John Melot, Et Al. V. JAKKS Pacific Inc., Et Al. 13-CV-05388-First

Case 2:13-cv-05388-JAK-SS Document 45 Filed 01/17/14 Page 1 of 59 Page ID #:351 Case 2:13-cv-05388-JAK-SS Document 45 Filed 01/17/14 Page 2 of 59 Page ID #:352 1 Lead Plaintiff Edward Donahue (“Plaintiff”), individually and on behalf of 2 all other persons similarly situated, by his undersigned attorneys, for his amended 3 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 7 other 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 19 “Class Period”), seeking to recover damages caused by Defendants’ violations of 20 the federal securities laws and to pursue remedies under §§ 10(b) and 20(a) of the 21 Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 22 promulgated thereunder against the Company and certain of its top officials. 23 2. JAKKS is a licensee, designer, producer, marketer and distributor of 24 toys and related consumer products. JAKKS’ success depends heavily on its 25 ability to obtain licenses to popular trademarks and brand names such as Disney®, 26 Nickelodeon, and Warner Bros®. Generally, the license agreements require 27 JAKKS to pay royalties ranging from 1% to 14% of its net sales, with some 28 FIRST AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS - 1 - Case 2:13-cv-05388-JAK-SS Document 45 Filed 01/17/14 Page 3 of 59 Page ID #:353 1 significant licensors also demanding a minimum guarantee payment regardless of 2 whether JAKKS is able to meet its sales quota to cover the royalties. 3 3. During the Class Period, Defendants touted JAKKS’s financial 4 success. For example, JAKKS reported a 10% increase in revenues for 2Q 2012 5 over the prior year period, from net sales of $131.9 million in Q2 2011 to net sales 6 of $145.4 million in 2Q 2012. Highlights of the second quarter’s spike included 7 increased revenues from two lines of toys: Monsuno and Winx Club, which the 8 Company lauded as “already showing strong momentum.” JAKKS also offered 9 upbeat guidance for full year 2012, projecting an increase in net sales of 6.2% to 10 7.4% to approximately $720 million to $728 million. 11 4. As attested to by a slew of confidential witnesses, however, JAKKS’ 12 financials and forecasts were hopelessly inflated, and its prospects for future 13 growth constrained by massive write-offs as a result of Defendants’ imprudent 14 15 guarantees of minimum royalty payments and the unsuccessful launch of the 16 Monsuno and Winx Club lines. In reality, throughout the Class Period, Defendants 17 made materially false and misleading statements regarding the Company’s 18 business and operations and/or failed to disclose that: (i) the Individual Defendants 19 had consistently manipulated JAKKS’ sales and forecast numbers in order to 20 mislead investors; (ii) JAKKS systematically laid off workers at the end of a 21 quarter in an effort to meet earnings projections and rehired workers to fill the 22 same positions at the start of the following quarter; (iii) to secure licenses for 23 popular trademarks and brand names, the Individual Defendants guaranteed 24 minimum royalty payments, knowingly or recklessly disregarding that the 25 Company would be unable to meet the minimum sales needed to cover those 26 payments, thereby incurring substantial write-downs; and (iv) Defendants were 27 aware that the Monsuno and Winx lines performed poorly upon their launch yet 28 continued to tout their success to unsuspecting investors. FIRST AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS - 2 - Case 2:13-cv-05388-JAK-SS Document 45 Filed 01/17/14 Page 4 of 59 Page ID #:354 1 5. Despite claiming consistent revenue growth, confidential witnesses 2 reveal that JAKKS’ high level executives had unfettered access to and manipulated 3 the Company’s sales and forecast numbers, deceiving the investors about JAKKS’ 4 financial health. For example, CW 1, JAKKS’ controller and Executive Vice 5 President, who reported directly to Defendant CFO Bennett and designed the sales 6 and forecasting system at JAKKS, observed that the forecasts he/she prepared were 7 often overridden by his/her superiors, Defendants Berman and Bennett. CW 1 8 remarked that “the salespeople would put in their numbers and when it came time 9 to designating the number on forward looking statements, it didn’t jive with the 10 system.” According to CW 1, “[t]he numbers [CW 1] gave were accurate” but 11 “the CEO kept telling me my numbers were wrong,” thereby inflating the 12 Company’s sales forecast. 13 6. In addition to these shenanigans, confidential witnesses also reveal 14 15 that in an effort to meet earnings projections, JAKKS routinely laid off workers 16 before the end of the quarter and often rehired workers to fill those positions in the 17 subsequent quarter. For example, CW 9, who helped supervise the design, 18 marketing, and sales of several lines of toys at JAKKS, remarked that every three 19 months, the Company would lay off a large number of workers, with the firings 20 timed to occur several weeks before the end of the fiscal quarter. Workers were 21 rehired the following quarter to fill the same positions. JAKKS carried on this 22 illicit practice without a whisper to the market. 23 7. Confidential witnesses also disclosed that, in an effort to secure 24 licenses for recognized brands, JAKKS guaranteed minimum payments to 25 licensors knowing full well it would fail to sell enough units to cover royalty 26 payments. This precarious practice eventually caused massive write-offs that 27 damaged JAKKS’ revenues and profitability. Indeed, according to CW 7, Ken 28 Price, JAKKS’ Vice President of Sales, refused to sign off on a large contract with FIRST AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS - 3 - Case 2:13-cv-05388-JAK-SS Document 45 Filed 01/17/14 Page 5 of 59 Page ID #:355 1 Disney because he knew the sales benchmark to meet the minimum royalty 2 payment was unattainable. 3 8. Defendants’ misstatements did not stop there. Defendants further 4 misled the public regarding the success of its newly-introduced toy lines Monsuno 5 and Winx, which they repeatedly claimed were “showing strong momentum” with 6 “orders on hand and our forecast in-house through both U.S. and 7 international…growing expeditiously,” and the “sell-throughs…well beyond what 8 we ever expected.” In stark contrast to Defendants’ assurances, however, 9 confidential witnesses confirm that Monsuno and Winx underperformed from the 10 outset. For example, CW 3, who was monitoring sales at one of JAKKS’ largest 11 customers, recalls that the Monsuno toy line performed poorly from its launch, and 12 that executives at JAKKS were privy to this information. 13 9. Following Defendants’ repeated guarantees of growth and projected 14 15 sales revenue increases, on July 17, 2013, after the market close, JAKKS shocked 16 the market when it suddenly slashed its full-year forecast of revenue and earnings, 17 citing poor sales and lackluster performance from the Monsuno and Winx Club 18 line of products. In response, the Company said it would suspend its dividend, and 19 implement a restructuring plan involving a “substantial reduction of leased space, 20 employees and other overhead expenses.” Moreover, in a conference call held 21 with investors that same day, the Company blamed its earnings miss in part on 22 “charges for license minimum guarantee shortfalls of $14.1 million,” essentially 23 admitting that the Company was simply unable to meet its minimum guarantee 24 agreements with its licensors without incurring significant charges. 25 10. This news sent JAKKS’ shares into a tailspin, dropping approximately 26 39% from a close of $11.48/share on July 17, 2013, to a close of $7.00/share on 27 July 18, 2013. 28 FIRST AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS - 4 - Case 2:13-cv-05388-JAK-SS Document 45 Filed 01/17/14 Page 6 of 59 Page ID #:356 1 11. As a result of Defendants’ wrongful acts and omissions, and the sharp 2 decline in the market value of the Company’s stock, Plaintiff and other Class 3 members have suffered significant losses and damages. 4 JURISDICTION AND VENUE 5 12. 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 13. This Court has jurisdiction over the subject matter of this action 9 pursuant to § 27 of the Exchange Act (15 U.S.C.

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