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On Wednesday, DreamWorks prevailed in a lawsuit that claimed that it had violated securities law by saying on an earnings announcement that the animated film Turbo would be profitable, and waiting too long to take a $13.5 million write-down.
Charles Paddock and others filed claims in 2014, and in a complaint that consolidated three class actions, the plaintiffs alleged they suffered when DreamWorks’ stock price dropped 12 percent following a Feb. 25, 2014, announcement of the write-down on Turbo, which cost $135 million to make and grossed just $83 million domestically. Six months after that announcement, DreamWorks revealed that the SEC had been investigating the write-down since May. The company’s stock dropped another 12 percent, allegedly leading to more shareholder harm.
In rejecting the lawsuit, U.S. District Judge James Otero ruled that plaintiffs haven’t alleged sufficient facts to support falsity, scienter (intent or knowledge of wrongdoing) and loss causation.
The judge points to a comment from DreamWorks CEO Jeffrey Katzenberg during a 2013 second-quarter earnings call.
“Katzenberg did not simply say Turbo will be a profitable film, but instead said ‘based on the data that we have to date, we do believe that Turbo will be a profitable film,'” writes Otero.
The judge faults the plaintiffs for conclusorily asserting that defendants had no basis to expect the film about a snail who wants to win the Indy 500 to be profitable. The judge says that generally accepted accounting principles tolerate a range when measuring expected performance of things like projected sales from home entertainment, consumer products and television. The lawsuit doesn’t meet pleading standards, he writes, because plaintiffs are substituting their “opinion” as to how DreamWorks should have made calculations for “facts describing how” the analysis was actually conducted.
According to the ruling, “Plaintiff has provided no testimony of confidential witnesses, nor anything else beyond its own financial analysis of Turbo‘s potential for profitability, before attempting to tie that analysis to the fact that DreamWorks later recorded an impairment charge related to Turbo as evidence that Defendants’ statements during the earnings calls were false when made.”
The judge finds that the plaintiffs have fallen short of showing scienter and agrees with DreamWorks that the lawsuit “aligns more closely to fraud-by-hindsight claims,” waving off the plaintiffs attempt to introduce alleged accounting violations, a debt offering and resignation of its chief marketing officer and chief accounting officer as support for knowledge of wrongdoing.
“They are collectively not as compelling as a competing inference that DreamWorks articulated a series of reasoned factors that led the company to anticipate Turbo would be profitable,” he writes. “The fact that the film did not turn out to be profitable, no matter how quickly that may have been apparent, certainly does not evidence a specific intent to make fraudulent statements to investors.”
Judge Otero dismisses the complaint with leave to amend, though, so the plaintiffs will have another opportunity to cure deficiencies. They have been given 15 days. The full decision is below.
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