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IMAX, the giant theater company, has agreed to pay $12 million to settle an investor class action lawsuit alleging it made material misrepresentations and omissions regarding revenue recognition.
In February 2006, IMAX issued a press release touting its financials for the previous year’s fourth quarter. The statement announced a record number of theater installations and $35.1 million in revenue.
Five months later, the SEC launched an investigation into the company’s accounting, particularly the decision to recognize revenue on 10 theaters that had yet to open. By July 2007, the scope of the inquiry had expanded, and IMAX was forced to restate financial results from 2002 to 2006. The price of IMAX shares took a hit.
That led to eight lawsuits in the U.S and one in Canada that’s been called “groundbreaking.”
The U.S.-based class action lawsuits were consolidated, and the plaintiffs survived a motion to dismiss. Last week, the parties in the U.S. case informed a New York federal court that a $12 million settlement had been struck. The deal, according to the plaintiff’s counsel, “achieves a result that is fair, reasonable, adequate and worthy of judicial approval.”
The Canadian class action continues, however. That litigation is being closely watched by many legal observers because it was the first one certified by a judge after Canada adopted U.S.-style securities litigation rules in 2005. When a Toronto judge certified the class action against IMAX in 2010, a global investor class was allowed, meaning that foreign investors would be allowed to join. The decision to certify a global class could greatly increase liability for corporations.
In detailing a settlement to wrap up the U.S. class action, the parties revealed that all investors who held IMAX stock from February 27, 2003 to July 20, 2007 would have the opportunity to make a claim, but not those who intended to continue pursuing the company in Canadian court.
As part of the settlement, the defendants have agreed to seek an order amending the definition of the Canadian class to exclude all class members who have not opted out of the U.S. settlement. And if the Canadian court refuses, the latest settlement agreement appears to be void, as it is said that the parties “shall revert to their litigation positions immediately prior to the execution of the [Memorandum of Understand].”
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