defendants provided only general cautionary 14

15 statements of purported “risk factors” that may impact JAKKS’ business. None

16 revealed the existence of contradictory internal projections or addressed Defendants’

17 manipulation of those projections. The cautionary language is general and

18 unspecific, nowhere indicating any discrepancy between JAKKS’ internal

19 projections and the different projections it was giving to the market. Moreover, none

20 of Defendants’ statements mentioned the source of variance between the internal and 21 public projections of earnings per share and sales revenues. At a minimum, 22 Defendants were required to disclose the information that was relied upon to arrive 23 at the lower internal forecasts, which projected for example (i) earnings per share 24 for 2012 that were inflated by at least $1.43 and sales revenues for 2012 that were 25 inflated by approximately $61 million, or over 9%; and (ii) earnings per share for 26 Q1 2013 that were inflated by at least $0.40 or 48%, full year 2013 earnings per 27 share guidance that was inflated by at least $1.51, and full year 2013 sales revenues 28

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1 that were inflated by approximately $67 million or 11%. Defendants failed to 2 disclose that not only was the ability to achieve the projected results uncertain, but 3 they could be achieved only if sales grew at least 9-10% more than projected by 4 those responsible for preparing internal forecasts at the Company. Accordingly, 5 Defendants failed to adequately caution the market about how unrealistic JAKKS’ 6 public projections were and failed to alert investors that the public projections were 7 entirely divorced from reality. The failure to disclose this critical information caused 8 investors to make an overly optimistic assessment of the risks that JAKKS was not 9 going to meet its public projections. Moreover, Defendants’ cautionary language 10 remained unchanged throughout the years, another factor evidencing the boiler-plate 11 and unspecific nature of JAKKS’s cautionary statements. Compare February 21, 12 2013 8-K (“actual outcomes and results may differ…due to numerous factors, 13 including, but not limited to…changes in demand for JAKKS’ products, [and] 14

15 product mix.” with February 15, 2011 8-K (same); March 2, 2010 8-K (same); and

16 April 23, 2009 (same); compare 2012 2Q 10-Q at 31 (“We cannot assure you that

17 media associated with our character-related and theme-related product lines will be

18 released at the times we expect or will be successful”) with 2009 1Q 10-Q at 28, 29

19 (same); 2010 1Q 10-Q at 28-29 (same); and 2011 1Q 10-Q at 29 (same). JAKKS’

20 cautionary language remained fixed even though the risks changed. By the 21 beginning of the Class Period, JAKKS had experienced cumulative losses of 22 approximately $15.8 million for the first half of 2012 and poor performance of the 23 Monsuno and Winx product lines. JAKKS also needed to obtain a $75 million 24 working capital line of credit, but obtaining that loan was conditioned upon having 25 a profit for the rolling four quarter period throughout the duration of the Line of 26 Credit. In light of these developments, JAKKS’ parroting of the same cautionary 27 language it had provided for years is meaningless. 28

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1 JAKKS Repeatedly Laid-Off Workers Before the End of Each Quarter in an Effort to Decrease Expenses and Increase Earnings 2 85. Numerous witnesses corroborate that JAKKS repeatedly laid-off 3 workers before the end of each quarter to manipulate its expenses, enabling the 4 Company to report lower expenses, and higher earnings and earnings per share. This 5 practice was particularly essential for JAKKS in the quarters immediately preceding 6 and subsequent to obtaining a Line of Credit, where it needed to do everything 7

8 possible to maintain an image of profitability. For example, CW 3 explained that

9 quarterly layoffs occurred at the end of the fiscal quarters in 2012 when it looked

10 like the Company was not going to “make its numbers,” i.e., its earnings forecast.

11 JAKKS’ employees would be fired to lower the Company’s costs and recorded

12 overhead, lending an appearance of financial viability, i.e. higher profitability. The

13 number of employees who were fired depended on the financial goals set for the 14 quarter. “They had a number they had to meet,” CW 3 said, “and if we weren’t 15 going to make our numbers, a certain number of people had to get fired.” 16 86. CW 8 worked as the lead designer for JAKKS’ line of Winx Club dolls 17 from October 2010 to July 2013. CW 8 observed that the Company engaged in 18 systematic layoffs at the end of the Company’s fiscal quarters. It was “common 19 knowledge” at JAKKS that employees were laid off in order to lower costs and make 20 the Company’s finances appear healthier to investors. Employees considered the 21 quarterly layoffs a type of “lottery” in which a certain number of people would 22 invariably be terminated. “Everyone there knew it,” said CW 8. In many cases, but 23 not always, these same positions from which employees had been fired would be 24 filled at the beginning of the following quarter. 25 87. CW 9 was an associate brand manager at JAKKS from August 2011 to 26 March 2013. CW 9 helped supervise the design, marketing, and sales of the 27

28 Company’s Marvel, DC, Star Wars, and Power Rangers’ lines of toys. CW 9

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1 reported to the Director of Marketing. CW 9 observed frequent layoffs at JAKKS 2 during his/her tenure. While the brands for which CW 9 was responsible were 3 performing relatively well and meeting internal projections, CW 9 was aware, 4 through conversations with co-workers, that other parts of the company were doing 5 poorly. According to CW 9, “a lot of people were talking about how [the Company] 6 wasn’t doing well.” CW 9 noticed that approximately every three months, the 7 Company would lay off a large number of workers. The firings appeared to be timed 8 to occur several weeks before the end of the financial quarter. CW 9 explained that 9 JAKKS’ employees had come to expect layoffs whenever the company looked like 10 it was not going to meet its goals or forecasts: “We knew the layoffs were coming,” 11 said CW 9. “It was habitual…It was to reduce their expenses so they come closer 12 to their forecasts,” CW 9 remarked. Employees were told their job had been 13 terminated. CW 9 saw them pack their belongings the same day and “they were 14

15 gone” the same day they met with Human Resources. Defendants Berman and

16 Bennett would have been aware of the layoffs since they occurred regularly at the

17 end of each quarter and came through Human Resources. CW 9 also observed that

18 the Company would often, but not always, hire new workers several weeks after

19 there had been a round of layoffs, i.e., after the financial quarter had ended. These

20 workers would often, but not always, hold the same position as workers who had 21 been laid off. 22 88. CW 10 was a senior brand manager at JAKKS from February 2011 to 23 October 2013. CW 10 reported to the Company’s Director of Marketing, Josh 24 Weichbrodt, who reported to Tara Hefter, the Vice President of Global Licensing. 25 CW 10 also observed regular layoffs at the Company. CW 10 described morale as 26 “low.” CW 10, too, noticed a pattern wherein many employees were consistently 27 fired before the end of a quarter. CW 10 remarked that “they planned to do it every 28

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1 quarter.” CW 10 also observed that new employees were often hired at the beginning 2 of a new quarter. 3 89. CW 6 also corroborated the layoff practice. CW 6 further explained 4 that Defendants Berman and Bennett knew about the end of quarter layoffs that 5 occurred regularly and, in fact, directed the layoffs: “Of course, [Berman and 6 Bennett] knew about the layoffs. They directed the layoffs. They had to cut their 7 expenses to make their numbers.” 8 90. SEC regulation S-K, Item 303 (17 CFR 229.303), Management’s 9 discussion and analysis of financial condition and results of operations (MD&A), 10 requires that each quarterly Form 10-Q and year-end Form 10-K include a narrative 11 explaining the company’s financial condition and changes in financial condition and 12 results of operations in order to help investors better understand a company’s 13 financial condition. The SEC Financial Reporting Rel. No. FR-36 states that “[t]he 14

15 MD&A requirements are intended to provide, in one section of a filing, material

16 historical and prospective textual disclosure enabling investors and other users to

17 assess the financial condition and results of operations of the registrant, with

18 particular emphasis on the registrant’s prospects for the future.”

19 91. Specifically, SEC regulation S-K, Item 303 requires year-end Form 10-

20 K to include the following in the discussion of results of operations:

21 • Any unusual or infrequent events or transactions that materially 22 affected the amount of reported income from continuing operations, in

23 each case, indicating the extent to which income was so affected;

24 • Any other significant components of revenues or expenses that, in the

25 registrant’s judgment, should be described in order to understand the registrant’s results of operations; and 26 • 27 Known events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of 28

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1 labor or materials or price increases or inventory adjustments). The change in the relationship shall be disclosed. 2 17 CFR 229.303 (a)(3)(i)-(ii). 3 92. With respect to quarterly filings on Form 10-Q, SEC regulation S-K, 4

5 Item 303 requires the following to be included in the discussion of results of

6 operations: 7 • Any material changes in the registrant’s results of operations with 8 respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period 9 of the preceding fiscal year; 10 • Any significant elements of the registrant’s income or loss from 11 continuing operations which do not arise from or are not necessarily 12 representative of the registrant’s ongoing business; and

13 • Any seasonal aspects of its business which have had a material effect 14 upon its financial condition or results of operation.

15 17 CFR 229.303 (b)(2) and Instructions 3-5. 16 93. Throughout the Class Period, Defendants discussed JAKKS’ Selling, 17 General and Administrative Expenses (“SG&A expenses”) within the MD&A 18 section of JAKKS’ periodic filings. Defendants failed to disclose, however, that 19 JAKKS’ SG&A expenses were materially manipulated by Defendants’ practice of 20 quarterly layoffs in order to lower JAKKS’ expenses and increase the Company’s 21 earnings and earnings per share numbers. 22 94. Throughout the Class Period, Defendants also discussed the source of 23 JAKKS’ SG&A expenses. In their public filings, Defendants disclosed not only the 24 amount of JAKKS’ SG&A expenses, but also the source of those expenses, 25 including the fact that some of the increases in the SG&A expenses were “offset in 26 part by a decrease in salaries and employee benefits, including bonus.” These types 27

28 of statements put the source of JAKKS’ SG&A expenses directly at issue. Having

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1 chosen to speak about the source of JAKKS’ SG&A expenses and therefore putting 2 that topic at issue, Defendants had a duty to disclose all information concerning the 3 source of their SG&A expenses, including the fact that Defendants’ SG&A expenses 4 were materially manipulated by Defendants’ practice of quarterly layoffs in order to 5 lower JAKKS’ expenses and increase the Company’s earnings and earnings per 6 share numbers. 7 95. It is not alleged that Defendants fired and rehired the same employees 8 every quarter. Indeed, as CW 8 observed, employees considered the quarterly 9 layoffs a type of “lottery” where employees did not know who would get picked. 10 Accordingly, the practice did not have the same impact on every quarter and was 11 indeed adjusted to achieve desired results for each reporting period. More 12 importantly, it was critical for investors to know about the existence of the 13 Company’s layoff practice in order for them to assess JAKKS’ financial condition, 14

15 results of operations, and its prospects for the future.

16 96. JAKKS’ layoff practice was open and pervasive. As such, Defendants

17 Berman and Bennett were aware of the practice. Indeed, as recounted by CW 8, it

18 was “common knowledge” at JAKKS that employees were laid off in order to lower

19 costs and allow the Company to manufacture a profit. “Everyone knew it,” said CW

20 8. Also, according to CW 9, Defendants Berman and Bennett would have been 21 aware of the layoffs since they occurred regularly at the end of each quarter and 22 came through Human Resources. Additionally, CW 6 explained that Defendants 23 Berman and Bennett knew about the end of quarter layoffs that occurred regularly 24 and, in fact, ordered the layoffs: “Of course, [Berman and Bennett] knew about the 25 layoffs. They directed the layoffs. They had to cut their expenses to make their 26 numbers.” Moreover, Berman and Bennett discussed and provided Sarbanes Oxley 27 certifications of public filings which directly addressed the subject of JAKKS’ 28

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1 expenses, including the fact that increases in JAKKS’ SG&A expenses were “offset 2 in part by a decrease in salaries and employee benefits.” By discussing the topic of 3 JAKKS’ decreases in expenses as a result of decreases in employee salaries and 4 benefits, Defendants Bennett and Berman are deemed knowledgeable about that 5 topic, including the layoff practice that allowed JAKKS to report lower expenses 6 and better earnings. 7 Despite the Company’s Representations, the Monsuno and Winx Club Lines 8 Were an Immediate Flop 9 97. Defendants attributed a significant portion of JAKKS’ overall revenues 10 forecast to the Monsuno and Winx product lines. For example, JAKKS reported that 11 the miss in these two categories was one of the principal factors that caused the 12 Company to miss its 2Q 2013 targets and lower its full year 2013 sales forecast by 13 approximately 11% (from a range of $694 – 700 million to $620 million) and 14 earnings per share projections from a range of $0.63 - $0.68 to a loss of $2.56. The 15 Monsuno and Winx lines were so important to JAKKS’ performance that they 16 warranted a separate discussion in the Company’s earnings release and earnings call, 17

18 where they were highlighted as one of the key reasons for the miss.

19 98. Defendants attributed JAKKS’ successful second quarter 2012 results,

20 with a 10% increase in sales to $145.4 million from the prior year period, to “the

21 expansion of the Monsuno toys…and [the] Winx Club [line]…both of which are

22 already showing strong momentum.” Defendants offered upbeat guidance for 2012,

23 anticipating growth in net sales in the range of $720 million to $728 million, with 24 Monsuno “growing…rapidly” and “expeditiously” and the launch of the Winx Club 25 line “off to an amazing start.” Contrary to these rosy depictions, however, 26 confidential witnesses confirm that the Monsuno and Winx lines underperformed 27 from their initial launch and at least as early as June 2012. Despite this failure, 28

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1 Defendants knowingly continued to mislead investors about the products’ success. 2 In fact, on October 23, 2012, when a skeptical shareholder questioned the 3 Company’s “wondrous prospects of Monsuno” and opined that “these failed to do,” 4 Defendant Berman was quick to disagree: “I will disagree with you on Monsuno. 5 Monsuno has done terrific for us as a company….” 6 99. During his/her tenure at JAKKS, CW 6 was present for the launch of 7 JAKKS’ Monsuno and Winx Club toy lines. Based on CW 6’s receipt of domestic 8 figures, it was apparent within months that the lines were underperforming. The 9 lines launched around March 2012. According to CW 6, based on the Individual 10 Defendants’ receipt of quarterly sales figures, they would have been apprised of the 11 lines’ severe underperformance by June 2012. 12 100. CW 3, who was monitoring sales at Toys R Us in 2012, similarly recalls 13 that the Monsuno toy line underperformed at Toys R Us from the time of its launch. 14

15 According to CW 3, this sales data was transmitted to the top executives at JAKKS.

16 101. CW 8, who worked as the lead designer for JAKKS’ line of Winx Club

17 dolls from October 2010 to July 2013, observed the toy line’s design and its final

18 production. As its lead designer, CW 8 paid close attention to the performance of

19 the Winx Club line of dolls. By mid-2012, CW 8 was aware of the fact that the line

20 of dolls did not perform in line with the Company’s expectations and the sales were 21 lower than forecasted. 22 102. CW 11 was a sales and account analyst for JAKKS from August 2011 23 to March 2013. CW 11 analyzed sales figures received from K-Mart and Kohl’s, 24 who sold many of JAKKS’ toy lines. CW 11 reported to the Vice President of Sales. 25 CW 11 stated that the Monsuno and Winx Club lines underperformed from the 26 outset. CW 11 received information from K-Mart and Kohl’s about the sales figures 27 of the company’s Monsuno and Winx Club toy lines. CW 11 said that the Company 28

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1 had invested a lot of money in the lines and “put a very big emphasis” on them. 2 Because she received sales figures from K-Mart and Kohl’s on a regular basis, she 3 had “the initial reads” on sales of the two lines when they first launched. Almost 4 immediately after the lines’ launch – sometime in early 2012 – it was clear that the 5 lines were not flying off the shelf and were in fact failing to meet the Company’s 6 forecasts. K-Mark and Kohl’s sent sales figures directly to CW 11 on a daily or 7 weekly basis. Based upon his/her review of the sales figures, CW 11 relates that it 8 was readily apparent that they “weren’t good” and were not in line with the 9 expectations laid out by JAKKS’ management. When CW 11 received sales figures 10 from K-Mart and Kohl’s regarding specific brands, including Monsuno and Winx, 11 CW 11 would apprise both the brand managers who managed these toy lines and the 12 account managers who managed the accounts with K-Mart and Kohl’s of the 13 relevant sales figures. CW 11 sent weekly, sometimes daily, reports on sales figures 14

15 related to all toy lines, including Monsuno and Winx, to the brand managers and

16 account managers. These reports were sent to “everyone who touched the brand,”

17 which included individuals in both the marketing and sales departments. Therefore,

18 brand managers associated with Winx and Monsuno were well aware of the lines’

19 underperformance within weeks of their launch.

20 103. Defendants’ cautionary statements that outcomes could differ due to 21 “changes in demand for JAKKS’ products, product mix, the timing of consumer 22 orders and deliveries, the impact of competitive products and pricing, and difficulties 23 with integrating acquired businesses” were insufficient, because they did not speak 24 “directly to the purported misstatements” regarding Monsuno and Winx’s lackluster 25 performance, and failed to disclose that the Monsuno and Winx lines of products 26 were already showing weaknesses in sales. Even assuming that Defendants’ 27 cautionary statements spoke directly to the misstatements, any concerns about 28

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1 Monsuno and Winx’s performance were dispelled by Defendants’ statements that 2 spoke directly and favorably to these lines’ performance: “I will disagree with you 3 on Monsuno. Monsuno has done terrific for us as a company....”; “Winx Club…[is] 4 already showing strong momentum”; “Our Winx Club Dolls are off to a positive 5 start,” we “feel positive about our prospects for the remainder of the year, including 6 the ever important holiday season with the initial success of Monsuno, Winx Club”; 7 “But I will give you some flavor of Monsuno, both in North America; call it U.S., 8 and International. It’s growing. It’s growing, I would say, rapidly,” “But the orders 9 on hand and our forecast in-house through both U.S. and international is growing 10 expeditiously,” “That’s not just to say our international, call it, Western Europe and 11 Eastern Europe, business is growing,” “we launched the Winx Club recently, and 12 from our retailers’ point of view and from JAKKS’ point of view, the sell-throughs 13 are well beyond what we ever expected. So that’s off to an amazing start.” 14

15 Moreover, Defendants failed to disclose that rather than the Company’s ability to

16 achieve the projections being dependent on obtaining and keeping the planned time

17 slots for advertising, the current time slots provided to the Company were in fact less

18 than appropriate for the targeted audience and were likely hurting sales.

19 104. Further, as evidenced below, Defendants’ explanation on February 21,

20 2013, that their anticipated sales of Monsuno toys were not met because of changes 21 in programming of the television shows on which this product were based, is simply 22 implausible. 23 105. Monsuno adventure series premiered on Nicktoons channel in late 24 February 2012. The series was co-produced by Pacific Animation Partners LLC, a 25 joint venture between JAKKS Pacific, Inc. & Dentsu Entertainment USA, Inc., with 26 FremantleMedia Enterprises and The Topps Company, Inc. FremantleMedia 27 Enterprises was responsible for the exclusive worldwide distribution of Monsuno 28

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1 TV programming.2 During 2012, as demonstrated in the chart below, the Monsuno 2 series aired weekly in prime time (Thursday evenings at 8:30 PM through July 26, 3 2012, Friday evenings at 10:00 PM through November 16, and in the 9 o’clock hour 4 through November 21, 2012) with two gaps in airing which included spring and 5 summer school breaks. The series did not air after November 21, 2012 until April 6 21, 2013, which, in 2012, included winter school holidays:3 7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26 2 http://www.nickandmore.com/2012/02/06/monsuno-premieres-february-23-on- nicktoons/ 27 3 Airtime information was compiled from http://www.tvtango.com/listings and 28 http://www.tvguide.com/tvshows/monsuno/episodes-season-1/464071.

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1 Title Air Date Air Time Courage Thursday, February 23, 2012 8:00 PM 2 Clash Thursday, February 23, 2012 8:30 PM

3 Underground Thursday, March 01, 2012 8:30 PM Wicked Thursday, March 08, 2012 8:30 PM 4 Knowledge Thursday, March 15, 2012 8:30 PM

5 Breakthrough Thursday, March 22, 2012 8:30 PM R.S.V.P. Thursday, March 29, 2012 8:30 PM 6

7 Appleseeds Tuesday, May 29, 2012 8:30 PM Eye Wednesday, May 30, 2012 8:30 PM 8 Deceit Thursday, May 31, 2012 8:30 PM 9 Trust Thursday, June 07, 2012 8:30 PM Hunted Thursday, June 14, 2012 8:30 PM 10 Shadow Thursday, June 21, 2012 8:30 PM 11 Lost Thursday, June 28, 2012 8:30 PM Light Thursday, July 05, 2012 8:30 PM 12 Bright Thursday, July 12, 2012 8:30 PM 13 Trophies Thursday, July 19, 2012 8:30 PM Ice Thursday, July 26, 2012 8:30 PM 14

15 Wellspring Friday, October 12, 2012 10:00 PM Life Friday, October 19, 2012 10:00 PM 16 Failsafe Friday, October 26, 2012 10:00 PM 17 Remembrance Friday, November 02, 2012 10:00 PM

18 Assault Friday, November 09, 2012 10:00 PM Monster Friday, November 16, 2012 10:00 PM 19 Rising Wednesday, November 21, 2012 9:00 PM

20 Endgame Wednesday, November 21, 2012 9:30 PM

21 106. As a joint venture participant in Pacific Animation Partners LLC, an 22 entity which co-produced the Monsuno series with FremantleMedia Enterprises, an 23 entity responsible for the exclusive worldwide distribution of Monsuno TV 24 programming, JAKKS was privy to current and future proposed air times for the 25 series in the U.S. and was required to incorporate the series’ television exposure in 26 JAKKS’ sales forecasts for related merchandise. Defendants’ knowledge of the 27 proposed airing schedule was demonstrated during the February 21, 2013 call with 28

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1 analysts. When asked about performance of the Monsuno brand on February 21, 2 2012, Defendant Berman attributed the poor performance of the brand to change in 3 airing time which had not yet occurred: 4 The two biggest components that were –that did lessen our expectations 5 –and it was more for the U.S., Monsuno has performed terrific overseas 6 –is it didn’t perform to our expectations in the U.S. The animated series, which is on Nickelodeon was not stripped and ended up being 7 on, I think it was a Saturday morning time slot, which wasn’t very 8 conducive for kids to watch. So the expectations we had in the U.S. weren’t at –they didn’t achieve our high-end goal…. 9

10 107. The change in Monsuno’s airing to a weekend morning slot, offered by

11 Berman as a reason for the disappointing Monsuno sales in 2012, did not, in fact,

12 occur until April 21, 2013. Thus, it could not have been the cause of Monsuno’s 13 underperformance. Between February 12, 2012 and November 21, 2012, the last 14 time Monsuno aired in 2012, Monsuno always aired on a weekday timeslot, at night. 15 Moreover, it is not plausible that a weekend timeslot would be less conducive for 16 children as a weekday night slot. Indeed, by the end of June 2012, the Company 17 knew that the television time slots for selling these new toys were not well-suited 18 for the targeted audience. Where the toys were marketed to young children, the 19 shows for which they were advertised were on as late as 10 pm on weekday nights. 20 These poor time slots translated into anemic growth for the first half of 2012, only 21 $15 million more compared to 2011. This paltry growth was woefully insufficient 22 to overcome the significant increase in launch expenses. As a result, the Company 23 reported a loss for the first half of 2012 of $15.8 million, which was a steep hurdle 24 if the Company was going to report the 150% increase in earnings per share included 25

26 in the July 2012 projection.

27 108. Therefore, Defendant Berman’s statements regarding

28 underperformance of Monsuno revealed false and unrealistic assumptions which

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1 were included in JAKKS’ sales forecasts and earnings guidance. Defendant 2 Berman’s statements regarding underperformance of Monsuno were false and 3 misleading at the time they were made. 4 109. The underperformance of the Monsuno and Winx Club in the U.S. 5 market failed to deter the Defendants from continuing to make optimistic sales and 6 earnings forecasts. The magnitude of Defendants’ unrealistic projections for 7 Monsuno and Winx Club included in the overall Company’s sales and earnings 8 guidance disseminated by the Defendants became apparent on July 17, 2013 when 9 the Company specifically acknowledged that JAKKS missed its guidance due to “the 10 poor performance of several of our key properties, including Monsuno and the Winx 11 Club.” 12

13 Materially False and Misleading Statements Issued During the Class Period 14 110. On July 17, 2012, the Company issued a press release touting its sales 15 growth for the second quarter 2012 (“2Q 2012”). The Company reported that “[n]et 16 sales for the second quarter of 2012 were $145.4 million, up from $131.9 million 17

18 reported in the comparable period in 2011.” The Company also reported that

19 earnings were down from the prior year: “[e]xcluding the legal and financial

20 advising fees, second quarter earnings would have totaled $1.6 million, or $0.06 per

21 diluted share, compared to $4.9 million, or $0.18 per diluted share, in 2011.”

22 111. Against this backdrop, the press release then offered the following false

23 and misleading upbeat guidance for 2012, including an increase in net sales and 24 increased projected earnings per share:

25 For 2012, the Company continues to expect an increase in net sales 26 of 6.2% to 7.4% to approximately $720 million to $728 million, with

27 revised diluted earnings per share in the range of approximately $1.04 to $1.08, giving effect to the repurchase of common stock 28

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1 pursuant to the self-tender and the related anticipated financing costs and excluding the financial and legal advisory fees. The Company’s 2 previous guidance for diluted earnings per share was in the range of 3 $1.01 to $1.07, excluding the financial and legal advisory fees.

4 112. Defendants’ statements in ¶100 that “the Company continues to expect 5 an increase in net sales of 6.2% to 7.4% to approximately $720 million to $728 6 million, with revised diluted earnings per share in the range of approximately $1.04 7 to $1.08” were materially false and misleading because: 8 i. JAKKS’ internal forecasts projected materially lower earnings 9 per share and sales revenues guidance (Compl. ¶¶ 35-73); 10 ii. JAKKS’ sales revenue guidance was inflated by $61 million or 11 over 9% (Compl. ¶ 58); 12 13 iii. JAKKS’ earnings per share guidance was inflated by at least $1.43 or over 100% (Compl. ¶ 58); and 14 15 iv. The Monsuno and Winx lines of products were performing poorly by mid-2012 (Compl. ¶¶ 86-98). 16 113. The press release, quoting Berman, misleadingly touted “strong [sales] 17 momentum” from the Monsuno and Winx lines: 18

19 We are pleased with the sales growth in the second quarter and year

20 to date, and we are on track to meet our guidance ranges for the full year. Highlights of our second quarter include the expansion of the 21 Monsuno toys in the US and the launch internationally of the 22 animated series and related toy products, which has met the Company’s expectations to date, and our Winx Club dolls and Big 23 Wheel line launched at select major retailers, both of which are 24 already showing strong momentum. Our outlook for the third quarter remains optimistic with contributions from a broad range of products 25 including our growing pool of owned content. 26 114. Defendant Berman’s statements in ¶102 that “we are on track to meet 27 our guidance ranges for the full year” were materially false and misleading because: 28

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1 i. JAKKS’ internal forecasts projected materially lower earnings per share and sales revenues guidance (Compl. ¶¶ 35-73); 2 3 ii. JAKKS’ sales revenue guidance was inflated by $61 million or over 9% (Compl. ¶ 58); 4 5 iii. JAKKS’ earnings per share guidance was inflated by at least $1.43 or over 100% (Compl. ¶ 58); and 6

7 iv. The Monsuno and Winx lines of products were performing

8 poorly by mid-2012 (Compl. ¶¶ 86-98).

9 115. Defendant Berman’s statements in ¶102 that “We are pleased with the 10 sales growth in the second quarter and year to date,” and that “Highlights of our 11 second quarter include the expansion of the Monsuno toys in the US and the launch 12 internationally of the animated series and related toy products, which has met the 13 Company’s expectations to date, and our Winx Club dolls…both of which are 14 already showing strong momentum,” were materially false and misleading because: 15 (i) The Monsuno and Winx line of products were performing poorly 16 by mid-2012 (Compl. ¶¶ 86-98). 17 116. Defendants Berman and Bennett again falsely reaffirmed the guidance 18 for full year 2012, and falsely assured investors that sales from the Monsuno and 19

20 Winx Club lines were solid and would continue that trajectory. In fact, Bennett

21 falsely stated that JAKKS’ positive guidance was based on the “initial success of

22 Monsuno, Winx…..” lines. Berman reiterated this false statement by stating that the

23 “WinxClubs are off to a positive start” and that from JAKKS’ “retailers’ point of

24 view and from JAKKS’ point of view,” sell-throughs of Winx Club “are well beyond

25 what we ever expected”:

26 : I’d like to start off by saying that we are very pleased with 27 the sell-in of our products for the second quarter and year-to-date and we are on track for meeting our guidance for the full year. We are 28

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1 working hard to bring high quality and compelling play things to market while tightly managing our business and increasing profitability. 2

3 Highlights for our second quarter include strong sell through of our Monsuno toys in the U.S. and the ongoing launches of the toy line 4 and animated series internationally in the markets like the UK, Italy 5 and Australia. Our Winx Club Dolls are off to a positive start and our Big Wheel line launched at select major retailers in June and is already 6 showing strong momentum. 7 * * * 8 : As per our earnings guidance for 2012, we’re still 9 anticipating growth with net sales in the range of $720 million to $728

10 million… * * * 11 : Again, we are very pleased with the results of our second 12 quarter of 2012 and feel positive about our prospects for the remainder 13 of the year, including the ever important holiday season with the initial success of Monsuno, Winx Club, and Big Wheel, and the broad 14 placement of our wide range of products going into the fall 2012 year. 15 * * * 16 : Okay, a couple things here. One, I know you’re not disclosing the amount of business you’re doing with Monsuno 17 today, but I would just like to, maybe, get some color on the domestic 18 versus international mix. And should we be expecting Monsuno to

19 become, say, about 10% of your business here in the coming year or two? Just broadly, if you can put some brackets around how to expect 20 revenue, about how we should model this. 21 : Well, as you know, we, as for competitive 22 reasons, not just for our competitors, but also for retailers, we do not 23 break out the percentage of anyone specific category. But I will give

24 you some flavor of Monsuno, both in North America; call it U.S., and International. It’s growing. It’s growing, I would say, rapidly. During 25 the summer months, remember, for majority of toy companies things 26 are a slow period. It’s very seasonal. People are getting back to school.

27 But the orders on hand and our forecast in-house through both U.S. and 28 international is growing expeditiously. And we had a very promising event

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1 through our partner Bandai, in Japan, and they’re focused very strongly in Japan, which we believe and they believe will be probably the one of or the 2 number one boy’s toy properties in Japan. We also have extremely strong 3 promising new ventures in Korea. That’s not just to say our international, call it, Western Europe and Eastern Europe, business is growing, so we are 4 extremely excited about Monsuno and we’re looking forward to the years 5 ahead with it.

6 * * * : But while you asked about Monsuno, we launched the 7 Winx Club recently, and from our retailers’ point of view and from 8 JAKKS’ point of view, the sell-throughs are well beyond what we ever

9 expected. So that’s off to an amazing start.

10 JAKKS Pacific Q2 2012 Earnings Call, July 17, 2012. 11 117. Defendant Berman’s statements in ¶105 that “we are on track for 12 meeting our guidance for the full year” and Defendant Bennett’s statements in ¶ 105 13 that “As per our earnings guidance for 2012, we’re still anticipating growth with net 14 sales in the range of $720 million to $728 million,” were materially false and 15 misleading because: 16

17 i. JAKKS’ internal forecasts projected materially lower earnings per share and sales revenues guidance (Compl. ¶¶ 35-73); 18 19 ii. JAKKS’ sales revenue guidance was inflated by over $61 million or over 9% (Compl. ¶ 58); 20

21 iii. JAKKS’ earnings per share guidance was inflated by at least

22 $1.43 or over 100% (Compl. ¶ 58); and

23 iv. The Monsuno and Winx lines of products were performing 24 poorly by mid-2012 (Compl. ¶¶ 86-98).

25 118. Defendant Berman’s statements in ¶ 105 that “Highlights for our 26 second quarter include strong sell through of our Monsuno toys in the U.S. and the 27 ongoing launches of the toy line and animated series internationally…Our Winx 28

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1 Club Dolls are off to a positive start,” that “we…feel positive about our prospects 2 for the remainder of the year, including the ever important holiday season with the 3 initial success of Monsuno [and] Winx Club,” that “But I will give you some flavor 4 of Monsuno, both in North America; call it U.S., and International. It’s growing. It’s 5 growing, I would say, rapidly,” that “But the orders on hand and our forecast in- 6 house through both U.S. and international is growing expeditiously,” that “That’s 7 not just to say our international, call it, Western Europe and Eastern Europe, business 8 is growing, so we are extremely excited about Monsuno and we’re looking forward 9 to the years ahead with it,” and that “we launched the Winx Club recently, and from 10 our retailers’ point of view and from JAKKS’ point of view, the sell-throughs are 11 well beyond what we ever expected. So that’s off to an amazing start” were 12 materially false and misleading because: 13

14 i. The Monsuno and Winx line of products were performing poorly by mid-2012 (Compl. ¶¶ 86-98). 15

16 119. On August 7, 2012, the Company filed with the SEC a quarterly report

17 on Form 10-Q for the period ended June 30, 2012, which included signed

18 Certifications by Defendants Berman and Bennett, stating that the financial 19 information contained in the Form 10-Q was accurate and that they disclosed any 20 material changes to the Company’s financial reporting. The report reiterated the 21 Company’s previously announced quarterly financial results and financial position. 22 JAKKS reported net sales of $145.4 million for the second quarter of 2012, 23 compared to net sales of $131.9 million in the same quarter the previous year. 2Q 24 10-Q 2012 at 4, 7, 23. Earnings per share were 0.01 for the three months ended June 25 30, 2012 vs. 0.16 for the three months ended June 30, 2011. Id. at 11. 26 120. With respect to SG&A expenses, the 10Q disclosed that SG&A 27 expenses were $46.8 million for the three months ended June 30, 2012 and $43.1 28

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1 million for the prior year period. The 10Q disclosed that the increase in expenses 2 over the prior year period was “offset in part by a decrease in salaries and employee 3 benefits, including bonus….” 4 121. Defendants’ statements in ¶109 that SG&A expenses were $46.8 5 million for the three months ended June 30, 2012, and that the increase in SG&A 6 expenses from the prior year period was “offset in part by a decrease in salaries and 7 employee benefits, including bonus” were materially false and misleading because: 8 i. Defendants failed to disclose that JAKKS’ SG&A expenses and 9 earnings were materially manipulated by Defendants’ practice of 10 quarterly layoffs in order to lower JAKKS’ expenses and

11 increase the Company’s earnings and earnings per share numbers. (Compl. ¶¶ 74-85). 12

13 122. On September 28, 2012, the Company issued a Press Release

14 announcing that it “lowered its guidance for 2012.” “The Company currently

15 anticipates net sales for the full year of approximately $690 million to $700

16 million, with revised non-GAAP earnings per share in the range of approximately

17 $0.68 to $0.74, excluding non-recurring legal and financial advisory charges of

18 $0.19 per share.” The “revised guidance represents a reduction from the Company’s 19 previously anticipated full year net sales of approximately $720 million to $728 20 million and diluted earnings per share in the range of approximately $1.04 to $1.08, 21 excluding the financial and legal advisory fees.” On a GAAP basis, the Company 22 announced anticipated diluted earnings per share for the full fiscal year ending 23 December 31, 2012 to be in the range of $0.68 - $0.74. JAKKS attributed the revised 24 guidance to “disappointing domestic product sales and a slow-down in product 25 orders, coupled with higher expenses, including marketing and advertising expense 26 commitments and minimum license royalty guarantees.” 27

28

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1 123. On this news, the price of JAKKS’ shares dropped 4% from $14.57 at 2 the close of September 28, 2012 to $14.00 on October 1, 2012, on unusually high 3 trading volume of 1.52 million shares or six times the average daily volume. 4 124. Defendants’ statements in ¶ 111 that “The Company currently 5 anticipates net sales for the full year of approximately $690 million to $700 million, 6 with revised non-GAAP earnings per share in the range of approximately $0.68 to 7 $0.74” were materially false and misleading because: 8 i. JAKKS’ internal forecasts projected materially lower earnings 9 per share and sales revenues guidance (Compl. ¶¶ 35-73); 10

11 ii. JAKKS’ sales revenue guidance was inflated by over $33 million or 5% (Compl. ¶¶ 60); 12 13 iii. JAKKS’ earnings per share guidance was inflated by at least $1.07 or over 100% (Compl. ¶¶ 60); and 14 15 iv. The Monsuno and Winx lines of products were performing

16 poorly by mid-2012 (Compl. ¶¶ 86-98).

17 125. On October 23, 2012, the Company issued a press release announcing

18 financial results for the third quarter 2012 (“3Q 2012”). The Company reported that 19 “[n]et sales for the third quarter of 2012 were $314.5 million, compared to $332.4 20 million reported in the comparable period in 2011.” With respect to earnings, the 21 Company reported that “[e]xcluding the legal and financial advising fees, third 22 quarter earnings would have totaled $31.2 million, or $1.13 per diluted share, 23 compared to $35.3 million, or $1.11 per diluted share, in 2011.” 24 126. Quoted in the press release, Defendant Berman again struck an 25 optimistic note: 26

27 In our third quarter we saw better than expected growth from our international business reflecting the success of our Monsuno line of 28

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1 toy products and solid performance from our Winx Club…product lines. Our Monsuno, Winx Club, Cinderella and Big Wheels 2 products, to name a few, have been received well at retail and have 3 earned coveted positions on many retailer and media Hot Holiday Toy Lists both in the U.S. and abroad. 4

5 127. Defendant Berman’s statements in ¶ 115 that “In our third quarter we 6 saw better than expected growth from our international business reflecting the 7 success of our Monsuno line of toy products and solid performance from our Winx 8 Club…product lines. Our Monsuno [and] Winx Club…have been received well at 9 retail and have earned coveted positions on many retailer and media Hot Holiday 10 Toy Lists both in the U.S. and abroad,” were materially false and misleading 11 because: 12

13 (i) The Monsuno and Winx line of products were performing poorly by mid-2012 (Compl. ¶¶ 86-98). 14 128. The press release then offered the following reduced guidance for 2012, 15

16 albeit still projecting profitability after excluding one-time charges:

17 As previously announced, the Company anticipates net sales for the

18 full year of approximately $690 million to $700 million, with revised non-GAAP earnings per share in the range of approximately $0.68 to 19 $0.74, excluding non-recurring legal and financial advisory charges of 20 $0.19 per share . . . The revised guidance represents a reduction from the Company’s previously anticipated full year net sales of 21 approximately $720 million to $728 million and diluted earnings per 22 share in the range of approximately $1.04 to $1.08, excluding the financial and legal advisory fees. The Company’s guidance with respect 23 to diluted earnings per share is a non-GAAP financial measure, due to 24 the exclusion of such one-time charges.

25 129. Defendants’ statements in ¶ 117 that “ the Company anticipates net 26 sales for the full year of approximately $690 million to $700 million, with revised 27

28

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1 non-GAAP earnings per share in the range of approximately $0.68 to $0.74,” were 2 materially false and misleading because:

3 i. JAKKS’ internal forecasts projected materially lower earnings 4 per share and sales revenues guidance (Compl. ¶¶ 35-73);

5 ii. JAKKS’ sales revenue guidance was inflated by over $33 million 6 or 5% (Compl. ¶ 60); 7 iii. JAKKS’ earnings per share guidance was inflated by at least 8 $1.07 or over 100% (Compl. ¶ 60); and 9

10 iv. The Monsuno and Winx lines of products were performing poorly by mid-2012 (Compl. ¶¶ 86-98). 11

12 130. In an earnings call discussing the Company’s third quarter results,

13 Defendants again led the market astray:

14 : We’ve been shareholders of JAKKS for 15 several years now and given our tenure, just bear with me for a moment.

16 Early in our ownership, we watched you guys impressively navigate the downturn and even while you don’t let the loss of key properties like 17 WWF, but over the past two years or so, we’ve been baffled by some 18 of your cap allocations decisions and I’d like to understand a little bit better your process -your thought process behind your capital allocation 19 decision. 20 Let me give you a few examples. So through the crisis, you managed 21 the cash horde, which was great. But rather than leveraging that cash 22 horde to pay down or renegotiate your convertible bonds, you refinanced the bonds with lower strike prices, which diluted your 23 shareholders. 24 Next, about 18 months ago, you began touting the wondrous prospects 25 of Monsuno, but these failed to do, whether you’ve severely missed 26 your earnings projections in 2011 and you’ve lowered expectations again for 2012. 27 * * * 28

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1 :…I will disagree with you on Monsuno. Monsuno has done terrific for us as a company, maybe it has 2 fluctuated versus U.S. to international, but we have a very solid 3 business, we still have a very solid balance sheet, we try to appease as many shareholders as we can. 4

5 JAKKS Pacific Q3 2012 Earnings Call, October 23, 2012.

6 131. Defendant Berman’s statements in ¶119 that “I will disagree with you

7 on Monsuno. Monsuno has done terrific for us as a company,” were materially false

8 and misleading because: 9 i. Monsuno was performing poorly by mid-2012 (Compl. ¶¶ 86- 98). 10

11 132. On November 9, 2012, the Company filed with the SEC a quarterly

12 report on Form 10-Q for the period ended September 30, 2012, which included

13 signed Certifications by Defendants Berman and Bennett, stating that the financial 14 information contained in the Form 10-Q was accurate and that they disclosed any 15 material changes to the Company’s financial reporting. The report reiterated the 16 Company’s previously announced quarterly financial results and financial position. 17 JAKKS reported net sales of $314.5 million for the third quarter of 2012, compared 18 to net sales of $332.4 million in the same quarter the previous year. 3Q 10-Q 2012 19 at 4, 7, 23. Earnings per share were 1.10 for the three months ended September 30, 20 2012 and 1.32 for the three months ended September 30, 2011. Id. at 12. 21 133. With respect to SG&A expenses, the 10Q disclosed that SG&A 22 expenses were $59.4 million for the three months ended September 30, 2012 and 23 $55.6 million for the prior year period. The 10Q disclosed that the increase in 24 expenses over the prior year period was “offset in part by a decrease in salaries and 25 employee benefits, including bonus….” 26

27 134. Defendants’ statements in ¶ 122 that SG&A expenses were $59.4

28 million for the three months ended September 30, 2012, and that the increase in

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1 SG&A expenses over the prior year period was “offset in part by a decrease in 2 salaries and employee benefits, including bonus,” were materially false and 3 misleading because: 4 i. Defendants failed to disclose that JAKKS’ SG&A expenses and 5 earnings were materially manipulated by Defendants’ practice of 6 quarterly layoffs in order to lower JAKKS’ expenses and increase the Company’s earnings and earnings per share 7 numbers. (Compl. ¶¶ 74-85). 8 135. On February 21, 2013, the Company issued a press release announcing 9 financial results for the fourth quarter 2012 (“4Q 2012”), and the full year 2012 (“FY 10 2012”). The Company reported that “[n]et sales for the fourth quarter of 2012 were 11 $133.5 million, compared to $141.1 million reported in the comparable period in 12

13 2011,” while “[n]et sales for the full year of 2012 were $666.8 million compared to

14 $677.8 million in 2011.” With respect to earnings, the Company reported that

15 “[e]xcluding the legal and financial advisory fees and expenses and the deferred tax

16 asset impairment charge, the fourth quarter net loss in 2012 would have totaled $27.2

17 million, or $1.24 per diluted share, compared to a loss of $18.8 million, or $0.72 per

18 diluted share, in 2011, while “[e]xcluding the deferred tax asset impairment charge 19 and legal and financial advisory fees and expenses, the full year 2012 results would 20 have been a loss totaling $9.3 million, or $0.39 per diluted share, compared to 21 earnings of $10.9 million, or $0.41 per diluted share, in 2011.” 22 136. In the press release, Defendant Berman acknowledged the 23 disappointing fourth quarter performance that led to a sharp miss of prior guidance: 24 We are disappointed by our performance in the fourth quarter. The 25 difficult and challenging toy environment did not generate the sales that 26 had been anticipated, and several of our key products did not achieve

27 the sales levels that we had planned for, also resulting in license royalty minimum guarantee shortfalls.” 28

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1 137. Despite the bad news, the press release offered the following upbeat 2 guidance for 2013 (which was reiterated by Defendant Bennett on a conference call 3 with analysts the same day): 4 For 2013, the Company anticipates an increase in net sales of 4.0% 5 to 5.0% to approximately $694 million to $700 million, with diluted 6 earnings per share in the range of approximately $0.63 to $0.68. This guidance anticipates first-quarter 2013 net sales in the range of $70 7 to $73 million, with a loss per share in the range of $0.83 to 8 $0.85…This is compared to net sales of $73.4 million and a loss per share of $0.62 per diluted share in the first quarter of 2012. 9

10 138. During the conference call with analysts, Defendant Bennett

11 maintained a highly optimistic outlook:

12 : Turning to our 2013 guidance, the company anticipates 13 an increase in net sales of 4% to 5% to approximately $694 million to

14 $700 million with diluted earnings per share in the range of approximately $0.63 to $0.68 per diluted share. 15 139. On this news, the Company’s shares fell $0.31 per share to close on 16

17 February 21, 2013 at $12.74. The Company’s shares continued to drop in the

18 following trading session, and closed on February 22, 2013 at $12.06, a one day

19 decline of $0.68 or over 5%, and a two day decline of $0.99 or approximately 7.5%.

20 140. Defendants’ statements in ¶ 126 that “For 2013, the Company

21 anticipates an increase in net sales of 4.0% to 5.0% to approximately $694 million

22 to $700 million, with diluted earnings per share in the range of approximately $0.63 23 to $0.68. This guidance anticipates first-quarter 2013 net sales in the range of $70 24 to $73 million, with a loss per share in the range of $0.83 to $0.85” and Defendant 25 Bennett’s statements in ¶ 127 that “Turning to our 2013 guidance, the company 26 anticipates an increase in net sales of 4% to 5% to approximately $694 million to 27

28

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1 $700 million with diluted earnings per share in the range of approximately $0.63 to 2 $0.68 per diluted share,” were materially false and misleading because:

3 i. JAKKS’ internal forecasts projected materially lower earnings 4 per share and sales revenues guidance (Compl. ¶¶ 35-73);

5 ii. JAKKS’ 2013 sales revenue guidance was inflated by 6 approximately $67 million or 11% (Compl. ¶ 71); 7 iii. JAKKS’ earnings per share guidance for Q1 2013 was inflated 8 by at least $0.40 or 48%, and JAKKS’ FY 2013 earnings per 9 share guidance was inflated by $1.51 to $1.56 or over 100%

10 (Compl. ¶ 71); and

11 iv. The Monsuno and Winx lines of products were performing 12 poorly by mid-2012 (Compl. ¶¶ 86-98). 13 141. On March 15, 2013, JAKKS filed an annual report for the period ended 14 December 31, 2012, on Form 10-K with the SEC, which was signed, among others, 15 by Defendants Berman and Bennett, and reiterated the Company’s previously 16 announced financial results and financial position. In addition, the Form 10-K 17 contained signed certifications pursuant to the Sarbanes-Oxley Act of 2002 by 18 Defendants Berman and Bennett, stating that the financial information contained in 19 the Form 10-K was accurate and that it disclosed any material changes to the 20 Company’s financial reporting. The 10-K disclosed net sales of $73.4 million for 21 Q1 2012; $145.4 million for 2Q 2012; $314.5 million for 3Q 2012, and $133.5 22 million for Q4 2012. 2012 10-K at 35, 72. The Company reported net sales of 23 $666.8 million for full year 2012. 2012 10-K at 53. The Company also reported 24

25 diluted loss per share in 2012 of ($4.37) vs. earnings per diluted share of $0.32 in

26 2011. 2012 10-K at 23, 52.

27 142. With respect to SG&A expenses, the 10K disclosed that SG&A

28 expenses were $211.2 million in 2012 and $192.7 million in 2011. The 10K

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1 disclosed that the increase in expenses over the prior year period was “offset in part 2 by decreases in amortization expense…bad debt recovery…currency exchange 3 gains…and restricted stock compensation.” 4 143. Defendants’ statements in ¶ 131 that SG&A expenses were $211.2 5 million in 2012, and that the increase over the prior year period was “offset in part 6 by decreases in amortization expense…bad debt recovery…currency exchange 7 gains…and restricted stock compensation,” were materially false and misleading 8 because: 9 i. Defendants failed to disclose that JAKKS’ SG&A expenses and 10 earnings were materially manipulated by Defendants’ practice of 11 quarterly layoffs in order to lower JAKKS’ expenses and 12 increase the Company’s earnings and earnings per share numbers. (Compl. ¶¶ 74-85). 13

14 144. On April 25, 2013, the Company issued a press release announcing

15 financial results for the first quarter 2013 (“1Q 2013”). The Company reported that

16 “[n]et sales for the first quarter of 2013 increased 6.4% to $78.1 million up from

17 sales of $73.4 million reported in the comparable period in 2012.” With respect to

18 earnings, the Company reported that “net loss for the first quarter was $27.6 million, 19 or $1.26 per diluted share, which included the final $0.75 million, or $0.03 per 20 diluted share, in financial advisory fees related to the 2011 unsolicited indication of 21 interest and reflects the non-recognition of a previously forecasted first quarter tax 22 benefit of $5.3 million, or $0.24 per diluted share. This compares to a net loss of 23 $16.0 million, or $0.62 per diluted share, reported in the comparable period in 2012, 24 which includes $1.4 million, or $0.03 per diluted share, of legal and financial 25 advisory fees and expenses related to the unsolicited indication of interest.” 26 145. In the press release, Defendant Berman represented that the Company 27 was on track to meet prior guidance: 28

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1 Our first quarter represents approximately 10% of our projected sales for the 2013 calendar year and we believe we are on track to achieve 2 our previously announced sales and earnings forecast for the year. 3 During the first quarter, sales of our broad array of core product lines got off to a good start and we are optimistic that they will continue to 4 perform as projected. 5 146. The press release then offered the following upbeat guidance for 2013 6 (which was reiterated by Defendant Bennett on a conference call with analysts the 7 same day): 8 For 2013, the Company continues to anticipate an increase in net 9 sales of 4.0% to 5.0% to approximately $694 million to $700 million, 10 with diluted earnings per share in the range of approximately $0.63

11 to $0.68, excluding financial advisory fees related to the 2011 indication of interest. 12 147. During the conference call with analysts, Defendant Berman continued 13 to maintain a highly optimistic outlook: 14

15 Sales are off to a solid start in 2013 exceeding our guidance and up 6.4% over last year. The early response to our broad mix of product 16 line has been encouraging, and we are cautiously optimistic for the 17 year ahead.

18 * * * 19 : Turning to our guidance for 2013, the company 20 continues to anticipate an increase in net sales of 4% to 5% to 21 approximately $694 million to $700 million, with diluted earnings per

22 share in the range of approximately $0.63 to $0.68, excluding financial advisory fees related to the 2011 indication of interest. 23 148. Defendants’ statements in ¶¶ 134-136 that “we believe we are on track 24

25 to achieve our previously announced sales and earnings forecast for the year [2013].

26 During the first quarter, sales of our broad array of core product lines got off to a

27 good start and we are optimistic that they will continue to perform as projected,” that

28 “For 2013, the Company continues to anticipate an increase in net sales of 4.0% to

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1 5.0% to approximately $694 million to $700 million, with diluted earnings per share 2 in the range of approximately $0.63 to $0.68,” that “Sales are off to a solid start in 3 2013 exceeding our guidance and up 6.4% over last year. The early response to our 4 broad mix of product line has been encouraging, and we are cautiously optimistic 5 for the year ahead,” and that “Turning to our guidance for 2013, the company 6 continues to anticipate an increase in net sales of 4% to 5% to approximately $694 7 million to $700 million, with diluted earnings per share in the range of approximately 8 $0.63 to $0.68,” were materially false and misleading because: 9 i. JAKKS’ internal forecasts projected materially lower earnings 10 per share and sales revenues guidance (Compl. ¶¶ 35-73);

11 ii. JAKKS’ 2013 sales revenue guidance was inflated by 12 approximately $67 million or 11% (Compl. ¶ 71);

13 iii. JAKKS’ 2013 earnings per share guidance was inflated by $1.51 14 to $1.56 or over 100% (Compl. ¶ 71); and 15 iv. The Monsuno and Winx lines of products were performing 16 poorly by mid-2012 (Compl. ¶¶ 86-98). 17 149. On May 10, 2013, the Company filed with the SEC a quarterly report 18 on Form 10-Q for the period ended March 31, 2013, which included signed 19 Certifications by Defendants Berman and Bennett, stating that the financial 20 information contained in the Form 10-Q was accurate and that they disclosed any 21

22 material changes to the Company’s financial reporting. The report reiterated the

23 Company’s previously announced quarterly financial results and financial position.

24 JAKKS reported net sales of $78.1 million for the first quarter of 2013, compared to

25 net sales of $73.4 million in the same quarter the previous year. 1Q 10-Q 2013 at 4,

26 7, 23. Loss per diluted share was ($1.26) for the three months ended March 31, 2013

27 vs. ($0.62) for the three months ended March 31, 2012. Id. at 12.

28

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1 150. With respect to SG&A expenses, the 10Q disclosed that SG&A 2 expenses were $47.2 million for the three months ended March 31, 2013 and $43.0 3 million for the prior year period. The 10Q disclosed that the increase in SG&A 4 expense from the prior year period was “primarily due to increases in legal 5 expense…bad debt expenses…product development…intangible amortization 6 expenses…direct selling expenses…and temporary employee expenses.” 7 151. Defendants’ statements in ¶139 that SG&A expenses were $47.2 8 million for the three months ended March 31, 2013, and that the increase in SG&A 9 expenses over the prior year period was “primarily due to increases in legal 10 expense…bad debt expenses…product development…intangible amortization 11 expenses…direct selling expenses…and temporary employee expenses,” were 12 materially false and misleading because: 13

14 i. Defendants failed to disclose that JAKKS’ SG&A expenses and earnings were materially manipulated by Defendants’ practice of 15 quarterly layoffs in order to lower JAKKS’ expenses and 16 increase the Company’s earnings and earnings per share

17 numbers. (Compl. ¶¶ 74-85).

18 The Truth Emerges 19 152. On July 17, 2013, the Company issued a press release announcing 20 financial results for the second quarter 2013 (“2Q 2013”). The Company reported 21 that “[n]et sales for the second quarter of 2013 were $106.2 million compared to net 22 sales of $145.4 million reported in the comparable period in 2012,” a staggering 27% 23 decrease. With respect to earnings, the Company reported that “net loss for the 24 second quarter was $46.9 million, or $2.14 per diluted share, which included charges 25 for license minimum guarantee shortfalls of $14.1 million and inventory impairment 26 of $12.2 million. This compares to net income of $0.2 million, or $0.01 per diluted 27 share, reported in the comparable period in 2012, which included $1.7 million, or 28

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1 $0.5 per diluted share, of legal and financial advisory fees and expenses related to 2 the 2011 unsolicited indication of interest.” 3 153. In the press release, Defendant Berman announced that JAKKS had not 4 met its second quarter target and will not achieve its full year 2013 forecast, singling 5 out the Monsuno and Winx products as reasons for the revenue miss: 6 We are disappointed that JAKKS has not met its second quarter target 7 and will not achieve its full year 2013 forecast. Sales for the second 8 quarter were significantly below expectations due to a variety of factors. Several retailers, both in the United States and in Europe, are 9 struggling and have substantially decreased their orders. In addition, 10 the poor performance of several of our key properties, including

11 Monsuno and the Winx Club, also contributed to the decline…

12 154. The press release then disclosed that the previously provided full year 13 guidance was being slashed, the Company’s dividend was being suspended, and 14 announced the implementation of a major restructuring: 15 The Company currently anticipates net sales for the full year of 16 approximately $620.0 million, with revised loss per share in the range 17 of approximately $56.1 million, or $2.56 per diluted share. The revised guidance represents a reduction from the Company’s previously 18 anticipated full year net sales of approximately $694 million to $700 19 million and diluted earnings per share in the range of approximately $0.63 to $0.68, excluding financial and legal advisory fees relating to 20 the 2011 unsolicited indication of interest. 21 The Company also announced that due to business conditions, it has 22 suspended its quarterly dividend, which it will re-evaluate upon a 23 return to profitability.

24 The Company also announced a restructuring plan to commence in 25 the third quarter, which will include the substantial reduction of leased space, employees and other overhead expenses. Despite the 26 projected loss this year, JAKKS is anticipating a return to profitability 27 in the year 2014. 28

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1 155. The Company also announced a plan to raise $100 million in capital 2 through an offering of convertible senior notes due 2018 in a private placement, with 3 a potential $15 million in over-allotments. 4 156. As a result of these alarming disclosures, analysts commented that 5 visibility into sales or margin recovery “remain[ed] very limited” and the analysts 6 expected “significant losses in 2013.” See PiperJaffray Company Note on JAKKS 7 Pacific, Inc., July 17, 2013. 8 157. Following these disclosures regarding the Company’s poor 2Q 2013 9 performance, and management’s response thereto, JAKKS’ stock dropped 10 precipitously by approximately 39% from a close of $11.48/share on July 17, 2013, 11 to a close of $7.00/share on July 18, 2013. 12 ADDITIONAL SCIENTER ALLEGATIONS 13

14 158. As alleged herein, Defendants acted with scienter in that Defendants

15 knew that the public documents and statements issued or disseminated by or in the

16 name of the Company were materially false and misleading or omitted material

17 information; knew or recklessly disregarded that such statements or documents 18 would be issued or disseminated to the investing public; and knowingly and 19 substantially participated or acquiesced in the issuance or dissemination of such 20 statements or documents as primary violators of the federal securities laws. 21 Defendants, by virtue of their receipt of information reflecting the true facts 22 regarding JAKKS’ financial and business operations, their control over the 23 materially false and misleading misstatements, and/or their associations with the 24 Company, which made them privy to confidential information concerning the 25 misstatements and/or omissions alleged herein, were active and culpable participants 26 in the fraudulent scheme alleged herein. Defendants knew of and/or recklessly 27

28

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1 disregarded the false and misleading nature of the information that they caused to be 2 disseminated to the investing public. 3 159. As detailed above, the Individual Defendants had unfettered access to 4 JAKKS’ sales and forecasts by virtue of their ability to access in real time the 5 Company’s JAKKS.net system where the numbers were maintained and promptly 6 updated; their receipt of reports setting forth sales numbers on a weekly basis; and 7 their attendance in weekly meeting with the Controller, where the actual sales 8 against the forecasts were discussed and analyzed. 9 160. Moreover, as detailed above, the Individual Defendants were motivated 10 to issue inflated guidance in order to maintain the illusion of stability, growth, and 11 profitability long enough to convince Wells Fargo (or any other prospective lender) 12 that JAKKS would remain profitable and, therefore, creditworthy. JAKKS 13 eventually obtained a working capital credit line of $75 million on September 27, 14

15 2012. In order to procure that loan, Defendants certified that JAKKS was in

16 compliance with certain “negative covenants.” One covenant required JAKKS to

17 maintain a Consolidated Net Profit for a rolling four-quarter period of no less than

18 $1 dollar. In Q4 2011, however, JAKKS had lost over $20 million. Accordingly,

19 JAKKS needed to forecast full year 2012 earnings per share of at least $0.84 to make

20 up for that loss, which would be included in the minimum net profit covenant 21 calculation at the end of Q3 2012. Thus, from July 17, 2012 until it procured the 22 Line of Credit on September 27, 2012, JAKKS forecasted earnings per share 23 guidance in the range of $1.04 to $1.08. 24 161. The Individual Defendants’ deceit is supported by the fact that only one 25 day after obtaining the $75 million loan from Wells Fargo, JAKKS slashed its 26 guidance. On September 28, 2012, JAKKS decreased its earnings per share 27 guidance from $1.04 – $1.08 it had forecasted since July 17, 2012 to $0.68 – $0.74, 28

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1 lower than what it needed to forecast cumulatively on a four-quarter basis to make 2 up for the $20 million loss, or equivalent of $0.84 per share, in 4Q 2011. On that 3 day, JAKKS also lowered its sales revenues guidance downwards by $28 million to 4 $30 million. The lowered sales revenue guidance is also significant because it 5 played an important role in calculating JAKKS’ ability to remain profitable under 6 the Credit Agreement. 7 162. The Individual Defendants’ deceit is further evidenced by the fact that 8 only three days after obtaining the $75 million loan from Wells Fargo (by certifying 9 that it was profitable for the four quarters ending September 30, 2012), JAKKS 10 failed two out of the three financial covenants in the Credit Agreement, including 11 the requirement that JAKKS show a net profit of at least $1 (one dollar) for the four 12 quarters ending on September 30, 2012. Specifically, by September 30, 2012, 13 JAKKS had consolidated Net Profit of negative $5,361,000 when it was required to 14

15 have at least $1. JAKKS also had a consolidated leverage ratio of 5.87 when it was

16 required to be not greater than 4.00.

17 163. JAKKS needed to maintain an image of profitability not only to

18 maintain the Line of Credit, but also to obtain additional financing upon expiration

19 of its credit facility with Wells Fargo on April 30, 2013. On February 21, 2013,

20 JAKKS projected inflated full year 2013 sales revenue guidance of $694-700 21 million, with earnings per share in the range of approximately $0.63 to $0.68. As of 22 March 31, 2013, the Company was not in compliance with two of the three financial 23 covenants under the Credit Agreement. JAKKS had consolidated Net Profit of 24 negative $34.4 million when it was required to have at least $1, and it had a 25 consolidated leverage ratio of 35.02 when it was required to be not greater than 26 3.0. By Amendment to the Loan Agreement dated March 28, 2013, Wells Fargo 27 granted JAKKS an over-advance of up to $30 million over the borrowing capacity 28

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1 of which $29 million was advanced to the Company on March 29, 2013. Wells 2 Fargo accelerated the maturity date of the Credit Agreement to April 2, 2013 from 3 April 30, 2013, however, on which date the Company paid off the credit facility in 4 full. Thus, JAKKS was in dire need to obtain a replacement line of credit in 2013, 5 and indeed announced that it “is in the process of obtaining a replacement credit 6 facility.” Without that life support, JAKKS’ operations and growth prospect would 7 have been severely constrained, as JAKKS itself admitted. Accordingly, JAKKS 8 had a motive to provide inflated sales guidance for full year 2013. JAKKS 9 reaffirmed the February 21, 2013 guidance on April 25, 2013. But on July 17, 2013, 10 JAKKS slashed its full year 2013 guidance by $80 million or 11% and its earnings 11 per share guidance by at least $3.19 from a profit of between $0.63 to $0.68 to a loss 12 of $2.56, far less than its February 2013 guidance. As a result of this significantly 13 lowered guidance, JAKKS was unable to obtain the replacement financing it needed 14

15 in 2013.

16 164. Further supportive of scienter are Defendants’ affirmative steps which

17 had the effect of discouraging Plaintiff’s CWs from cooperating with Plaintiff in

18 ferretting out Defendants’ fraudulent scheme. In its June 6, 2014 Decision

19 dismissing Plaintiffs’ complaint, the Court gave Plaintiff leave to amend to plead

20 certain allegations with more specificity. Heeding the Court’s directive, Plaintiff’s 21 investigator attempted to contact CWs in order to obtain additional information, but 22 was impeded in his efforts due to actions taken by Defendants after the Court’s 23 dismissal. CW 7 relayed that he/she received a letter from an attorney at Skadden 24 Arps (Defendants’ attorneys of record), marked “Confidential.” In that letter, 25 Defendants’ counsel informed CW7 that they had reason to believe she was in fact 26 one of the CWs to whom statements are attributed in the SAC, and requested “to be 27 present if you decide to grant any further interviews with plaintiffs’ counsel.” CW 28

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1 7 said that he/she had many sleepless nights since he/she received the letter and that 2 he/she was scared to speak any further. CW 7 said he/she was afraid of what JAKKS 3 and its lawyers would do to him/her. 4 165. Also indicative of scienter is that the Individual Defendants were each 5 motivated to maintain their lucrative jobs, and increase their compensation over their 6 normal salary and their personal net worth. 7 166. The Individual Defendants pocketed handsome salaries in 2012: 8 Berman received $1,165,000 million and Bennett received $435,000 million, each 9 reflecting increases from their prior salaries. 2012 10-K at 84. 10 PLAINTIFF’S CLASS ACTION ALLEGATIONS 11

12 167. Plaintiff brings this action as a class action pursuant to Federal Rule of

13 Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who

14 purchased or otherwise acquired JAKKS securities during the Class Period (the

15 “Class”) and were damaged thereby. Excluded from the Class are Defendants

16 herein, the officers and directors of the Company, at all relevant times, members of

17 their immediate families and their legal representatives, heirs, successors or assigns 18 and any entity in which Defendants have or had a controlling interest. 19 168. The members of the Class are so numerous that joinder of all members 20 is impracticable. Throughout the Class Period, JAKKS’ securities were actively 21 traded on the NASDAQ. While the exact number of Class members is unknown to 22 Plaintiff at this time and can be ascertained only through appropriate discovery, 23 Plaintiff believes that there are hundreds or thousands of members in the proposed 24 Class. Record owners and other members of the Class may be identified from 25 records maintained by JAKKS or its transfer agent and may be notified of the 26 pendency of this action by mail, using the form of notice similar to that customarily 27 used in securities class actions. 28

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1 169. Plaintiff’s claims are typical of the claims of the members of the Class 2 as all members of the Class are similarly affected by Defendants’ wrongful conduct 3 in violation of federal law that is complained of herein. 4 170. Plaintiff will fairly and adequately protect the interests of the members 5 of the Class and has retained counsel competent and experienced in class and 6 securities litigation. Plaintiff has no interests antagonistic to or in conflict with those 7 of the Class. 8 171. Common questions of law and fact exist as to all members of the Class 9 and predominate over any questions solely affecting individual members of the 10 Class. Among the questions of law and fact common to the Class are: 11 • whether the federal securities laws were violated by Defendants’ 12 acts as alleged herein; 13 • whether statements made by the Individual Defendants to the 14 investing public during the Class Period misrepresented and/or 15 omitted material facts about the business, prospects, and operations of JAKKS; 16

17 • whether Defendants acted knowingly or recklessly (i.e., with scienter) in issuing false and misleading financial statements; 18

19 • whether the prices of JAKKS’ securities during the Class Period were artificially inflated because of the Defendants’ conduct 20 complained of herein; and 21 • whether the members of the Class have sustained damages and, if 22 so, what is the proper measure of damages. 23 172. A class action is superior to all other available methods for the fair and 24 efficient adjudication of this controversy since joinder of all members is 25

26 impracticable. Furthermore, as the damages suffered by individual Class members

27 may be relatively small, the expense and burden of individual litigation make it

28

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1 impossible for members of the Class to individually redress the wrongs done to them. 2 There will be no difficulty in the management of this action as a class action.

3 CAUSATION AND ECONOMIC LOSS 4 173. As described herein, during the Class Period, Defendants made or 5 caused to be made a series of materially false or misleading statements and/or 6

7 omitted material information about JAKKS’ financial and business practices, results,

8 prospects, and operations. These material misstatements and omissions had the

9 cause and effect of creating in the market an unrealistically positive assessment of

10 JAKKS, thus causing the Company’s shares to be overvalued and artificially inflated

11 at all relevant times. Defendants’ materially false and misleading statements during

12 the Class Period were widely disseminated to the securities markets, investment 13 analysts, and to the investing public, and resulted in Plaintiff and other members of 14 the Class purchasing the Company’s shares at artificially inflated prices. Moreover, 15 upon the revelation to the market and the investing public of the truth concerning 16 JAKKS’ financial and business practices, results, prospects, and operations, the 17 market price of JAKKS’ shares declined substantially, resulting in significant 18 damages to Plaintiff and other shareholders. 19 174. Had the truth about JAKKS been revealed to the market earlier, 20 Plaintiff and the Class would not have purchased JAKKS’ common stock or would 21 have purchased the stock only at dramatically lower prices. 22 175. When the truth about JAKKS was finally revealed through a series of 23 partial disclosures on September 28, 2012, February 21, 2013, and July 17, 2013, as 24 detailed above, a significant portion of the artificial inflation that had been caused 25

26 by Defendants’ materially false and misleading statements and omissions was

27 eliminated from the price of JAKKS’ common stock, causing significant losses to

28 Plaintiff and the Class.

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1 176. On September 28, 2012, JAKKS lowered its guidance for full year net 2 sales and revised downward its non-GAAP earnings per share. JAKKS attributed 3 the downward guidance to “disappointing domestic product sales and a slow-down 4 in product orders, coupled with higher expenses, including marketing and 5 advertising expense commitments and minimum license royalty guarantees.” As a 6 result of these disclosures, JAKKS’ shares dropped 4% from $14.57 at the close of 7 September 28, 2012 to $14.00 on October 1, 2012, on unusually high trading volume 8 of 1.52 million shares or six times the average daily volume. Thus, JAKKS’ share 9 price fell after Defendants began to reveal facts showing the Company’s true 10 financial condition and true prospects for growth. Confidential witnesses confirm 11 that JAKKS’ internal forecasts were materially less than what the Company had been 12 forecasting since July 17, 2012. (See, e.g., ¶¶ 55-68). For example, CW 6 explained 13 that JAKKS exaggerated the numbers he gave to the Street by about 10 to 15 percent 14

15 for several quarters. JAKKS’ disclosures on September 28, 2012: (i) were directly

16 corrective or the direct result of JAKKS’ materially inflated guidance it had

17 previously provided to investors, and to Wells Fargo in order to obtain and maintain

18 the $75 million Line of Credit, which forecasts JAKKS had no real prospects of

19 meeting; (ii) were directly corrective or the direct result of JAKKS’ previously

20 inflated forecasts which lacked any reasonable basis because inter alia the Monsuno 21 and Winx lines were not selling well; and (iii) were directly corrective or the direct 22 result of the Company’s inability to reach projected numbers despite planned layoffs 23 designed to decrease the Company’s expenses and increase its profit. Alternatively, 24 this disclosure was the materialization of the undisclosed risks to the Company’s 25 forecasts for the reasons stated above. The manipulation of internal projections 26 caused JAKKS’ actual results to differ from what Defendants were forecasting to 27 the market. CW 12 explained that the internal projections were accurate and would 28

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1 have closely resembled the actual results. For example, CW 12 explained that the 2 internal forecast figures were only about 2% higher than the actual sales for 2012. 3 In contrast, the publicly released guidance was 8% higher than the actual sales. This 4 difference equated to tens of millions of dollars. Despite the accuracy of the internal 5 forecasts, those numbers were never used in the guidance. As explained by CW 12, 6 the same kind of manipulations happened in 2013 and are the reason why the actual 7 results materially differed from what Defendants were forecasting to the market. 8 177. On February 21, 2013, JAKKS reported sales and earnings per share 9 for full year 2012 that were significantly lower than forecasted. JAKKS attributed 10 the miss to a “difficult and challenging toy environment” where “several of our key 11 products did not achieve the sales levels that [the Company] had planned for, also 12 resulting in license royalty minimum guarantee shortfalls.” As a result of these 13 disclosures, the Company’s shares fell $0.31 per share to close on February 21, 2013 14

15 at $12.74. The Company’s shares continued to drop in the following trading session,

16 and closed on February 22, 2013 at $12.06, a one-day decline of $0.68 or over 5%,

17 and a two day decline of $0.99, or approximately 7.5%. Id. Thus, JAKKS’ share

18 price fell after Defendants began to reveal facts showing the Company’s true

19 financial condition and true prospects for growth. Confidential witnesses confirm

20 that JAKKS’ internal forecasts were materially less than what the Company had been 21 forecasting. (See, e.g., ¶¶ 55-70, 72). For example, CW 6 explained that JAKKS 22 exaggerated the numbers he gave to the Street by about 10 to 15 percent for several 23 quarters. JAKKS’ disclosures on February 21, 2013: (i) were directly corrective or 24 the direct result of JAKKS’ materially inflated guidance it had previously provided 25 to investors, and to Wells Fargo in order to obtain and maintain the $75 million Line 26 of Credit, which forecasts JAKKS had no real prospects of meeting; (ii) were directly 27 corrective or the direct result of JAKKS’ previously inflated forecasts which lacked 28

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1 any reasonable basis because inter alia the Monsuno and Winx lines were not selling 2 well; and (iii) were directly corrective or the direct result of the Company’s inability 3 to maintain profitability and reach projected numbers despite planned layoffs 4 designed to decrease the Company’s expenses and increase its profit. Alternatively, 5 this disclosure was the materialization of the undisclosed risks to the Company’s 6 forecasts for the reasons stated above. The manipulation of internal projections 7 caused JAKKS’ actual results to differ from what Defendants were forecasting to 8 the market. CW 12 explained that the internal projections were accurate and would 9 have closely resembled the actual results. For example, CW 12 explained that the 10 internal forecast figures were only about 2% higher than the actual sales for 2012. 11 In contrast, the publicly released guidance was 8% higher than the actual sales. This 12 difference equated to tens of millions of dollars. Despite the accuracy of the internal 13 forecasts, those numbers were never used in the guidance. As explained by CW 12, 14

15 the same kind of manipulations happened in 2013 and are the reason why the actual

16 results materially differed from what Defendants were forecasting to the market.

17 178. On July 17, 2013, JAKKS disclosed that it missed its second quarter

18 target and will not achieve its full year 2013. JAKKS told the market that “[s]ales

19 for the second quarter were significantly below expectations.” “[T]he poor

20 performance of several of [JAKKS’s] key properties, including Monsuno and the 21 Winx Club…contributed to the decline.” JAKKS also lowered its 2013 net sales 22 forecasts and earnings per share. As a result of these disclosures, JAKKS’ shares 23 nosedived by approximately 39% from a close of $11.48 per share on July 17, 2013, 24 to a close of $7.00 per share on July 18, 2013. Thus, JAKKS’ share price fell after 25 Defendants began to reveal facts showing the Company’s true financial condition 26 and true prospects for growth. Confidential witnesses confirm that JAKKS’ internal 27 forecasts were materially less than what the Company had been forecasting. (See, 28

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1 e.g., ¶¶ 55-71). For example, CW 6 explained that JAKKS exaggerated the numbers 2 he gave to the Street by about 10 to 15 percent for several quarters. JAKKS’ 3 disclosures on July 17, 2013 (i) were directly corrective or the direct result of 4 JAKKS’ materially inflated guidance it had previously provided to investors and the 5 Street in order to obtain loan financing, which forecasts JAKKS had no real 6 prospects of meeting; (ii) were directly corrective or the direct result of JAKKS’ 7 previously inflated forecasts which lacked any reasonable basis because inter alia 8 the Monsuno and Winx lines were not selling well; and (iii) were directly corrective 9 or the direct result of the Company’s inability to maintain profitability and reach 10 projected numbers despite planned layoffs designed to decrease the Company’s 11 expenses and increase its profit. Alternatively, this disclosure was the 12 materialization of the undisclosed risks to the Company’s forecasts for the reasons 13 stated above. The manipulation of internal projections caused JAKKS’ actual results 14

15 to differ from what Defendants were forecasting to the market. CW 12 explained

16 that the internal projections were accurate and would have closely resembled the

17 actual results. For example, CW 12 explained that the internal forecast figures were

18 only about 2% higher than the actual sales for 2012. In contrast, the publicly released

19 guidance was 8% higher than the actual sales. This difference equated to tens of

20 millions of dollars. Despite the accuracy of the internal forecasts, those numbers 21 were never used in the guidance. As explained by CW 12, the same kind of 22 manipulations happened in 2013 and are the reason why the actual results materially 23 differed from what Defendants were forecasting to the market. 24 179. Defendants’ conduct, as alleged herein, proximately caused foreseeable 25 losses to Plaintiff and the other members of the Class. 26 APPLICABILITY OF PRESUMPTION OF RELIANCE: 27 FRAUD-ON-THE-MARKET DOCTRINE 28

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1 180. Plaintiff will rely, in part, upon the presumption of reliance established 2 by the fraud-on-the-market doctrine in that:

3 • Defendants made public misrepresentations or failed to disclose 4 material facts during the Class Period; 5 • the omissions and misrepresentations were material; 6 • the Company’s stock met the requirements for listing, and was 7 listed and actively traded on the NASDAQ, a highly efficient and 8 automated market;

9 • the Company’s shares were liquid and traded with moderate to 10 heavy volume during the Class Period (ranging from hundreds of

11 thousands to millions of shares per week);

12 • as a regulated issuer, the Company filed with the SEC periodic

13 reports during the Class Period;

14 • the Company regularly communicated with public investors via

15 established market communication mechanisms, including regular disseminations of press releases on the national circuits of major 16 newswire services and other wide-ranging public disclosures, such 17 as communications with the financial press and other similar reporting services; 18

19 • the Company was followed by multiple securities analysts employed by major brokerage firms who wrote reports that were 20 distributed to the sales force and certain customers of their 21 respective brokerage firms during the Class Period; these reports

22 were publicly available and entered the public marketplace;

23 • numerous FINRA member firms were active market-makers in the Company’s stock at all times during the Class Period; and 24

25 • unexpected material news about the Company was rapidly reflected in and incorporated into the Company’s stock price 26 during the Class Period. 27

28

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1 181. Based upon the foregoing, Plaintiff and the members of the Class are 2 entitled to a presumption of reliance upon the integrity of the market. 3 COUNT I 4 (Against All Defendants For Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder) 5 182. Plaintiff repeats and realleges each and every allegation contained 6 above as if fully set forth herein. 7

8 183. This Count is asserted against defendant JAKKS and the Individual

9 Defendants, and is based upon Section 10(b) of the Exchange Act, 15 U.S.C. §

10 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.

11 184. During the Class Period, Defendants engaged in a plan, scheme,

12 conspiracy and course of conduct, pursuant to which they knowingly or recklessly

13 engaged in acts, transactions, practices and courses of business which operated as a 14 fraud and deceit upon Plaintiff and the other members of the Class; made various 15 untrue statements of material facts and omitted to state material facts necessary in 16 order to make the statements made, in light of the circumstances under which they 17 were made, not misleading; and employed devices, schemes and artifices to defraud 18 in connection with the purchase and sale of securities. Such scheme was intended 19 to, and, throughout the Class Period, did: (i) deceive the investing public, including 20 Plaintiff and other Class members, as alleged herein; (ii) artificially inflate and 21 maintain the market price of JAKKS’ securities; and (iii) cause Plaintiff and other 22 members of the Class to purchase or otherwise acquire JAKKS’ securities and 23 options at artificially inflated prices. In furtherance of this unlawful scheme, plan 24 and course of conduct, Defendants, and each of them, took the actions set forth 25 herein. 26 185. Pursuant to the above plan, scheme, conspiracy and course of conduct, 27

28 each of the Defendants participated directly or indirectly in the preparation and/or

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1 issuance of the quarterly and annual reports, SEC filings, press releases and other 2 statements and documents described above, including statements made to securities 3 analysts and the media that were designed to influence the market for JAKKS’ 4 securities. Such reports, filings, releases and statements were materially false and 5 misleading in that they failed to disclose material adverse information and 6 misrepresented the truth about JAKKS’ finances and business prospects. 7 186. By virtue of their positions at JAKKS, Defendants had actual 8 knowledge of the materially false and misleading statements and material omissions 9 alleged herein and intended thereby to deceive Plaintiff and the other members of 10 the Class, or, in the alternative, Defendants acted with reckless disregard for the truth 11 in that they failed or refused to ascertain and disclose such facts as would reveal the 12 materially false and misleading nature of the statements made, although such facts 13 were readily available to Defendants. Said acts and omissions of Defendants were 14

15 committed willfully or with reckless disregard for the truth. In addition, each

16 Defendant knew or recklessly disregarded that material facts were being

17 misrepresented or omitted as described above.

18 187. Information showing that Defendants acted knowingly or with reckless

19 disregard for the truth is peculiarly within Defendants’ knowledge and control. As

20 the senior managers and/or directors of JAKKS, the Individual Defendants had 21 knowledge of the details of JAKKS’ internal affairs. 22 188. The Individual Defendants are liable both directly and indirectly for the 23 wrongs complained of herein. Because of their positions of control and authority, 24 the Individual Defendants were able to and did, directly or indirectly, control the 25 content of the statements of JAKKS. As officers and/or directors of a publicly-held 26 company, the Individual Defendants had a duty to disseminate timely, accurate, and 27 truthful information with respect to JAKKS’ businesses, operations, financial 28

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1 condition and future prospects. As a result of the dissemination of the 2 aforementioned false and misleading reports, releases and public statements, the 3 market price of JAKKS’ securities was artificially inflated throughout the Class 4 Period. In ignorance of the adverse facts concerning JAKKS’ business and financial 5 condition which were concealed by Defendants, Plaintiff and the other members of 6 the Class purchased or otherwise acquired JAKKS’ securities at artificially inflated 7 prices and relied upon the price of the securities, the integrity of the market for the 8 securities and/or upon statements disseminated by Defendants, and were damaged 9 thereby. 10 189. During the Class Period, JAKKS’ securities traded on a well- developed 11 and efficient market. Plaintiff and the other members of the Class, relying on the 12 materially false and misleading statements described herein, which the Defendants 13 made, issued or caused to be disseminated, or relying upon the integrity of the 14

15 market, purchased or otherwise acquired shares of JAKKS’ securities at prices

16 artificially inflated by Defendants’ wrongful conduct. Had Plaintiff and the other

17 members of the Class known the truth, they would not have purchased or otherwise

18 acquired said securities, or would not have purchased or otherwise acquired them at

19 the inflated prices that were paid. At the time of the purchases and/or acquisitions

20 by Plaintiff and the Class, the true value of JAKKS’ securities was substantially 21 lower than the prices paid by Plaintiff and the other members of the Class. The 22 market price of JAKKS’ securities declined sharply upon public disclosure of the 23 facts alleged herein to the injury of Plaintiff and Class members. 24 190. By reason of the conduct alleged herein, Defendants knowingly or 25 recklessly, directly or indirectly, have violated Section 10(b) of the Exchange Act 26 and Rule 10b-5 promulgated thereunder. 27

28

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1 191. As a direct and proximate result of Defendants’ wrongful conduct, 2 Plaintiff and the other members of the Class suffered damages in connection with 3 their respective purchases, acquisitions and sales of the Company’s securities during 4 the Class Period, upon the disclosure that the Company had been disseminating false 5 and misleading financial statements to the investing public. 6 COUNT II 7 (Violations of Section 20(a) of the

8 Exchange Act Against The Individual Defendants)

9 192. Plaintiff repeats and realleges each and every allegation contained in

10 the foregoing paragraphs as if fully set forth herein.

11 193. During the Class Period, the Individual Defendants participated in the

12 operation and management of JAKKS, and conducted and participated, directly and

13 indirectly, in the conduct of JAKKS’ business affairs. Because of their senior 14 positions, they knew the adverse non-public information about JAKKS’ financial 15 and business results, prospects and operations. 16 194. As officers and/or directors of a publicly owned company, the 17 Individual Defendants had a duty to disseminate accurate and truthful information 18 with respect to JAKKS’ financial condition and results of operations, and to correct 19 promptly any public statements issued by JAKKS which had become materially 20 false or misleading. 21 195. Because of their positions of control and authority as senior officers, 22 the Individual Defendants were able to, and did, control the contents of the various 23 reports, press releases and public filings which JAKKS disseminated in the 24 marketplace during the Class Period concerning JAKKS’ financial and business 25 results, prospects and operations. Throughout the Class Period, the Individual 26 Defendants exercised their power and authority to cause JAKKS to engage in the 27

28 wrongful acts complained of herein. The Individual Defendants, therefore, were

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1 “controlling persons” of JAKKS within the meaning of Section 20(a) of the 2 Exchange Act. In this capacity, they participated in the unlawful conduct alleged, 3 which artificially inflated the market price of JAKKS’ securities. 4 196. Each of the Individual Defendants, therefore, acted as a controlling 5 person of JAKKS. By reason of their senior management positions and/or being 6 directors of JAKKS, each of the Individual Defendants had the power to direct the 7 actions of, and exercised the same to cause, JAKKS to engage in the unlawful acts 8 and conduct complained of herein. Each of the Individual Defendants exercised 9 control over the general operations of JAKKS and possessed the power to control 10 the specific activities which comprise the primary violations about which Plaintiff 11 and the other members of the Class complain. 12 197. As set forth above, JAKKS violated Section 10(b) and Rule 10b-5. By 13 virtue of their positions as controlling persons, the Individual Defendants are liable 14

15 pursuant to Section 20(a) of the Exchange Act as they culpably participated in the

16 fraud alleged herein.

17 198. As a direct and proximate result of the Individual Defendants’ wrongful

18 conduct, Plaintiff and other members of the Class suffered damages in connection

19 with their purchases of the Company’s common stock during the Class Period.

20 PRAYER FOR RELIEF 21 WHEREFORE, Plaintiff demands judgment as follows: 22 A. Determining that the instant action may be maintained as a class action 23 under Rule 23 of the Federal Rules of Civil Procedure, and certifying Plaintiff as 24 the Class representative; 25 B. Awarding compensatory damages in favor of Plaintiff and the other 26 Class members against all Defendants, jointly and severally, for all damages 27

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1 sustained as a result of Defendants’ wrongful acts and misconduct as alleged 2 herein, in an amount to be proven at trial; 3 C. Awarding Plaintiff and the other members of the Class prejudgment 4 and post-judgment interest, as well as their reasonable attorneys’ fees, expert fees 5 and other costs; and 6 D. Awarding such other and further relief as this Court may deem just 7 and proper. 8 DEMAND FOR TRIAL BY JURY 9 Plaintiff hereby demands a trial by jury. 10 11 Dated: March 23, 2015

12 Respectfully submitted, 13

14 POMERANTZ LLP

15 By: /s/Jeremy A. Lieberman

16 Marc I. Gross Jeremy A. Lieberman 17 Emma Gilmore th 18 600 Third Avenue, 20 Floor New York, New York 10016 19 Telephone: (212) 661-1100 20 Facsimile: (212) 661-8665 [email protected] 21 [email protected] 22 [email protected]

23 POMERANTZ LLP 24 Patrick V. Dahlstrom

25 Ten South LaSalle Street, Suite 3505 Chicago, Illinois 60603 26 Telephone: (312) 377-1181 27 Facsimile: (312) 377-1184 [email protected] 28

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1 GLANCY BINKOW & GOLDBERG LLP 2 Lionel Z. Glancy 3 Michael Goldberg Robert V. Prongay 4 1925 Century Park East, Suite 2100 5 Los Angeles, CA 90067 Telephone: (310) 201-9150 6 Facsimile: (310) 201-9160 7 Email: [email protected]

8 FEDERMAN & SHERWOOD 9 William B. Federman 10 10205 North Pennsylvania Avenue Oklahoma City, Oklahoma 73120 11 Telephone: (405) 235-1560 12 Facsimile: (405) 239-2112

13 [email protected]

14 WOHL & FRUCHTER LLP J. Elazar Fruchter 15 570 Lexington Avenue, 16th Floor New York, New York 10022 16 Telephone: (212) 758-4000 Fax: (212) 758-4004 17 [email protected]

18 Attorneys for Lead Plaintiff and the Class 19

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1 CERTIFICATE OF SERVICE 2 3 I hereby certify that on March 23, 2015, a copy of the foregoing was filed 4 electronically and served by mail on anyone unable to accept electronic filing. 5 Notice of this filing will be sent by e-mail to all parties by operation of the Court’s 6 electronic filing system or by mail to anyone unable to accept electronic filing as 7 indicated on the Notice of Electronic Filing. Parties may access this filing through 8 the Court’s CM/ECF System. 9 10 /s/ Jeremy A. Lieberman 11 Jeremy A. Lieberman 12 13

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