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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 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

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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.

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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

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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

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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. § 78aa) and 28 U.S.C. § 1331. 10 14. 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 13 herein occurred in this District. 14

15 15. 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,

18 interstate telephone communications and the facilities of the national securities

19 exchange.

20 PARTIES 21 16. Plaintiff, as set forth in his previously filed Certification, acquired 22 JAKKS securities at artificially inflated prices during the Class Period and was 23 damaged upon the revelation of the alleged corrective disclosures. 24 17. Defendant JAKKS is a Delaware corporation with its principal 25 executive offices located at 22619 Pacific Coast Highway, Malibu, California 26 90265. JAKKS’ common stock trades on the NASDAQ under the ticker symbol 27 “JAKK.” 2012 10-K at 10. 28

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1 18. 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 3 the Company’s board of directors (“Board”). 2012 10-K at 77. 4 19. 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 20. The defendants referenced above in ¶¶ 18-19 are sometimes referred 10 to herein as the “Individual Defendants.” 11 21. The defendants referenced above in ¶¶ 17-19 are sometimes referred 12 to herein as “Defendants.” 13

14 SUBSTANTIVE ALLEGATIONS

15 Background

16 22. 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 19 Toy and Electronics, and (ii) Role Play, Novelty and Seasonal Toys. Id. at 53. 20 The Traditional Toy and Electronics segment includes action figures and 21 accessories, for example licensed characters like Monsuno and Batman, toy 22 vehicles, electronics products, and dolls and accessories. Id. at 2, 53. The Role 23 Play, Novelty and Seasonal Toys segment includes activity kits, dress-up and 24 pretend play products, kids’ furniture, Halloween and everyday costumes. Id. 25 23. 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 24. JAKKS “focus[es] its business on acquiring or licensing well- 7 recognized trademarks and brand names, most with long product histories 8 (“evergreen brands”).” Id. at 2. The Company’s “[s]ales of products under 9 trademarks or trade or brand names licensed from others account for substantially 10 all of [JAKKS’] net sales.” 3Q 10-Q 2012 at 32. Among others, JAKKS has 11 license agreements with Nickelodeon, Disney®, UFC, and Warner Bros®. Id. at 4. 12 Typically, JAKKS’ “license agreements for products and concepts call for royalties 13 ranging from 1% to 14% of net sales, and some may require minimum guarantees 14

15 and advances.” Id. at 5. These license agreements “require [JAKKS] to make

16 specified minimum royalty payments, even if [the Company] fail[s] to sell a

17 sufficient number of units to cover these amounts.” Id. at 12. JAKKS “derive[s] a

18 significant portion of [its] net sales from a limited number of licensors.” Id. at 12.

19 25. With respect to the Traditional Toys and Electronics segment, in

20 2012, JAKKS launched a new line of action figures, playsets and accessories based 21 on the boys’ animated television show Monsuno, which premiered in the U.S. on 22 Nicktoons® in February 2012 and abroad in the fall of 2012. Id. at 5. JAKKS also 23 launched in 2012 a WinxClub® line of toys. Id. at 32. 24 26. On September 12, 2012, JAKKS entered into a joint venture called 25 DreamPlay Toys with NantWorks LLC (“NantWorks”), in which it owns a fifty 26 percent interest, hoping to use innovative patent technologies which feature image, 27 video, sound, and object recognition abilities. Id. at 55. These technologies 28 instantly recognize toys, prompting children to interact, play, and learn from these

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1 content-driven experiences. Id. The Company announced that it expected to 2 launch a line of toy products utilizing DreamPlay technology in 2013. Id. at 6. 3 JAKKS paid NantWorks $8.0 million in cash and issued NantWorks a warrant to 4 purchase 1.5 million shares of JAKKS common stock valued at $7.0 million in 5 exchange for the exclusive right to use NantWorks’ recognition technology 6 platform for toys. Id. at 55. 7 27. For the year ended 2012, JAKKS generated net sales of $668.8 8 million, with net sales of $363.7 million in its Traditional Toys and Electronics 9 segment and net sales of $303.1 million in the Role Play, Novelties and Seasonal 10 Products segment. Id. at 3, 29. 11

12 The Individual Defendants Had Unfettered Access to JAKKS’ Sales Figures and Projections 13 28. Numerous confidential witnesses corroborate that the Individual 14 Defendants had continuous and unrestricted access to the Company’s current sales 15 figures and forecasts via its JAKKS.net system and also were apprised of all 16 changes in sales and projections in weekly meetings with its Controller. CW 1 17

18 served as the Controller and Executive Vice President at JAKKS from 2010 until

19 he was terminated in October 2012. Based at the Company’s headquarters in

20 Malibu, California, CW 1 reported directly to Defendant CFO Joel Bennett. CW 1

21 was responsible for overseeing JAKKS’ finances. CW 1 designed the sales and

22 forecasting system at JAKKS, and managed the Company’s sales meetings. CW 1

23 was hired to fix JAKKS’ finance and forecasting systems after a massive loss at 24 JAKKS on or about Q4 2009 or Q1 2010. When CW 1 joined JAKKS, the 25 Company had no meaningful forecasting controls in place. CW 1 built a detailed 26 in-house forecasting system that examined volumes and forecasted each 27 customer’s sales by month. The forecasts were maintained in a spreadsheet 28 format. CW 1 produced an internal report on a weekly basis, which broke down

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1 the actual sales for each toy line by each customer in every region of the country. 2 The report compared the actual sales to the budgeted forecast of sales. CW 1 3 emailed the report to the Individual Defendants. CW 1 and the Individual 4 Defendants met on a weekly basis to discuss the actual sales against the forecasts. 5 The weekly forecast showed the executives how each toy line was performing and 6 which customers were purchasing the Company’s toys, and in what quantities. 7 29. CW 1 also explained that, to minimize losses, CW 1 implemented a 8 system in which JAKKS received point-of-sale data from large retailers 9 immediately after a toy was launched. This meant that the Company and its chief 10 executives knew almost immediately after a product was launched how it was 11 performing. This way, JAKKS could promptly cease production of 12 underperforming toys. The Individual Defendants saw this detailed information in 13 the forecasts and Excel spreadsheets CW 1 provided them on a weekly basis. 14

15 Thus, the Individual Defendants could review sales by toy line, by store, by region,

16 as well as ascertain which toys were sitting on the shelves. CW1 observed that

17 Defendants Berman and Bennett did away with this system after CW 1 left the

18 Company because they did not want the sales force spending their time examining

19 the sales data instead of selling toys.

20 30. The Company’s published forecasts were primarily based on estimates 21 obtained from the sales team. The salespeople provided confidence levels for the 22 forecasts, and the progress of anticipated sales was continuously monitored. CW 1 23 informed management of all changes in product demand: if the numbers on a 24 product started waning, CW 1 would promptly appraise management. 25 31. CW 2 worked as an executive assistant to JAKKS’ Senior Vice 26 President of domestic sales, Ken Price, from June 1999 to late June 2012. CW 2 27 worked in the New York office, which houses many of the Company’s sales 28 executives. As a long-time employee and executive assistant to a vice president,

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1 CW 2 was familiar with how sales forecasts were compiled and disseminated 2 throughout the Company. CW 2 remarked that JAKKS’ sales executives regularly 3 received sales figures and forecasts of pending deals from various regions of the 4 country. Price received sales forecasts for domestic sales, and Vice President of 5 International Sales Carmine Russo received sales forecasts for international sales. 6 Price was responsible for compiling the domestic sales forecast every quarter into a 7 report. This report was composed of sales forecasts drawn from sales staff located 8 throughout the country. The forecasts were based upon sales figures from retail 9 stores and merchants. According to CW 2, the quarterly sales reports were sent to 10 the Company’s executives, including Defendant Berman. JAKKS’ executives 11 would also request additional sales forecasts between quarters. Carmine Russo 12 also rolled up the sales numbers from overseas and sent quarterly sales reports and 13 forecasts, for international sales, to the Individual Defendants in California. 14

15 32. CW 3 worked as a business analyst for JAKKS from January 2011 to

16 September 2012. CW 3’s responsibilities included receiving sales data for all of

17 JAKKS’ products from two major vendors, Amazon.com and Toys R Us, which

18 CW 3 would then compile and forward to executives at the Company’s

19 headquarters in California. CW 3 worked in the New York office, which housed

20 many of the executives in the Company’s sales division. CW 3 reported to Vice 21 President of Sales Dan Cooney. Every week, CW 3 sent sales data from Toys R 22 Us and Amazon.com to the executives in California, as well as most of the top 23 executives in the marketing department. CW 3 said that other business analysts 24 received similar data from all the large chain stores who sold JAKKS’ products, 25 including Wal-Mart and Kohl’s. Those analysts also sent sales data to the 26 Company’s top executives on a weekly basis. The sales data was referred to as the 27 “R Report.” Sales forecasts, compiled by sales coordinators, were produced using 28 JAKKS’ own software called “JAKKS’ VI Tool.” As a result of the internal flow

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1 of information, the CEO, COO and other top executives at JAKKS knew how well 2 all products were selling on a weekly basis. The sales data was also made 3 available to Price and Russo. 4 33. CW 4 worked as a business analyst for JAKKS from October 2011 to 5 August 2012. CW 4’s responsibilities included receiving sales data for JAKKS’ 6 products from Wal-Mart, one of JAKKS’ largest retailers, and producing forecasts 7 for future sales. CW 4 worked out of the Company’s office in Bentonville, 8 Arkansas and reported to Senior Vice President of Sales Bryan Shoe. CW 4 9 received sales data from Wal-Mart and, using a number of variables, including past 10 sales, marketing, and anticipated consumer demand, CW 4 prepared forecasts for 11 future sales at Wal-Mart. These forecasts were provided both to Wal-Mart, to help 12 the retailer make decisions about inventory, and to JAKKS’ executives. JAKKS 13 used a web-based system called “JAKKS.net” to prepare forecasts. CW 4 and 14

15 other analysts entered their forecasts into the system as soon as they were

16 generated. CW 4 added forecasts to the system on a daily or weekly basis.

17 Forecasts for the sales of JAKKS’ products were listed by product name and by the

18 retailer in which the product was sold. The forecasts on JAKKS.net were visible to

19 large numbers of sales staff, including all inside analysts, account managers and

20 senior vice presidents. According to CW 4, the numbers were “rolled up” to all 21 levels of management. “Anybody had full visibility of what you were 22 forecasting,” said CW 4. 23 34. CW 5 worked at JAKKS as an associate product manager from 24 November 2010 to August 2011 and as a brand manager from August 2011 until 25 March 2013. Both of these positions were in the Company’s marketing 26 department. During that time, CW 5 routinely reviewed the sales data and sales 27 projections of several products. Sales representatives obtained point of sale 28 (“POS”) data directly from major retailers, including Wal-Mart, K-Mart, Target,

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1 and Toys R Us. The sales representatives then entered the sales data into 2 JAKKS.net, the Company’s online network. Sales projections were developed in 3 collaboration between JAKKS’ marketing and sales departments. According to 4 CW 5, sales projections were also placed on JAKKS.net. CW 5 noted that point- 5 of-sale data from retailers was updated at least weekly, and many individuals in 6 both the sales and marketing divisions had access to all or some of the data on the 7 network through a log in system. Data could also be extracted from the site and 8 emailed to other parties in the form of a Microsoft Excel document. 9 JAKKS’ Reported Sales and Forecasts Were Subject to Rampant 10 Manipulation by the Individual Defendants 11 35. Throughout the Class Period, Defendants continuously touted 12 JAKKS’ financial growth and stability. For example, for full year 2012, 13 Defendants forecasted a 6.2% to 7.4% increase in net sales from the prior year to a 14 range of $720 to $728 million, and represented that the Company is “on track for 15 meeting [its] guidance for the full year.” Even after they subsequently reduced the 16 guidance for 2012 in December, Defendants still projected profitability for 2013, 17 with “an increase in net sales of 4% to 5% to approximately $694 to $700 million,” 18 emphasizing that JAKKS “will return to profitability in 2013.” These and similar 19 representations, however, were false and misleading as the Individual Defendants 20 continuously manipulated the Company’s reported sales forecasts. 21 36. According to CW 1, the forecasts prepared by CW 1 were often 22 overridden and manipulated by the Individual Defendants. CW 1 remarked that 23 “the salespeople would put in their numbers and when it came time to designating 24

25 the number on forward looking statements, it didn’t jive with the system.” CW 1

26 emailed his superior, Defendant Bennett, just before he was laid off, that CW 1’s

27 forecasting showed sales numbers much lower than what Defendant Berman was

28 forecasting. CW 1 remarked that his email to the CFO describes these

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1 discrepancies in detail. CW 1 noted that the email “fell on deaf ears.” CW 1 2 believes he was terminated because of his persistence on this issue. CW 1 3 remarked that “the numbers I gave were accurate, based on the forecasts from the 4 sales group” but “the CEO kept telling me my numbers were wrong and that he 5 talked to the sales guys, and the numbers were wrong.” CW 1 explained that he 6 went back to all the sales people to ask if they changed their forecast numbers to 7 the numbers the CEO had and was told by the sales people that they did not change 8 their numbers. CW 1 said that when Q2 2012 numbers were reported to his 9 superiors, they were exactly as he had previously forecasted. As far as CW 1 10 knew, Defendant Berman just changed numbers as he saw fit, so there was no 11 reason the Individual Defendants would need to get any salespeople to adjust their 12 forecasts. 13 37. CW 1 explained that in addition to the sales and forecast system, 14

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

16 Operating Officer, John McGrath. Before CW 1 was terminated, CW 1 had been

17 working on tying the forecast system into the IT/production system. This would

18 have allowed the Company to accurately predict which products were suffering

19 and to avoid excess inventory. The IT/production system would have made it

20 more difficult for management to manipulate the forecasts as they saw fit. CW 1 21 believes that his involvement in the IT/production system was another reason for 22 his termination. 23 38. According to CW 1, McGrath brought in an individual with no formal 24 education named Adam Prump (spelled phonetically). CW 1 described Prump as 25 the “henchman” at JAKKS who followed the instructions of senior management. 26 Prump had control of the IT/production system, which allowed him to change sales 27 forecast on the production side. Prump had access to all the passwords needed to 28 make changes in the system. Prump pressured Ken Price, who was the senior sales

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1 person and Executive Vice President for JAKKS’ core business. Price reported 2 directly to Defendant Berman. Price would typically make high-level sales 3 estimations. According to CW 1, Price had been pressured by senior management 4 to manipulate sales numbers and wrote a letter of protest to senior management.1 5 39. According to CW 1, former JAKKS Director Dan Almagor, who was 6 a member of JAKKS’ audit committee, resigned around the same time that CW 1 7 was terminated in October of 2012. Almagor was very frustrated that senior 8 management was overwriting all internal controls at the Company. 9 40. CW 6 worked in JAKKS’ sales division from 1996 to August 2012. 10 He joined the Company as a sales analyst and was later promoted to sales manager, 11 reporting directly to Ken Price, the Executive Vice President of domestic sales, 12 from October 2001 until he left the Company. CW 6 rolled up JAKKS’ domestic 13 sales each quarter. CW 6’s responsibilities included collecting sales numbers from 14

15 different divisions within the Company and helping Price organize quarterly

16 forecasts for domestic sales.

17 41. CW 6 would help tally the numbers from the Company’s different

18 domestic sales divisions and compile them into a report. Price sent the sales

19 forecasts to the executives at the Company’s headquarters in California. Each

20 quarter, CW 6 saw the dollar amount of total domestic sales forecasted for the 21 following quarter. After Price sent out the report to headquarters, CW 6 often 22 would listen to or read an account of the Company’s quarterly earnings call with 23 analysts and shareholders. In these public statements, the Individual Defendants 24

25 1 CW 1 explained that high-level discussions and disagreements took place at 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 27 a key employee because Price was so highly paid. Senior management responded

28 to CW 1 in an email, informing CW 1 that they disagreed with the classification of Price as a key employee.

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1 would present a forecast for the net sales of the company, equivalent to the 2 domestic sales plus the international sales. Based upon the report sent by Price to 3 the Company’s executives, the numbers provided by the Individual Defendants to 4 investors and analysts were inflated. According to CW 6, “the numbers they were 5 giving were too high.” 6 42. CW 7 worked at JAKKS for over a decade, holding a number of high- 7 level positions, including as Director of Marketing and Licensing, Vice President 8 of Marketing and Licensing, and Senior Vice President of Licensing and Media. 9 According to CW 7, Price made a formal complaint to the Company (wrote a 10 letter) because he did not believe in the Company’s sales forecasts. Specifically, 11 Price complained that the sales numbers reported to investors were not matching 12 the Company’s internal reports. 13

14 JAKKS Repeatedly Laid-Off Workers Before the End of Each Quarter in an Effort to Meet Earnings Projections and Rehired Workers When the New 15 Quarter Began 16 43. While Defendants announced increased revenues from sales and 17 maintained that JAKKS is “on track” to meet its guidance, Defendants concealed 18 that the Company engaged in systematic layoffs prior to the end of each quarter in 19 order to make its numbers, and rehired workers the following quarter to fill those 20 same positions. Defendants failed to disclose that JAKKS’ perceived ability to 21 meet its guidance did not stem from organic sales but instead was a product of 22 machinations. 23

24 44. CW 3 explained that quarterly layoffs occurred at the end of the fiscal

25 quarters in 2012 when it looked like the Company was not going to “make its

26 numbers,” i.e., its sales goals. JAKKS’ employees would be fired to lower the

27 Company’s costs and recorded overheard, lending an appearance of financial

28 viability. The number of employees who were fired depended on the financial

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1 goals set for the quarter. “They had a number they had to meet,” CW 3 said, “and 2 if we weren’t going to make our numbers, a certain number of people had to get 3 fired.” 4 45. CW 8 worked as the lead designer for JAKKS’ line of Winx Club 5 dolls from October 2010 to July 2013. CW 8 observed that the Company engaged 6 in systematic layoffs at the end of the Company’s fiscal quarters. It was “common 7 knowledge” at JAKKS that employees were laid off in order to lower costs and 8 make the Company’s finances appear healthier to investors. Employees considered 9 the quarterly layoffs a type of “lottery” in which a certain number of people would 10 invariably be terminated. “Everyone there knew it,” said CW 8. In many cases, 11 these same positions from which employees had been fired would be filled at the 12 beginning of the following quarter. 13 46. CW 9 was an associate brand manager at JAKKS from August 2011 14

15 to March 2013. CW 9 helped supervise the design, marketing, and sales of the

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

17 reported to the Director of Marketing. CW 9 observed frequent layoffs at JAKKS

18 during his/her tenure. While the brands for which CW 9 was responsible were

19 performing relatively well and meeting internal projections, CW 9 was aware,

20 through conversations with co-workers, that other parts of the company were doing 21 poorly. According to CW 9, “a lot of people were talking about how [the 22 Company] wasn’t doing well.” CW 9 noticed that approximately every three 23 months, the Company would lay off a large number of workers. The firings 24 appeared to be timed to occur several weeks before the end of the financial quarter. 25 CW 9 also observed that the Company would often hire new workers several 26 weeks after there had been a round of layoffs, i.e. after the financial quarter had 27 ended. These workers would often hold the same position as workers who had 28 been laid off.

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1 47. CW 10 was a senior brand manager at JAKKS from February 2011 to 2 October 2013. CW 10 reported to the Company’s Director of Marketing, Josh 3 Weichbrodt, who reported to Tara Hefter, the Vice President of Global Licensing. 4 CW 10 also observed regular layoffs at the Company. CW 10 described morale as 5 “low.” CW 10, too, noticed a pattern wherein many employees were consistently 6 fired before the end of a quarter. CW 10 remarked that “they planned to do it 7 every quarter.” CW 10 also observed that new employees were often hired at the 8 beginning of a new quarter. 9

10 To Secure Licenses for Known Brands and Trademarks, JAKKS Guaranteed Payments to Licensors Knowing It Was Unable to Meet the 11 Sales Quota Needed to Cover Royalty Payments 12 48. “Substantially all of [JAKKS’] net sales” derive from sales of 13 products under trademarks or brand names licensed from other sources. In its 14 filings, JAKKS represented only that some “license agreements generally require 15 [it] to make specified minimum royalty payments, even if [the Company] fail[s] to 16 sell a sufficient number of units to cover these amounts.” Defendants concealed, 17 however, that in order to secure licenses to popular brands and trademarks, the 18 Defendants guaranteed minimum royalties knowing the Company was unable to 19 generate sufficient sales to cover said payments, resulting in massive write-offs. 20 49. CW 1 explained that JAKKS wrote a number of “pretty hefty” 21 licensing agreements that contained minimum guarantees. Under a minimum 22 guarantee agreement, JAKKS would guarantee a company from whom it is 23

24 licensing a certain amount of royalty payments, regardless of the actual revenues

25 generated from the product. According to CW 1, the minimum license guarantees

26 were written off once a product was determined to be unsuccessful, even if that

27 event preceded the contract dates when the license guarantees were due. The sales

28 and forecasting system at JAKKS also were used to determine which products

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1 should be written off. JAKKS’ senior management knew they were going to have 2 to write off some guarantees. 3 50. CW 7 similarly observed that, typically, the Company’s contracts with 4 licensors are signed by the Individual Defendants and other top management. CW 5 7 stated that Defendant Berman signs off on every contract and that Berman is 6 always carefully vague in investor calls when talking about which accounts caused 7 minimum license guarantee write-offs. According to CW 7, a JAKKS employee 8 reporting directly to CW 7 told CW 7 that he/she was directed by Defendant 9 Berman to take Executive Vice President of Sales Ken Price’s name off a contract 10 because he refused to agree to its terms. The reason for Price’s refusal was that he 11 knew it was an unattainable guarantee amount and objected to its execution. The 12 contract was for approximately $100 million and was related to a Disney segment. 13 Despite the Company’s Representations, the Monsuno and Winx Club Lines 14 Were an Immediate Flop 15 51. Defendants attributed JAKKS’s successful second quarter 2012 16 results, with a 10% increase in sales to $145.4 million from the prior year period, 17 to “the expansion of the Monsuno toys…and [the] Winx Club [line]…both of 18 which are already showing strong momentum.” Defendants offered upbeat 19 guidance for 2012, anticipating growth in net sales in the range of $720 million to 20 $728 million, with Monsuno “growing…rapidly” and “expeditiously” and the 21 launch of the Winx Club line “off to an amazing start.” Contrary to these rosy 22

23 depictions, however, confidential witnesses confirm that the Monsuno and Winx

24 lines underperformed from their initial launch and at least as early as June 2012.

25 Despite this failure, Defendants knowingly continued to mislead investors about

26 the products’ success. In fact, on October 23, 2012, when a distraught shareholder

27 questioned the Company’s “wondrous prospects of Monsuno” and opined that

28 “these failed to do,” Defendant Berman was quick to disagree: “I will disagree

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1 with you on Monsuno. Monsuno has done terrific for us as a company…we have a 2 very solid business.” 3 52. During his/her tenure at JAKKS, CW 6 was present for the launch of 4 JAKKS’ Monsuno and Winx Club toy lines. Based on CW 6’s receipt of domestic 5 figures, it was apparent within months that the lines were underperforming. The 6 lines launched around March 2012. According to CW 6, based on the Individual 7 Defendants’ receipt of quarterly sales figures, they would have been apprised of 8 the lines’ severe underperformance by June 2012. 9 53. CW 3, who was monitoring sales at Toys R Us in 2012, similarly 10 recalls that the Monsuno toy line underperformed at Toys R Us from the time of its 11 launch. According to CW 3, this sales data was transmitted to the top executives at 12 JAKKS. 13 54. CW 8, who worked as the lead designer for JAKKS’ line of Winx 14

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

16 final production. As its lead designer, CW 8 paid close attention to the

17 performance of the Winx Club line of dolls. By mid-2012, CW 8 was aware of the

18 fact that the line of dolls did not perform in line with the Company’s expectations

19 and the sales were lower than forecasted. The line’s underperformance is

20 attributable to a shift in toy preferences among children towards electronic, smart- 21 phone-type toys, and also to a decision by the television channel Nickelodeon to 22 air a television series entitled “Winx Club,” featuring the characters depicted in the 23 toy line, at night instead of in the afternoon, a time slot when the target 24 demographic for the Winx Club line––young children––was likely to watch 25 television. 26 55. CW 11 was a sales and account analyst for JAKKS from August 2011 27 to March 2013. CW 11 analyzed sales figures received from K-Mart and Kohl’s, 28 who sold many of JAKKS’ toy lines. CW 11 reported to the Vice President of

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

15 Monsuno and Winx, CW 11 would apprise both the brand managers who managed

16 these toy lines and the account managers who managed the accounts with K-Mart

17 and Kohl’s of the relevant sales figures. CW 11 sent weekly, sometimes daily,

18 reports on sales figures related to all toy lines, including Monsuno and Winx, to the

19 brand managers and account managers. These reports were sent to “everyone who

20 touched the brand,” which included individuals in both the marketing and sales 21 departments. Therefore, brand managers associated with Winx and Monsuno were 22 well aware of the lines’ underperformance within weeks of their launch. 23 Materially False and Misleading Statements Issued During the Class Period 24 56. On July 17, 2012, the Company issued a press release announcing 25 financial results for the second quarter 2012 (“2Q 2012”). The Company reported 26 that “[n]et sales for the second quarter of 2012 were $145.4 million, up from 27 $131.9 million reported in the comparable period in 2011.” The Company also 28 reported that earnings were down from the prior year: “[e]xcluding the legal and

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1 financial advising fees, second quarter earnings would have totaled $1.6 million, or 2 $0.06 per diluted share, compared to $4.9 million, or $0.18 per diluted share, in 3 2011.” 4 57. Quoting Defendant Berman, the press release focused on the reported 5 sales growth, including “strong momentum” from the Monsuno and Winx lines: 6 We are pleased with the sales growth in the second quarter and year to 7 date, and we are on track to meet our guidance ranges for the full year. 8 Highlights of our second quarter include the expansion of the Monsuno toys in the US and the launch internationally of the animated series and 9 related toy products, which has met the Company’s expectations to date, 10 and our Winx Club dolls and Big Wheel line launched at select major

11 retailers, both of which are already showing strong momentum. Our outlook for the third quarter remains optimistic with contributions from a 12 broad range of products including our growing pool of owned content. 13

14 58. The press release then offered the following upbeat guidance for

15 2012, including an increase in the projected earnings per share:

16 For 2012, the Company continues to expect an increase in net sales of 17 6.2% to 7.4% to approximately $720 million to $728 million, with revised 18 diluted earnings per share in the range of approximately $1.04 to $1.08,

19 giving effect to the repurchase of common stock pursuant to the self-tender and the related anticipated financing costs and excluding the financial and 20 legal advisory fees. The Company’s previous guidance for diluted earnings 21 per share was in the range of $1.01 to $1.07, excluding the financial and legal advisory fees. 22 59. During an earnings call with analysts to discuss its second quarter 23 results, Defendants Berman and Bennett again reaffirmed the guidance for full year 24 2012 and assured investors that sales from the Monsuno and Winx Club lines were 25 solid and would continue that trajectory: 26

27 : I'd like to start off by saying that we are very pleased with the

28 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 working hard to

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1 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 and 4 animated series internationally in the markets like the UK, Italy and 5 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 showing 6 strong momentum. 7

8 * * *

9 : As per our earnings guidance for 2012, we're still anticipating 10 growth with net sales in the range of $720 million to $728 million…

11 * * * 12 : Again, we are very pleased with the results of our second quarter 13 of 2012 and feel positive about our prospects for the remainder of the year, 14 including the ever important holiday season with the initial success of

15 Monsuno, Winx Club, and Big Wheel, and the broad placement of our wide range of products going into the fall 2012 year. We have some really 16 terrific products in our portfolio and have both new and evergreen 17 contributions coming across all JAKKS divisions this year.

18 * * * 19 : Okay, a couple things here. One, I know you're not

20 disclosing the amount of business you're doing with Monsuno today, but I would just like to, maybe, get some color on the domestic versus 21 international mix. And should we be expecting Monsuno to become, say, 22 about 10% of your business here in the coming year or two? Just broadly, if you can put some brackets around how to expect revenue, about how we 23 should model this. 24 : Well, as you know, we, as for competitive 25 reasons, not just for our competitors, but also for retailers, we do not break 26 out the percentage of anyone specific category. But I will give you some

27 flavor of Monsuno, both in North America; call it U.S., and International. It's growing. It's growing, I would say, rapidly. During the summer months, 28

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1 remember, for majority of toy companies things are a slow period. It's very seasonal. People are getting back to school. 2 But the orders on hand and our forecast in-house through both U.S. and 3 international is growing expeditiously. And we had a very promising event 4 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 5 the number one boy's toy properties in Japan. We also have extremely 6 strong promising new ventures in Korea. That's not just to say our

7 international, call it, Western Europe and Eastern Europe, business is growing, so we are extremely excited about Monsuno and we're looking 8 forward to the years ahead with it. 9 * * * 10 : But while you asked about Monsuno, we launched the Winx 11 Club recently, and from our retailers' point of view and from JAKKS' point of view, the sell-throughs are well beyond what we ever expected. So 12 that's off to an amazing start. 13 JAKKS Pacific Q2 2012 Earnings Call, July 17, 2012. 14 60. The foregoing statements were materially false and misleading 15

16 because they misrepresented and/or failed to disclose the following:

17 (i) the Individual Defendants had access to and consistently manipulated

18 JAKKS’ sales and forecast numbers in order to present an image of consistent growth; 19 (ii) JAKKS methodically laid off workers in an effort to meet earnings 20 projections and rehired workers to fill the same positions at the start of 21 the following quarter; 22 (iii) to secure licenses for popular trademarks and brand names, the

23 Individual Defendants guaranteed minimum royalty payments knowingly or recklessly disregarding the Company’s inability to meet 24 the minimum sales needed to cover royalty payments, thereby 25 incurring substantial charges; and

26 (iv) Defendants knew that the Monsuno and Winx lines of products performed poorly upon their launch yet Defendants continued to tout 27 their success to the unsuspecting investors. 28

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1 61. On August 7, 2012, the Company filed with the SEC a quarterly 2 report on Form 10-Q for the period ended June 30, 2012, which included signed 3 Certifications by Defendants Berman and Bennett, stating that the financial 4 information contained in the Form 10-Q was accurate and that they disclosed any 5 material changes to the Company’s financial reporting. The report reiterated the 6 Company’s previously announced quarterly financial results and financial position. 7 JAKKS reported net sales of $145.4 million for the second quarter of 2012, 8 compared to net sales of $131.9 million in the same quarter the previous year. 2Q 9 10-Q 2012 at 4, 7, 23. With respect to the Traditional Toys and Electronics 10 segment, the Company reported net sales of $72.0 million for the three months 11 ended June 30, 2012, compared to $67.7 million for the prior year period, 12 representing an increase of $4.3 million, or 6.4%. Id. at 24. “The increase in net 13 sales was primarily due to the launch of the Winx Club® dolls and sales 14

15 contribution of [the Company’s] recently acquired Moose Mountain division.” Id.

16 For the Role Play, Novelty and Seasonal Toys segment, the Company reported net

17 sales of $73.3 million for the three months ended June 30, 2012, compared to

18 $64.2 million for the prior year period, representing an increase of $9.1 million, or

19 14.2%. Id. “The increase in net sales was primarily due to increases in unit sales

20 of [the Company’s] Halloween costumes and accessories.” Id. Earnings per share 21 were 0.01 for the three months ended June 30, 2012 vs. 0.16 for the three months 22 ended June 30, 2011. Id. at 11. 23 62. With respect to licensing and royalties, the 10Q disclosed only that the 24 Company’s “license agreements generally require [it] to make specified minimum 25 royalty payments, even if [the Company] fail[s] to sell a sufficient number of units 26 to cover these amounts.” Id. at 32. 27 63. The foregoing statements were materially false and misleading for the 28 reasons set forth in ¶ 60.

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1 64. On September 28, 2012, the Company issued a Press Release 2 announcing lower guidance for 2012, with anticipated net sales for the full year of 3 approximately $690 million to $700 million, representing a reduction from the 4 Company’s previously anticipated full year net sales of approximately $720 5 million to $728 million. The Company also revised downward its non-GAAP 6 earnings per share to approximately $0.68 to $0.74, excluding non-recurring legal 7 and financial advisory charges of $0.19 per share, from its prior guidance of 8 diluted earnings per share in the range of approximately $1.04 to $1.08. JAKKS 9 attributed the revised guidance to “disappointing domestic product sales and a 10 slow-down in product orders, coupled with higher expenses, including marketing 11 and advertising expense commitments and minimum license royalty guarantees.” 12 65. On this news, the price of JAKKS’ shares dropped 4 % from $14.57 13 at the close of September 28, 2012 to $14.00 on October 1, 2012, on unusually 14

15 high trading volume of 1.52 million shares or six times the average daily volume.

16 66. The foregoing statements were materially false and misleading for the

17 reasons set forth in ¶ 60.

18 67. On October 23, 2012, the Company issued a press release announcing

19 financial results for the third quarter 2012 (“3Q 2012”). The Company reported

20 that “[n]et sales for the third quarter of 2012 were $314.5 million, compared to 21 $332.4 million reported in the comparable period in 2011.” With respect to 22 earnings, the Company reported that “[e]xcluding the legal and financial advising 23 fees, third quarter earnings would have totaled $31.2 million, or $1.13 per diluted 24 share, compared to $35.3 million, or $1.11 per diluted share, in 2011.” 25 68. Quoted in the press release, Defendant Berman again struck an 26 optimistic note: 27 In our third quarter we saw better than expected growth from our 28 international business reflecting the success of our Monsuno line of toy

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1 products and solid performance from our Winx Club, Disney Princess and Disguise Halloween product lines. Our Monsuno, Winx Club, 2 Cinderella and Big Wheels products, to name a few, have been received 3 well at retail and have earned coveted positions on many retailer and media Hot Holiday Toy Lists both in the U.S. and abroad. 4 5 We are in the midst of our Fall Toy Fair meetings with retailers, licensors and other industry partners and are excited by the enthusiastic response to 6 our 2013 product line, including our new DreamPlay Toys products. We 7 believe that our DreamPlay technology positions JAKKS to be a leader in

8 interactivity and augmented reality play for children and will put JAKKS in the forefront of new trends with smart phones and other devices being used 9 more and more each day by children of all ages for their gaming enjoyment 10 and experiences. Looking ahead to 2013, we are optimistic about future opportunities including the launch of DreamPlay products and the solid 11 performance of our core business lines, which spans a wide spectrum that 12 includes action figures, dolls, dress-up and role play; Halloween costumes

13 from Disguise, kids furniture and seasonal products from Kids Only; infant/pre-school products from Tollytots; ride-on vehicles and wagons 14 from Moose Mountain, and outdoor and junior sports products and impulse 15 toys from Maui Toys.

16 69. The press release then offered the following reduced guidance for

17 2012, albeit still projecting profitability after excluding one-time charges:

18 As previously announced, the Company anticipates net sales for the full 19 year of approximately $690 million to $700 million, with revised non- GAAP earnings per share in the range of approximately $0.68 to $0.74, 20 excluding non-recurring legal and financial advisory charges of $0.19 per 21 share . . . The revised guidance represents a reduction from the Company’s

22 previously anticipated full year net sales of approximately $720 million to $728 million and diluted earnings per share in the range of approximately 23 $1.04 to $1.08, excluding the financial and legal advisory fees. The 24 Company’s guidance with respect to diluted earnings per share is a non- GAAP financial measure, due to the exclusion of such one-time charges. 25 26 70. In an earnings call discussing the Company’s third quarter results, 27 Defendants again led the market astray: 28

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1 : We've been shareholders of JAKKS for several years now and given our tenure, just bear with me for a moment. Early in 2 our ownership, we watched you guys impressively navigate the downturn 3 and even while you don't let the loss of key properties like WWF, but over the past two years or so, we've been baffled by some of your cap allocations 4 decisions and I'd like to understand a little bit better your process -your 5 thought process behind your capital allocation decision.

6 Let me give you a few examples. So through the crisis, you managed the cash horde, which was great. But rather than leveraging that cash horde to 7 pay down or renegotiate your convertible bonds, you refinanced the bonds 8 with lower strike prices, which diluted your shareholders. 9 Next, about 18 months ago, you began touting the wondrous prospects of

10 Monsuno, but these failed to do, whether you've severely missed your earnings projections in 2011 and you've lowered expectations again for 11 2012. 12 Most recently, you refused to negotiate in good faith with the firm willing 13 to offer shareholders $20 plus, but instead you decided to spend shareholder money on a tender at the same price. Since that tender took 14 place, you've weakened the balance sheet and provided over a 30% drop in 15 the share price, yet you re-hedge your compensation contracts renewed at

16 pretty substantial levels. So can you explain to me why you might deserve to have that contract renewed and why you think your capital allocation 17 record over the past three years really deserves to be rewarded? 18 * * * 19 20 :…I will disagree with you on Monsuno. Monsuno has done terrific for us as a company, maybe it has fluctuated 21 versus U.S. to international, but we have a very solid business, we still 22 have a very solid balance sheet, we try to appease as many shareholders as

23 we can.

24 JAKKS Pacific Q3 2012 Earnings Call, October 23, 2012 25 71. The foregoing statements were materially false and misleading for the 26 reasons set forth in ¶ 60. 27 72. On November 9, 2012, the Company filed with the SEC a quarterly 28 report on Form 10-Q for the period ended September 30, 2012, which included

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1 signed Certifications by Defendants Berman and Bennett, stating that the financial 2 information contained in the Form 10-Q was accurate and that they disclosed any 3 material changes to the Company’s financial reporting. The report reiterated the 4 Company’s previously announced quarterly financial results and financial position. 5 JAKKS reported net sales of $314.5 million for the third quarter of 2012, 6 compared to net sales of $332.4 million in the same quarter the previous year. 3Q 7 10-Q 2012 at 4, 7, 23. With respect to the Traditional Toys and Electronics 8 segment, the Company reported net sales of $171.2 million for the three months 9 ended September 30, 2012, compared to $163.2 million for the prior year period, 10 representing an increase of $8.0 million, or 4.9%. Id. at 24. “The increase in net 11 sales was primarily due to the launch of Power Train, action figures based on the 12 animation series Monsuno®, Disney® large dolls and accessories, Winx Club® 13 dolls and sales contribution of [the Company’s] recently acquired Moose Mountain 14

15 division.” Id. For the Role Play, Novelty and Seasonal Toys segment, the

16 Company reported net sales of $143.3 million for the three months ended

17 September 30, 2012, compared to $169.2 million for the prior year period,

18 representing a decrease of $25.9 million, or 15.3%. Id. “The decrease in net sales

19 was primarily due to decreases in unit sales of [the Company’s] Disney Princess®

20 dress up and role play items, Halloween costumes and accessories and [the 21 Company’s] kids outdoor furniture and activity tablets.” Id. Earnings per share 22 were 1.38 for the three months ended September 30, 2012 vs. 1.32 for the three 23 months ended September 30, 2011. Id. at 12. 24 73. The 10-Q also reported that on September 12, 2012, the Company 25 entered into a joint venture called DreamPlay Toys with NantWorks, LLC 26 (“NantWorks”), in which it owns a fifty percent interest, in order to obtain “the 27 exclusive right to arrange for the provision of the NantWorks platform for toy 28 products.” 3Q 10-Q 202 at 15. The consideration paid by the Company consists of

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1 cash in the amount of $8.0 million and a warrant issued to NantWorks to purchase 2 1.5 million shares of JAKKS’ common stock at an exercise price of $16.2823 per 3 share at a value of $7.0 million. Id. 4 74. With respect to licensing and royalties, the 10Q disclosed only that the 5 Company’s “license agreements generally require [it] to make specified minimum 6 royalty payments, even if [the Company] fail[s] to sell a sufficient number of units 7 to cover these amounts.” Id. at 32. 8 75. The foregoing statements were materially false and misleading for the 9 reasons set forth in ¶ 60. 10 76. On February 21, 2013, the Company issued a press release 11 announcing financial results for the fourth quarter 2012 (“4Q 2012”), and the full 12 year 2012 (“FY 2012”). The Company reported that “[n]et sales for the fourth 13 quarter of 2012 were $133.5 million, compared to $141.1 million reported in the 14

15 comparable period in 2011,” while “[n]et sales for the full year of 2012 were

16 $666.8 million compared to $677.8 million in 2011.” With respect to earnings, the

17 Company reported that “[e]xcluding the legal and financial advisory fees and

18 expenses and the deferred tax asset impairment charge, the fourth quarter net loss

19 in 2012 would have totaled $27.2 million, or $1.24 per diluted share, compared to

20 a loss of $18.8 million, or $0.72 per diluted share, in 2011, while “[e]xcluding the 21 deferred tax asset impairment charge and legal and financial advisory fees and 22 expenses, the full year 2012 results would have been a loss totaling $9.3 million, or 23 $0.39 per diluted share, compared to earnings of $10.9 million, or $0.41 per diluted 24 share, in 2011.” 25 77. In the press release, Defendant Berman acknowledged the 26 disappointing fourth quarter performance that led to a sharp miss of prior guidance: 27 We are disappointed by our performance in the fourth quarter. The difficult 28 and challenging toy environment did not generate the sales that had been

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1 anticipated, and several of our key products did not achieve the sales levels that we had planned for, also resulting in license royalty minimum 2 guarantee shortfalls.” 3 78. Despite the bad news, Defendant Berman again struck an optimistic 4 tone: 5

6 However, we are optimistic for our future growth and profitability. We believe that our core business lead by our infant/preschool, seasonal and 7 Halloween segments, in conjunction with meaningful reductions in 8 operating costs, will return the Company to profitability in 2013.

9 We believe that the difficult environment for toys in 2012 resulted from 10 rapid changes in children’s play patterns as tablet and smartphone devices

11 and interactive games and toys have more and more become cornerstones of their play and fun experiences. We recognize that it is critical for us to 12 provide new, more exciting and magical experiences for today’s child 13 compatible with these new play patterns. We believe that our partnership with NantWorks in creating our DreamPlay line of toys using NantWorks 14 proprietary iD recognition technology will place JAKKS in the forefront of 15 the play revolution we are witnessing.

16 We believe that applying this technology to a broad array of characters 17 and play patterns will create new consumer demand for JAKKS products

18 and will help JAKKS achieve substantial long range growth and profitability, warranting the investment in technology and content that we 19 are making. 20

21 79. The press release then offered the following upbeat guidance for 2013

22 (which was reiterated by Defendant Bennett on a conference call with analysts the

23 same day):

24 For 2013, the Company anticipates an increase in net sales of 4.0% to 25 5.0% to approximately $694 million to $700 million, with diluted earnings per share in the range of approximately $0.63 to $0.68. This 26 guidance anticipates first-quarter 2013 net sales in the range of $70 to $73 27 million, with a loss per share in the range of $0.83 to $0.85, which reflects 17.6% fewer common shares outstanding primarily as a result of the July 28 2012 self-tender of 4.0 million shares and includes incremental operating

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1 expenses associated with the recent acquisition of Maui Toys in a seasonally low sales volume quarter, and incremental operating and 2 marketing expenses associated with the launch of our DreamPlay product 3 lines. 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. 4

5 80. During the conference call with analysts, Defendant Berman 6 maintained a highly optimistic outlook: 7 With the backdrop of a fairly challenging season for the toy industry and 8 the global economy overall, weaker-than-expected product demand during 9 the holidays led to a lower-than-expected results for fourth quarter and full year 2012. However, our core business remains strong. Our products in 10 Traditional Toy segment, such as Infant/Pre-school, Seasonal, Dress-Up, 11 and Role Play and Halloween continued to perform at retail and remained our areas of strength. 12

13 The world is changing and JAKKS is changing along with it. We have

14 experienced such excitement and receptiveness on our DreamPlay technology initiative. What we have shown on the iD image recognition 15 and DreamPlay technologies, combined with toys and kids consumer 16 products, has been nothing short of redefining the boundaries of the physical and digital toy play. From retail partners in the U.S. and 17 internationally, to our licensing partner, Disney, as well as some of the 18 biggest toy and consumer product companies and brands in the world, there

19 is a strong belief in the long-term adoption by children and adults of this technology. 20 21 We believe that toys and technology have to change to adapt to the way kids play today, as kids gain more and more access to smart devices. By 22 applying the technologies to a broad array of characters and play 23 patterns, we believe we will create a new consumer demand for our toy

24 products. Through the DreamPlay venture, we aim to achieve substantial long-range growth and profitability, warranting the investment in this 25 technology and content that we are making. 26 2013 will be a period of focused transition as we build the infrastructure for 27 our DreamPlay venture, while also continuing to execute on our core 28 business strategy of organic and external growth. We have added to our

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1 core business a number of new brands and licenses that we are launching this year that we feel show great promise. 2 3 We are keeping a tight rein on our operational expenses, starting with a meaningful internal restructuring. Our outlook for 2013 remains 4 cautiously optimistic as we invest for the future and begin to rollout our 5 plans with exciting growth opportunities in 2014 and beyond with our DreamPlay initiatives, as well as our continued focus on capitalizing on 6 our international distribution growth opportunities. 7

8 While we recognize that it's critical for us to provide new, exciting and magical experiences for today's wired families, we will not deviate from 9 our core business strategy to offer a diverse portfolio of evergreen 10 products that support traditional play patterns and products that remain core to our business. 11

12 * * *

13 : Turning to our 2013 guidance, the company anticipates an 14 increase in net sales of 4% to 5% to approximately $694 million to $700 15 million with diluted earnings per share in the range of approximately $0.63 to $0.68 per diluted share. 16 17 * * *

18 Despite a challenging year we had, we're optimistic in the future of 19 JAKKS. Our diverse product portfolio is built on core, evergreen products 20 that make up a large part of our business and remain solid with little fluctuation. Our Toddler and baby dolls, Dress-up and Role Play, 21 Infant/Pre-school products, such as our foot-to-floor ride-ons and activity 22 tables, outdoor seasonal products and Disguise Halloween Costumes had terrific sales in 2012. We also had nice success with a few of our own 23 JAKKS brands, including Power Trains. These are examples of back-to- 24 the-basic products that resonate with consumers every year on our less per

25 age to age compression and to the rapid changes in children's play patterns.

26 We are also pleased with the success of our international business in 27 2012, with a record full year sales. Securing license for international territories continue to be a priority. China represents a big growth 28 opportunity, and we recently met with one of the largest Chinese retailers

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1 to expand our distribution in this territory. There's a great incremental sales potential in this region in 2014 and beyond, and we are focused on 2 expanding licensing rights where appropriate in Asia. 3 Again, 2013 will be a year of transition for JAKKS. We will continue to 4 consolidate operations to gain efficiencies and lower occupancy costs and 5 enhance profitability in the short term with the closing of our New York office and moving our Maui division into our headquarters. We recently 6 completed a meaningful internal restructuring, and we believe our 7 worldwide team today has the drive, passion and creativity to move our

8 business forward. We are optimistic that their efforts, aligned with our focused long-term strategy and investment discipline, will produce strong, 9 creative product lines and financial results for our company. We remain 10 focused on our brand management and growing our core business, and are looking forward to the new product launches target for extensive 11 mass and specialty retail distribution networks. 12

13 * * *

14 The toy industry is undergoing a challenging macroeconomic 15 environment, including the rapid growth of mobile and smart device usage amongst children that is competing with physical toys and 16 changing how kids and parents play today. With a sharp eye on the 17 future, our DreamPlay initiative headlines our efforts to stay ahead of the

18 evolving play patterns by developing a segment of our product portfolio focused on physical toys that can interact with smartphones and tablets 19 in a compelling and revolutionary way. Using iD recognition 20 technologies, we believe DreamPlay is the answer to the new hybrid model of smart device technology and toy interactive ecosystem, where our 21 merchandise becomes a full experience, interacting with both consumers 22 and other items in the toy aisle and/or at home.

23 81. When questioned by an analyst on the call about areas of weakness in

24 4Q 2012 with respect to licensed properties, Defendant Berman responded that the 25 Company’s core business remained solid:

26 The 2 biggest components that we're -- that did less than our expectations, 27 and it was more for the U.S., Monsuno has performed terrific overseas is

28 was -- it did perform to our expectations in the U.S. The animated series which is on Nickelodeon, was not stripped and ended up being on, I think,

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1 it was a Saturday morning time slot, which wasn't very conducive for kids to watch. So the expectations we have in the U.S. weren't -- they didn't 2 achieve our high-end goal. And the same thing occurred with the Winx 3 Club that the immediate sales in spring or the mid part of the year were terrific, but the programming changed. Those are the 2 biggest areas that 4 we spent the most amount of media, so those 2 areas are really the 5 components of the lower sales. All of our normal -- not all. Majority of our normal, basic business is extremely solid from our foot to floor, which is 6 the Moose area, from our Kids Only!, from our Toy division, to Disguise, 7 to CDI, to our basic business in Power Trains, MXS, our 31-inch figures,

8 but those are the 2 major areas that really affected us in fourth quarter. And what we realized is, what we've always said in the past is going back to 9 the basics of the singles and doubles, which has been the core asset of 10 our business. Keeping that in mind, we do need to adapt our business to go into the areas of where children are playing, and they are playing 11 more and more from a younger age from 18 months, which are smart 12 devices, and the engagement and initiative that we're doing with

13 NantWorks and DreamPlay is the direction we're going with our core business as well. But we're not taking any big bets as we did last year by 14 focusing on the Monsuno and/or Winx. 15 82. 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

20 7.5%.

21 83. The foregoing statements were materially false and misleading for the

22 reasons set forth in ¶ 60. 23 84. On March 15, 2013, JAKKS filed an annual report for the period 24 ended December 31, 2012, on Form 10-K with the SEC, which was signed, among 25 others, by Defendants Berman and Bennett, and reiterated the Company’s 26 previously announced financial results and financial position. In addition, the 27 Form 10-K contained signed certifications pursuant to the Sarbanes-Oxley Act of 28 2002 by Defendants Berman and Bennett, stating that the financial information

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1 contained in the Form 10-K was accurate and that it disclosed any material changes 2 to the Company’s financial reporting. The 10-K disclosed net sales of $73.4 3 million for Q1 2012; $145.4 million for 2Q 2012; $314.5 million for 3Q 2012, and 4 $133.5 million for Q4 2012. 2012 10-K at 35, 72. The Company reported net 5 sales of $666.8 million for full year 2012. 2012 10-K at 53. With respect to the 6 Traditional Toys and Electronics segment, the Company reported net sales of 7 $363.7 million in 2012, compared to $348.9 million in 2011, representing an 8 increase of $14.8 million, or 4.2%. Id. at 29. “The increase in net sales was 9 primarily due to the launch of Power Train, action figures based on the animation 10 series Monsuno®, Disney® large dolls and accessories, Winx Club® dolls and 11 sales contribution of [the Company’s] recently acquired Moose Mountain 12 division.” Id. For the Role Play, Novelty and Seasonal Toys segment, the 13 Company reported net sales of $303.1 million in 2012, compared to $328.9 million 14

15 in 2011, representing a decrease of $25.8 million, or 7.8%. Id. “The decrease in

16 net sales was primarily due to decreases in unit sales of role play and dress-up toys,

17 including those based on Disney Princess® and Disney Fairies.®” Id. The

18 Company also reported basic and diluted earnings per share in 2012 of (4.37) vs.

19 0.32 in 2011. 2012 10-K at 23, 52.

20 85. The 10-K also reported that on September 12, 2012, the Company 21 entered into a joint venture called DreamPlay Toys with NantWorks, LLC 22 (“NantWorks”), in which it owns a fifty percent interest, in order to obtain “the 23 exclusive right to arrange for the provision of the NantWorks recognition 24 technology platform for toy products.” 2012 10-K at 55. The consideration paid 25 by the Company consists of cash in the amount of $8.0 million and a warrant 26 issued to NantWorks to purchase 1.5 million shares of JAKKS’ common stock at 27 an exercise price of $16.2823 per share at a value of $7.0 million. Id. at 55, 67. 28

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1 86. With respect to licensing and royalties, the 10-K disclosed only that 2 JAKKS “focus[es] [its] business on acquiring or licensing well-recognized 3 trademarks or brand names…Generally, [the Company’s] license agreements for 4 products and concepts call for royalties ranging from 1% to 14% of net sales, and 5 some may require minimum guarantees and advances.” Id. at 5. 6 87. The foregoing statements were materially false and misleading for the 7 reasons set forth in ¶ 60. 8 88. On April 25, 2013, the Company issued a press release announcing 9 financial results for the first quarter 2013 (“1Q 2013”). The Company reported that 10 “[n]et sales for the first quarter of 2013 increased 6.4% to $78.1 million up from 11 sales of $73.4 million reported in the comparable period in 2012.” With respect to 12 earnings, the Company reported that “net loss for the first quarter was $27.6 13 million, or $1.26 per diluted share, which included the final $0.75 million, or $0.03 14

15 per diluted share, in financial advisory fees related to the 2011 unsolicited

16 indication of interest and reflects the non-recognition of a previously forecasted

17 first quarter tax benefit of $5.3 million, or $0.24 per diluted share. This compares

18 to a net loss of $16.0 million, or $0.62 per diluted share, reported in the

19 comparable period in 2012, which includes $1.4 million, or $0.03 per diluted share,

20 of legal and financial advisory fees and expenses related to the unsolicited 21 indication of interest.” 22 89. In the press release, Defendant Berman represented that the Company 23 was on track to meet prior guidance: 24 Our first quarter represents approximately 10% of our projected sales for 25 the 2013 calendar year and we believe we are on track to achieve our 26 previously announced sales and earnings forecast for the year. 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 28 projected. Top contributors were centered on our evergreen, core brands

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1 including our JAKKS-owned Fly Wheels, Disney Princess dolls and dress- up, Fisher-Price ride-ons, outdoor and indoor preschool furniture, and 2 outdoor activity items from our Maui division. While our costs were 3 somewhat higher, including the deferral of the $5.3 million tax benefit, which is expected to be recognized in the third quarter based on our 4 forecast, we believe that operating efficiencies and continued cost 5 reductions for the balance of the year will also deliver the projected earnings. 6 90. The press release then offered the following upbeat guidance for 2013 7

8 (which was reiterated by Defendant Bennett on a conference call with analysts the

9 same day):

10 For 2013, the Company continues to anticipate an increase in net sales of

11 4.0% to 5.0% to approximately $694 million to $700 million, with diluted earnings per share in the range of approximately $0.63 to $0.68, excluding 12 financial advisory fees related to the 2011 indication of interest. 13 91. During the conference call with analysts, Defendant Berman 14 continued to maintain a highly optimistic outlook: 15 Sales are off to a solid start in 2013 exceeding our guidance and up 6.4% 16 over last year. The early response to our broad mix of product line has 17 been encouraging, and we are cautiously optimistic for the year ahead. We have some really terrific products in our lineup this year with 18 contributions coming from a broad range of toys and toy-related products 19 and electronics for all ages and for the entire family.

20 Our portfolio is an exciting blend of top licenses that give us leadership 21 in a broad array of categories, high profile movie properties and our own 22 intellectual developed brands that we believe are right on trend. Evolving along with our environment is vital to JAKKS Pacific's future prospects. 23 And our DreamPlay initiative headlines our efforts to stay ahead of these 24 continually developing play patterns. We are looking forward to the launch

25 this fall of our DreamPlay Little Mermaid toys enhanced with iD recognition technology. 26 27 We continue to focus on carrying out the cost-saving initiatives and company-wide restructuring plans that were put into place late last year. 28 Our infrastructure is aligned with our current business levels, and we

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1 believe the benefits from the restructuring will be evident in our short and long-term financial performance. 2 3 * * *

4 : Turning to our guidance for 2013, the company continues to 5 anticipate an increase in net sales of 4% to 5% to approximately $694 million to $700 million, with diluted earnings per share in the range 6 of approximately $0.63 to $0.68, excluding financial advisory fees 7 related to the 20 J 1 indication of interest.

8 * * * 9 10 We will continue to execute on our core business strategy of organic and external growth while investing for the future and rolling out plans for 11 exciting growth opportunities in 2014 and beyond. 12 Recent internal restructuring allowed us to consolidate operations, gain 13 efficiencies and enhance profitability while allowing us to continue to 14 effectively focus on our core business. We believe these efforts, combined

15 with our focused long-term strategies and investment discipline will greatly benefit JAKKS in both the short and long term. 16 17 While the toy industry environment is more challenging than ever before, we tend to forget that there are many good positive things happening with 18 this company. We are pursuing all avenues to grow our distribution. And 19 we have exciting programs at retail, such as Costco and Coles this year.

20 92. The foregoing statements were materially false and misleading for the 21 reasons set forth in ¶ 60. 22 93. On May 10, 2013, the Company filed with the SEC a quarterly report 23 on Form 10-Q for the period ended March 31, 2013, which included signed 24 Certifications by Defendants Berman and Bennett, stating that the financial 25

26 information contained in the Form 10-Q was accurate and that they disclosed any

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

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

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1 JAKKS reported net sales of $78.1 million for the first quarter of 2013, compared 2 to net sales of $73.4 million in the same quarter the previous year. 1Q 10-Q 2013 3 at 4, 7, 23. With respect to the Traditional Toys and Electronics segment, the 4 Company reported net sales of $38.1 million for the three months ended March 31, 5 2013, compared to $41.6 million for the prior year period, representing a decrease 6 of $3.5 million, or 8.3%. Id. at 24. “The decrease in net sales was primarily due to 7 the tapering off of sales of action figures based on the animation series Monsuno 8 and Winx Club® dolls.” Id. For the Role Play, Novelty and Seasonal Toys 9 segment, the Company reported net sales of $40.0 million for the three months 10 ended March 31, 2013, compared to $31.8 million for the prior year period, 11 representing an increase of $8.2 million, or 25.5%. Id. “The increase in net sales 12 was primarily due to sales contribution of [the Company’s] recently acquired Maui 13 Toys division and increases in unit sales of Halloween costumes and accessories.” 14

15 Id. Earnings per share were (1.26) for the three months ended March 31, 2013 vs.

16 (0.62) for the three months ended March 31, 2012. Id. at 12.

17 94. The 10-Q also reported that on September 12, 2012, the Company

18 entered into a joint venture called DreamPlay Toys with NantWorks, LLC

19 (“NantWorks”), in which it owns a fifty percent interest, in order to obtain “the

20 exclusive right to arrange for the provision of the NantWorks recognition 21 technology platform for toy products.” 1Q 10-Q 2013 at 15. The consideration 22 paid by the Company consists of cash in the amount of $8.0 million and a warrant 23 issued to NantWorks to purchase 1.5 million shares of JAKKS’ common stock at a 24 value of $7.0 million. Id. JAKKS reported that “[s]ales of DreamPlay Toys 25 products is [sic] expected to commence in the third quarter of 2013.” Id. JAKKS 26 further reported that “[i]n addition, the Company invested $7.0 million in cash in 27 exchange for a five percent economic interest in a related entity, DreamPlay LLC, 28 that will exploit the recognition technologies in non-toy consumer product

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1 categories. NantWorks has the right to repurchase the Company’s interest for $7.0 2 million.” Id. 3 95. With respect to licensing and royalties, the 10Q disclosed only that the 4 Company’s “license agreements generally require [it] to make specified minimum 5 royalty payments, even if [the Company] fail[s] to sell a sufficient number of units 6 to cover these amounts.” Id. at 31. 7 96. The foregoing statements were materially false and misleading for the 8 reasons set forth in ¶ 60. 9 The Truth Emerges 10 97. On July 17, 2013, the Company issued a press release announcing 11 financial results for the second quarter 2013 (“2Q 2013”). The Company reported 12 that “[n]et sales for the second quarter of 2013 were $106.2 million compared to 13 net sales of $145.4 million reported in the comparable period in 2012,” a 14

15 staggering 27% decrease. With respect to earnings, the Company reported that

16 “net loss for the second quarter was $46.9 million, or $2.14 per diluted share,

17 which included charges for license minimum guarantee shortfalls of $14.1 million

18 and inventory impairment of $12.2 million. This compares to net income of $0.2

19 million, or $0.01 per diluted share, reported in the comparable period in 2012,

20 which included $1.7 million, or $0.5 per diluted share, of legal and financial 21 advisory fees and expenses related to the 2011 unsolicited indication of interest.” 22 98. In the press release, Defendant Berman delivered devastating news: 23 We are disappointed that JAKKS has not met its second quarter target 24 and will not achieve its full year 2013 forecast. Sales for the second 25 quarter were significantly below expectations due to a variety of factors. Several retailers, both in the United States and in Europe, are struggling 26 and have substantially decreased their orders. In addition, the poor 27 performance of several of our key properties, including Monsuno and the Winx Club, also contributed to the decline, along with unusually cool 28 weather that affected seasonal toy sales leading to more aggressive

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1 markdowns at retail as shelves are cleared for back-to-school products. We also believe the decline in sales reflects the continuing change in play 2 patterns of children of all ages, who continue to rely more and more on 3 smart devices for their fun and entertainment. As previously announced, this shift in play patterns has caused companies like JAKKS to evolve to 4 meet the changing demands of its consumers with technologically 5 enhanced product offerings.

6 99. The press release then disclosed that the previously provided full 7 year guidance was being slashed, the Company’s dividend was being suspended, 8 and announced the implementation of a major restructuring: 9

10 The Company currently anticipates net sales for the full year of 11 approximately $620.0 million, with revised loss per share in the range of 12 approximately $56.1 million, or $2.56 per diluted share. The revised guidance represents a reduction from the Company’s previously anticipated 13 full year net sales of approximately $694 million to $700 million and 14 diluted earnings per share in the range of approximately $0.63 to $0.68, excluding financial and legal advisory fees relating to the 2011 unsolicited 15 indication of interest. 16

17 The Company also announced that due to business conditions, it has suspended its quarterly dividend, which it will re-evaluate upon a return 18 to profitability. 19 The Company also announced a restructuring plan to commence in the 20 third quarter, which will include the substantial reduction of leased 21 space, employees and other overhead expenses. Despite the projected loss

22 this year, JAKKS is anticipating a return to profitability in the year 2014.

23 100. The Company also announced a plan to raise $100 million in capital 24 through an offering of convertible senior notes due 2018 in a private placement, 25 with a potential $15 million in over-allotments. 26

27

28

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1 101. On a conference call with analysts the same day, Defendant Bennett 2 revealed that part of the huge second quarter loss was attributable to “charges for 3 license minimum guarantee shortfalls of $14.1 million.” 4 102. On the call, analysts grilled management about the magnitude of the 5 license minimum guarantee shortfall and the deteriorating sales: 6 Sean P. McGowan - Needham & Company, LLC, Research 7 Division 8 Second question, this isn't the first time, by any means, that minimum 9 license guarantees have been the source of some reduction and I'm 10 surprised at this point that there would be the magnitude of $14

11 million. What does this say about the viability of those underlying licenses? I mean, this must be some pretty big properties if there's 12 $14 million of guarantees being written off. 13 Stephen G. Berman - Co-Founder, Chief Executive Officer, 14 President, Secretary and Director 15

16 They come from several different licensee content -- licensor content holders. Some of them were previous deals done back with previous 17 management in specific divisions. So the deals that were done and 18 set forth were quite rich and due to the environment and the, call it the shrinkage of retail space, the minimum guarantees were not met 19 with the decline in sales. The other license shortfall is from a 20 property that was no longer put on air as we had expectations that this property was being on air for quite a few years of obligation and 21 on strip. So based off of what we see, those 2 areas of businesses, we 22 ended up having to take the write-off of the shortfalls. But we -- in

23 addition to what you're asking, Sean, there's about a -- 85% to 90% of our business is extremely constant, solid and evergreen, which 24 goes from our Kids Only! outdoor furniture product to our foot-to- 25 floor ride-on Moose product to our Tollytots Pre-School division to Maui to so on. What we've realized in this new environment is we 26 need to enhance that play pattern with the, call it, iD technology, 27 which is enhancing the, call it, physical world with the digital world.

28 You can play with the physical world without the digital component. You can play with the digital component without the physical. But

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1 when you combine them both when a child wants to, it just is a magical experience, and we've seen it from working with Lego with 2 our technology and they do a lot of testing. Their feedback and their 3 focus groups was truly breathtaking. So with our core business is where we're really solid, what we realize now and what the industry is 4 and we've seen it, the likes and days of launching an item, and I'll use 5 as we launched 4 years ago, our night vision goggles that did 20 million, 30 million, 40 million, 50 million in sales and a Furby, call it, 6 that has done, those days of the euphoric items of marketing and TV 7 advertising and looking for these euphoric items to take off is few and

8 far between because retailers won't bid on the inventory. There's not the top 20 retailers anymore. Where our segmentation of retail, which 9 we're very proud of, spans throughout the mass retailers that we all 10 know about -- the Target, the Walmart, the Toys"R"Us', the Sears, but it goes to Sports Authority, Dicks Sporting Goods, Sports Chalet, Big 11 5, Kohl's, Spencers, Ross, Party City. So while we're diversifying the 12 customer base, we're focusing on the basic play pattern, which is

13 primarily we see around under 6 is where the key play pattern for children are with playing with toys. But at the same time, they're 14 utilizing smart devices. So the enhancement of what we're doing, and 15 we've seen it, is a magical combination.

16 Sean P. McGowan - Needham & Company, LLC, Research 17 Division

18 I can't disagree. This actually dovetails into my final question. I can't 19 disagree, the kids are certainly interested in these technology 20 products. But this isn't like it happened overnight and yet your sales shortfalls go back several years and you say 80%, 90% of it is rock 21 solid. The sales decline suggests that maybe even there's weakness 22 there. But my question is how much confidence can you have that you're making the right bet when there's still going to be a lot of 23 business that needs to be done in basic, traditional toys that don't 24 have a technology element? I'm saying that other companies are not

25 seeing their business decline as much as your business is declining. Lego couldn't be lower tech and they just keep crushing it year after 26 year. So somebody else is doing something that you guys aren't 27 doing to generate sales of traditional non-technical toys. So I'm not disagreeing that there needs to be some technology component to 28

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1 your toys, but you can't abandon the non-tech part either and you got to get that right. 2

3 103. As a result of these alarming disclosures, analysts at PiperJaffray

4 announced that, having missed their revenue estimate by nearly 30%, confidence 5 remained “quite low and risk to losses of key licenses continues to mount, 6 especially if the company continues to fall short of contract minimums.” 7 PiperJaffray Company Note on JAKKS Pacific, Inc., July 17, 2013. Visibility into 8 sales or margin recovery “also remain[ed] very limited” and the analysts expected 9 “significant losses in 2013.” 10 104. Following these earth-shattering disclosures regarding the Company’s 11 poor 2Q 2013 performance, and management’s response thereto, JAKKS’ stock 12 dropped precipitously by approximately 39% from a close of $11.48/share on July 13 17, 2013, to a close of $7.00/share on July 18, 2013. 14 ADDITIONAL SCIENTER ALLEGATIONS 15

16 105. As alleged herein, Defendants acted with scienter in that Defendants

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

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

19 information; knew or recklessly disregarded that such statements or documents

20 would be issued or disseminated to the investing public; and knowingly and 21 substantially participated or acquiesced in the issuance or dissemination of such 22 statements or documents as primary violators of the federal securities laws. 23 Defendants, by virtue of their receipt of information reflecting the true facts 24 regarding JAKKS’ financial and business operations, their control over the 25 materially false and misleading misstatements, and/or their associations with the 26 Company, which made them privy to confidential information concerning the 27 misstatements and/or omissions alleged herein, were active and culpable 28

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1 participants in the fraudulent scheme alleged herein. Defendants knew of and/or 2 recklessly disregarded the false and misleading nature of the information that they 3 caused to be disseminated to the investing public. 4 106. As detailed in ¶¶ 28-34 above, the Individual Defendants had 5 unfettered access to JAKKS’ sales and forecasts by virtue of their ability to access 6 in real time the Company’s JAKKS.net system where the numbers were 7 maintained and promptly updated; their receipt of reports setting forth sales 8 numbers on a weekly basis; and their attendance in weekly meeting with the 9 Controller, where the actual sales against the forecasts were discussed and 10 analyzed. 11 107. The Individual Defendants were each motivated to maintain their 12 lucrative jobs, and increase their compensation over their normal salary and their 13 personal net worth. According to the Company’s 2012 10-K, “a factor given 14

15 considerable weight in establishing bonus performance criteria is Adjusted EPS.”

16 2012 10-K at 80. Keeping JAKKS’ stock at artificially inflated prices enabled

17 Defendants to enhance their net worth, as Defendants’ compensation was directly

18 linked to the EPS targets.

19 108. According to the terms of Defendant Berman’s amended and restated

20 2010 employment agreement, with respect to 2012, “during the first quarter, the 21 Compensation Committee established the targeted level of [JAKKS’] adjusted 22 EPS…growth, and the corresponding bonus levels, as a percentage of base salary, 23 Mr. Berman earns if the target is met. Pursuant to the terms of his employment 24 agreement as in effect of January 1, 2012, this bonus is capped at a maximum of 25 200% of base salary, although the Compensation Committee has the authority, in 26 its discretion, to increase the maximum.” 2012 10-K at 80. “Mr. Berman’s 27 agreement as in effect on January 1, 2012 also provides for an additional annual 28 performance bonus capped at a maximum of 100% of base salary, payable solely

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1 in shares of restricted stock, which can be earned by Mr. Berman if the Company’s 2 performance meets certain criteria established by the Compensation Committee 3 during the first quarter. In addition, Mr. Berman’s agreement as in effect on 4 January 1, 2012 provided for an annual grant of $500,000 of restricted stock, the 5 initial vesting of which depended solely on EPS targets established in the 6 agreement; if initial vesting occurred, then the restricted stock vested over time.” 7 2012 10-K at 80. Pursuant to a 2012 amendment to his employment agreement, 8 made in connection with JAKKS’ agreements dated September 10, 2012 with 9 NantWorks to form DreamPlay, commencing in 2013 the amount of the annual 10 restricted stock award for Defendant Berman was increased to $3,500,000, and part 11 of Berman’s additional annual performance bonus was capped at 300% of that 12 year’s base and was partly tied to cash distributions received from DreamPlay. 13 2012 10-K at 82, 92. 14

15 109. Defendant Bennett’s employment agreement provides that Bennett is

16 “entitled to an annual base salary of $420,000, to be increased annually by at least

17 $15,000 over the prior year’s base salary, and will be eligible at the discretion of

18 the Compensation Committee to receive bonuses or other compensation in the

19 form of cash or equity-based awards upon the achievement of performance goals

20 determined by the Board or the Compensation Committee.” 2012 10-K at 93. 21 110. Defendants’ compensation also depended heavily on JAKKS’ success 22 measured by the amount of its sales. For example, in determining whether the 23 Individual Defendants would be granted discretionary bonuses, the Company’s 24 Compensation Committee annually reviews their compensation relative to peer 25 group companies and compares JAKKS’ “total shareholder return, earnings per 26 share growth, sales, [and] net income to the peer group companies.” 2012 10-K at 27 81. 28

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1 111. The Individual Defendants also pocketed handsome salaries in 2012: 2 Berman received $1,165,000 million and Bennett received $435,000 million, each 3 reflecting increases from their prior salaries. 2012 10-K at 84. 4 PLAINTIFF’S CLASS ACTION ALLEGATIONS 5 112. Plaintiff brings this action as a class action pursuant to Federal Rule of 6 Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who 7 purchased or otherwise acquired JAKKS securities during the Class Period (the 8 “Class”) and were damaged thereby. Excluded from the Class are Defendants 9 herein, the officers and directors of the Company, at all relevant times, members of 10 their immediate families and their legal representatives, heirs, successors or assigns 11

12 and any entity in which Defendants have or had a controlling interest.

13 113. The members of the Class are so numerous that joinder of all

14 members is impracticable. Throughout the Class Period, JAKKS’ securities were

15 actively traded on the NASDAQ. While the exact number of Class members is

16 unknown to Plaintiff at this time and can be ascertained only through appropriate

17 discovery, Plaintiff believes that there are hundreds or thousands of members in the 18 proposed Class. Record owners and other members of the Class may be identified 19 from records maintained by JAKKS or its transfer agent and may be notified of the 20 pendency of this action by mail, using the form of notice similar to that 21 customarily used in securities class actions. 22 114. Plaintiff’s claims are typical of the claims of the members of the Class 23 as all members of the Class are similarly affected by Defendants’ wrongful 24 conduct in violation of federal law that is complained of herein. 25 115. Plaintiff will fairly and adequately protect the interests of the 26 members of the Class and has retained counsel competent and experienced in class 27

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1 and securities litigation. Plaintiff has no interests antagonistic to or in conflict with 2 those of the Class. 3 116. Common questions of law and fact exist as to all members of the 4 Class and predominate over any questions solely affecting individual members of 5 the Class. Among the questions of law and fact common to the Class are: 6 • whether the federal securities laws were violated by Defendants’ 7 acts as alleged herein;

8 • whether statements made by the Individual Defendants to the 9 investing public during the Class Period misrepresented and/or

10 omitted material facts about the business, prospects, and operations of JAKKS; 11 • 12 whether Defendants acted knowingly or recklessly (i.e., with scienter) in issuing false and misleading financial statements; 13 • whether the prices of JAKKS’ securities during the Class Period 14 were artificially inflated because of the Defendants’ conduct 15 complained of herein; and

16 • whether the members of the Class have sustained damages and, if 17 so, what is the proper measure of damages.

18 117. A class action is superior to all other available methods for the fair 19 and efficient adjudication of this controversy since joinder of all members is 20 impracticable. Furthermore, as the damages suffered by individual Class members 21 may be relatively small, the expense and burden of individual litigation make it 22 impossible for members of the Class to individually redress the wrongs done to 23 them. There will be no difficulty in the management of this action as a class 24 action. 25

26 CAUSATION AND ECONOMIC LOSS

27 118. As described herein, during the Class Period, Defendants made or 28 caused to be made a series of materially false or misleading statements and/or

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1 omitted material information about JAKKS’ financial and business practices, 2 results, prospects, and operations. These material misstatements and omissions 3 had the cause and effect of creating in the market an unrealistically positive 4 assessment of JAKKS, thus causing the Company’s shares to be overvalued and 5 artificially inflated at all relevant times. Defendants’ materially false and 6 misleading statements during the Class Period were widely disseminated to the 7 securities markets, investment analysts, and to the investing public, and resulted in 8 Plaintiff and other members of the Class purchasing the Company’s shares at 9 artificially inflated prices. Moreover, upon the revelation to the market and the 10 investing public of the truth concerning JAKKS’ financial and business practices, 11 results, prospects, and operations, the market price of JAKKS’ shares declined 12 substantially, resulting in significant damages to Plaintiff and other shareholders. 13 119. Had the truth about JAKKS been revealed to the market earlier, 14

15 Plaintiff and the Class would not have purchased JAKKS’ common stock or would

16 have purchased the stock only at dramatically lower prices.

17 120. When the truth about JAKKS was finally revealed through a series of

18 partial disclosures on September 28, 2012, February 21, 2013, and July 17, 2013,

19 as detailed above in ¶¶ 64, 97-102, a significant portion of the artificial inflation

20 that had been caused by Defendants’ materially false and misleading statements 21 and omissions was eliminated from the price of JAKKS’ common stock, causing 22 significant losses to Plaintiff and the Class. See ¶¶ 65, 82, 104. 23 121. Defendants’ conduct, as alleged herein, proximately caused 24 foreseeable losses to Plaintiff and the other members of the Class. 25 APPLICABILITY OF PRESUMPTION OF RELIANCE: 26 FRAUD-ON-THE-MARKET DOCTRINE 27 122. Plaintiff will rely, in part, upon the presumption of reliance 28

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1 established by the fraud-on-the-market doctrine in that:

2 • Defendants made public misrepresentations or failed to disclose 3 material facts during the Class Period;

4 • the omissions and misrepresentations were material; 5 • the Company’s stock met the requirements for listing, and was 6 listed and actively traded on the NASDAQ, a highly efficient and 7 automated market;

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

10 thousands to millions of shares per week);

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

12 reports during the Class Period;

13 • the Company regularly communicated with public investors via

14 established market communication mechanisms, including regular disseminations of press releases on the national circuits of 15 major newswire services and other wide-ranging public 16 disclosures, such as communications with the financial press and other similar reporting services; 17 • 18 the Company was followed by multiple securities analysts employed by major brokerage firms who wrote reports that were 19 distributed to the sales force and certain customers of their 20 respective brokerage firms during the Class Period; these reports were publicly available and entered the public marketplace; 21

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

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

27 123. Based upon the foregoing, Plaintiff and the members of the Class are

28 entitled to a presumption of reliance upon the integrity of the market.

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COUNT I 1 (Against All Defendants For Violations of Section 10(b) 2 of the Exchange Act and Rule 10b-5 Promulgated Thereunder)

3 124. Plaintiff repeats and realleges each and every allegation contained

4 above as if fully set forth herein. 5 125. This Count is asserted against defendant JAKKS and the Individual 6 Defendants, and is based upon Section 10(b) of the Exchange Act, 15 U.S.C. § 7 78j(b), and Rule 10b-5 promulgated thereunder by the SEC. 8 126. During the Class Period, Defendants engaged in a plan, scheme, 9 conspiracy and course of conduct, pursuant to which they knowingly or recklessly 10 engaged in acts, transactions, practices and courses of business which operated as a 11 fraud and deceit upon Plaintiff and the other members of the Class; made various 12 untrue statements of material facts and omitted to state material facts necessary in 13 order to make the statements made, in light of the circumstances under which they 14 were made, not misleading; and employed devices, schemes and artifices to 15 defraud in connection with the purchase and sale of securities. Such scheme was 16 intended to, and, throughout the Class Period, did: (i) deceive the investing public, 17

18 including Plaintiff and other Class members, as alleged herein; (ii) artificially

19 inflate and maintain the market price of JAKKS’ securities; and (iii) cause Plaintiff

20 and other members of the Class to purchase or otherwise acquire JAKKS’

21 securities and options at artificially inflated prices. In furtherance of this unlawful

22 scheme, plan and course of conduct, Defendants, and each of them, took the

23 actions set forth herein. 24 127. Pursuant to the above plan, scheme, conspiracy and course of conduct, 25 each of the Defendants participated directly or indirectly in the preparation and/or 26 issuance of the quarterly and annual reports, SEC filings, press releases and other 27 statements and documents described above, including statements made to 28 securities analysts and the media that were designed to influence the market for

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1 JAKKS’ securities. Such reports, filings, releases and statements were materially 2 false and misleading in that they failed to disclose material adverse information 3 and misrepresented the truth about JAKKS’ finances and business prospects. 4 128. By virtue of their positions at JAKKS, Defendants had actual 5 knowledge of the materially false and misleading statements and material 6 omissions alleged herein and intended thereby to deceive Plaintiff and the other 7 members of the Class, or, in the alternative, Defendants acted with reckless 8 disregard for the truth in that they failed or refused to ascertain and disclose such 9 facts as would reveal the materially false and misleading nature of the statements 10 made, although such facts were readily available to Defendants. Said acts and 11 omissions of Defendants were committed willfully or with reckless disregard for 12 the truth. In addition, each Defendant knew or recklessly disregarded that material 13 facts were being misrepresented or omitted as described above. 14

15 129. Information showing that Defendants acted knowingly or with

16 reckless disregard for the truth is peculiarly within Defendants’ knowledge and

17 control. As the senior managers and/or directors of JAKKS, the Individual

18 Defendants had knowledge of the details of JAKKS’ internal affairs.

19 130. The Individual Defendants are liable both directly and indirectly for

20 the wrongs complained of herein. Because of their positions of control and 21 authority, the Individual Defendants were able to and did, directly or indirectly, 22 control the content of the statements of JAKKS. As officers and/or directors of a 23 publicly-held company, the Individual Defendants had a duty to disseminate 24 timely, accurate, and truthful information with respect to JAKKS’ businesses, 25 operations, financial condition and future prospects. As a result of the 26 dissemination of the aforementioned false and misleading reports, releases and 27 public statements, the market price of JAKKS’ securities was artificially inflated 28 throughout the Class Period. In ignorance of the adverse facts concerning JAKKS’

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1 business and financial condition which were concealed by Defendants, Plaintiff 2 and the other members of the Class purchased or otherwise acquired JAKKS’ 3 securities at artificially inflated prices and relied upon the price of the securities, 4 the integrity of the market for the securities and/or upon statements disseminated 5 by Defendants, and were damaged thereby. 6 131. During the Class Period, JAKKS’ securities traded on a well 7 developed and efficient market. Plaintiff and the other members of the Class, 8 relying on the materially false and misleading statements described herein, which 9 the Defendants made, issued or caused to be disseminated, or relying upon the 10 integrity of the market, purchased or otherwise acquired shares of JAKKS’ 11 securities at prices artificially inflated by Defendants’ wrongful conduct. Had 12 Plaintiff and the other members of the Class known the truth, they would not have 13 purchased or otherwise acquired said securities, or would not have purchased or 14

15 otherwise acquired them at the inflated prices that were paid. At the time of the

16 purchases and/or acquisitions by Plaintiff and the Class, the true value of JAKKS’

17 securities was substantially lower than the prices paid by Plaintiff and the other

18 members of the Class. The market price of JAKKS’ securities declined sharply

19 upon public disclosure of the facts alleged herein to the injury of Plaintiff and

20 Class members. 21 132. By reason of the conduct alleged herein, Defendants knowingly or 22 recklessly, directly or indirectly, have violated Section 10(b) of the Exchange Act 23 and Rule 10b-5 promulgated thereunder. 24 133. As a direct and proximate result of Defendants’ wrongful conduct, 25 Plaintiff and the other members of the Class suffered damages in connection with 26 their respective purchases, acquisitions and sales of the Company’s securities 27 during the Class Period, upon the disclosure that the Company had been 28 disseminating false and misleading financial statements to the investing public.

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COUNT II 1 (Violations of Section 20(a) of the 2 Exchange Act Against The Individual Defendants)

3 134. Plaintiff repeats and realleges each and every allegation contained in

4 the foregoing paragraphs as if fully set forth herein. 5 135. During the Class Period, the Individual Defendants participated in the 6 operation and management of JAKKS, and conducted and participated, directly 7 and indirectly, in the conduct of JAKKS’ business affairs. Because of their senior 8 positions, they knew the adverse non-public information about JAKKS’ financial 9 and business results, prospects and operations. 10 136. As officers and/or directors of a publicly owned company, the 11 Individual Defendants had a duty to disseminate accurate and truthful information 12 with respect to JAKKS’ financial condition and results of operations, and to correct 13 promptly any public statements issued by JAKKS which had become materially 14 false or misleading. 15 137. Because of their positions of control and authority as senior officers, 16 the Individual Defendants were able to, and did, control the contents of the various 17

18 reports, press releases and public filings which JAKKS disseminated in the

19 marketplace during the Class Period concerning JAKKS’ financial and business

20 results, prospects and operations. Throughout the Class Period, the Individual

21 Defendants exercised their power and authority to cause JAKKS to engage in the

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

23 “controlling persons” of JAKKS within the meaning of Section 20(a) of the 24 Exchange Act. In this capacity, they participated in the unlawful conduct alleged, 25 which artificially inflated the market price of JAKKS’ securities. 26 138. Each of the Individual Defendants, therefore, acted as a controlling 27 person of JAKKS. By reason of their senior management positions and/or being 28 directors of JAKKS, each of the Individual Defendants had the power to direct the

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1 actions of, and exercised the same to cause, JAKKS to engage in the unlawful acts 2 and conduct complained of herein. Each of the Individual Defendants exercised 3 control over the general operations of JAKKS and possessed the power to control 4 the specific activities which comprise the primary violations about which Plaintiff 5 and the other members of the Class complain. 6 139. As set forth above, JAKKS violated Section 10(b) and Rule 10b-5. By 7 virtue of their positions as controlling persons, the Individual Defendants are liable 8 pursuant to Section 20(a) of the Exchange Act as they culpably participated in the 9 fraud alleged herein. 10 140. As a direct and proximate result of the Individual Defendants’ 11 wrongful conduct, Plaintiff and other members of the Class suffered damages in 12 connection with their purchases of the Company’s common stock during the Class 13 Period. 14

15 PRAYER FOR RELIEF

16 WHEREFORE, Plaintiff demands judgment as follows:

17 A. Determining that the instant action may be maintained as a class

18 action under Rule 23 of the Federal Rules of Civil Procedure, and certifying

19 Plaintiff as the Class representative;

20 B. Awarding compensatory damages in favor of Plaintiff and the other 21 Class members against all Defendants, jointly and severally, for all damages 22 sustained as a result of Defendants’ wrongful acts and misconduct as alleged 23 herein, in an amount to be proven at trial; 24 C. Awarding Plaintiff and the other members of the Class prejudgment 25 and post-judgment interest, as well as their reasonable attorneys’ fees, expert fees 26 and other costs; and 27 D. Awarding such other and further relief as this Court may deem just 28 and proper.

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1 FEDERMAN & SHERWOOD William B. Federman 2 10205 North Pennsylvania Avenue 3 Oklahoma City, Oklahoma 73120 Telephone: (405) 235-1560 4 Facsimile: (405) 239-2112 5 [email protected]

6 WOHL & FRUCHTER LLP J. Elazar Fruchter 7 570 Lexington Avenue, 16th Floor 8 New York, New York 10022 Telephone: (212) 758-4000 9 Fax: (212) 758-4004 [email protected] 10 Attorneys for Lead Plaintiff and the Class 11 12

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