In Re Cinar Corporation Securities Litigation 1:00-CV-1086

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In Re Cinar Corporation Securities Litigation 1:00-CV-1086 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK IN RE CINAR CORPORATION Master File No. CV 00 1086 SECURITIES LITIGATION CONSOLIDATED AND AMENDED This Document Relates To: CLASS ACTION COMPLAINT== ALL ACTIONS Plaintiffs, individually and on behalf of all other persons similarly situated, by their undersigned attorneys, for their consolidated and amended class action complaint, allege upon personal knowledge as to themselves and their own acts, and upon information and belief as to all other matters, based upon, inter alia , the investigation made by and through their attorneys as detailed in Paragraph 13. NATURE OF THE ACTION 1. Plaintiffs bring this lawsuit as a class action on behalf of themselves and all purchasers of limited voting shares ("Class B shares")"' of CINAR Corporation ("CINAR" or the "Company") through the NASDAQ National Market ("NASDAQ") during i/ CINAR's share capital consists of Variable Multiple Voting Shares and Limited Voting Shares. Only Limited Voting Shares were traded on the NASDAQ. The 1997 Offering (as defined below) was for Subordinate Voting Shares which were redesignated as Limited Voting Shares in 1998. The 1999 Offering (as de below) also only offered Limited Voting Shares. 1553 / CMP / 00043823.WPD v 1 tr the period April 8, 1997 through and including March 10, 2000 (the "Class Period"), and on behalf of sub-classes consisting of: a) all purchasers of CINAR stock issued in connection with the secondary public offering pursuant to the Registration Statement dated March 3, 1999 (The "1999 Registration Statement") and through the U.S./International Underwriters as defined therein (the "1999 Offering"); and b) all purchasers of CINAR stock issued in connection with the secondary public offering pursuant to the Registration Statement dated September 23, 1997 (The "1997 Registration Statement") and through the U.S./International Underwriters as defined therein (the "1997 Offering"); to recover damages caused by defendants' violations of the federal securities laws. 2. During the Class Period, CINAR and the Executive Defendants, as defined below, caused CINAR to disseminate to the investing public materially false and misleading financial statements, press releases, and public filings concerning CINAR's publicly reported revenues, earnings, and assets. Moreover, the defendants issued materially false and misleading registration statements in connection with the 1999 Offering of 7 million Class B shares and the 1997 Offering of 3.1 million Class B shares to the public, resulting in proceeds for CINAR totaling 1553 / CMP / 00043523 WPD v 1 2 proximately $241 million.= 3. During the Class Period, with respect to claims brought under the Securities and Exchange Act of 1934, CINAR and the Executive Defendants engaged in a common course of conduct that operated as a fraud on the integrity of the market for shares of CINAR stock by intentionally and/or recklessly: i) overstating CINAR's revenues and earnings which had been, in large part, fraudulently obtained through tax credits; ii) failing to disclose the improper and unauthorized investment of $122 million of Company assets ; and iii) :ailing to record related party transactions properly in accordance with U.S. and Canadian Generally Accepted Accountinc Principles ("GAAP"). As a result, all of the Company's 1997, 1:98 and 1999 financial reports and public filings contained numorous material misstatements and omissions. Indeed, the Company has announced that it will be restating its fiscal year 197 and 1998 financial statements and has yet to file its financial results for fiscal year 1999. 4. As a direct result of the defendants' continuing series of false representations and material omissions, the market price of CINAR Class B stock surged during the Class Period to a high of $30.25 per share. 5. The false and misleading nature of defendants' ?/ All dollar amounts in the complaint are in U.S. Dollars unless otherwise indicated. 1553 / CMP / 00043823 . WPD vl 3 statements was concealed from the investing public until October 15, 1999, when the truth slowly began to emerge. On that day, press reports began to circulate in the market that CINAR was being investigated by Montreal police in connection with tax credit fraud. A report published on Bloomberg on October 15, 1999, stated, in pertinent part, as follows: The CBC [Canadian Broadcasting Corp.] reported that Canadians were asked to sign screenplays that were actually written by U.S. authors to secure tax breaks that were intended for television productions that were written by Canadians. Indeed, it was later di.;closed that one of the Canadians used as a "front" for scripts w_is Helen Charest, sister to Defendant Charest, who had signed several scripts using a pseudonym and had collected nearly $1 million (Cdn.) in royalties. In response to these reports, CINAR an:iounced that its Audit Committee would be conducting an internal -_nvestigation into the charges. 6. Immediately f,.)llowing the October 15, 1999 report, the price of the Company's Class B stock plunged from more than $28.00 per share on October 14, 1999 to $22.125 per share on October 15, 1999 and continued to decline over the next few days. 7. Seeking to minimize the damage, CINAR and the Executive Defendants made public statements in which they falsely stated that any tax liability would be limited and immaterial. In response to defendants' materially false and misleading reassurances, the price of CINAR stock rebounded, climbing from 1553 / CMP / 00043823 . WPD vi 4 $15.9375 per share on October 21, 1999 to $27.3875 per share on February 8, 2000. 8. However, in a February 18, 2000 press release issued over Business Wire , CINAR made another partial disclosure that the financial and accounting impacts of the reviews of the Company's records related to the tax practices allegations were "expected to be greater than initially anticipated." Market reaction to this announcement was immediate. The price of CINAR Class B stock declined to $17.9375 per share from $24.625, a one- day decrease of 27% and a decrease of over 40% from the Class Period high of $30.25 per share reached on September 30, 1999. Once again, however, this announcement only disclosed part of the truth- 9. After the close of trading on March 6, 2000, the Company issued a press release over Business Wire further disclosing that: [t]he Company has determined that approximately US $122 million of its funds have been invested without the approval of its Board of Directors. About US$86 million of these investments have been pledged to secure other investments. The Company's efforts to date have not permitted it to determine with clarity the nature of those other investments or their value. The Company is endeavoring to complete with the utmost urgency a special review of this matter to determine its legal position, and to obtain possession of such funds. Hasanain Panju has been terminated as an officer and employee of the Company. He was formerly the Senior Executive Vice-President. 1553 / CMP / 00043823 .WPD 0 5 The reviews by the Audit Committee and the Company, which have been broadened in scope, now suggest that while the Company will make every effort to do so, the Company may not be able to release its financial statements for the 1999 financial year within the prescribed statuary delays. 10. In the wake of this shocking disclosure, husband and wife team Ronald Weinberg and Micheline Charest, founders of the Company, resigned as Co-Chief Executive officers. 11. The response to these stunning disclosures was swift and devastating. CINAR's stock price plummeted $12.62 to --,lose at $5.75 per share on March 7, 2000, an amaz_.ng plunge of -learly 70% in one day, and 80% f==-om the Class Period high. Tradieg in CINAR ClaEs B stock has boon halted on the Ce:.nadian and American stock excranges since March 8, 2000. 12. On March 10, 20(;0, CINAR announced it would be restating its financial results for fiscal yE:ars 1997 and 1998 and the first three quarters of fiscal year -999 due to is:eues related tc improperly obtee.ined tax incentive., nondisclosure of related party transactions and unauthorized investment transactions. To date, C1NAR had not filed its annual financial statement for the year ended November 30, 1999. 13. Class members who purchased shares of CINAR Class B stock throughout the Class Period have suffered and continue to suffer substantial injury from the fraud perpetrated by the Company's most senior executive officers. 1553 / CMP / 00043823.WPD % 1 6 BASIS OF ALLEGATIONS 14. Plaintiffs' allegations set forth herein are based upon their thorough investigation, conducted by and through their attorneys, of all reasonably available sources of information, including, but not limited to, the review of filings by CINAR with the United States Securities and Exchange Commission ("SEC"), the Canadian securities regulatory authorities (on "SEDAR")3I, as well as regulatory filings and reports, securities analyst reports about the Company, press releases and other public statements issued by the Company during the Class Period, and media reports about the Company, including articles in Canadian newspapers, and consultation with experts, including forensic accountants. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. JURISDICTION AND VENUE 15. The claims alleged herein arise under Sections 10(b) and 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t, and Rule 10b-5, 17 C.F.R. 3` Filings with Canadian securities regulatory authorities are electronically filed on the System for Electronic Document Analysis and Retrieval (SEDAR). All references to Canadian filings by CINAR will hereinafter be referred to as SEDAR filings. 1553 / CMP / 00043823 .WPD vi 7 § 240.10b-5 promulgated thereunder; and Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C.
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