Central District of California dismisses lawsuit against children’s cartoon society with prejudice, finds complaint violated Rule 8 of the Federal Rules of Civil Procedure | Shearman & Sterling LLP
On July 15, 2022, the United States District Court for the Central District of California granted a motion to dismiss a putative class action lawsuit against a children’s cartoon company (the “Company”) and certain of its officers alleging violations of Section 10(b) of the Securities Exchange Act of 1934. In Re Genius Brands Int’l, Inc. Sec. Litigation, CV 20-7457 DSF (RAOx) (CD Cal. 2022 Jul 15). In a second amended complaint, plaintiffs alleged that the company made materially false and misleading statements and omissions regarding the company’s involvement in a stock promotion company, an impending acquisition by Disney or Netflix, and its economic resilience in the face of COVID-19, among other topics. The Court dismissed the claims with prejudice for failing to adequately plead falsity or materiality, and further ruled that the 289-paragraph, 84-page complaint violated Rule 8 of the Federal Rules of Civil Procedure which requires a “statement short and clear” complaints. .
The plaintiffs alleged that between March 11, 2020 and March 30, 2021, the company made a series of materially misleading statements and omissions. Although the complaint alleges an assortment of inaccuracies and omissions, the Court’s decision focused on statements based on two matters. First, the plaintiffs alleged that the company failed to disclose that it had engaged a third-party stock promotion company (the “Promotions Company”) to publish favorable reports about it. According to the plaintiffs, this omission rendered the company’s statements materially misleading that: (i) the company had “taken no action intended to cause or induce[danslastabilisationoulamanipulationducoursdel’actiondelaSociété ;(ii)ilavait”[not] paid or agreed to pay any person compensation for soliciting another person to purchase shares of the Company; and (iii) its “stock price may be subject to substantial volatility, and a shareholder may lose all or a substantial part of his investment”. Second, the plaintiffs alleged that the company made a series of statements that deliberately misled investors into believing it would be acquired by Netflix or Disney when the company (i) reposted on its social media account an analyst’s report speculating on a potential takeover; (ii) announced a new board member who built a successful children’s network that was later acquired by Disney; and (iii) announced that it was planning a conference call to discuss a “key business development”. Plaintiffs also alleged that the company made various materially misleading statements regarding its resilience to the impact of COVID-19 and other matters. The Court dismissed all claims with prejudice.
First, the Court ruled that the company’s alleged failure to disclose its commitment to the promotion company was not actionable. The Court explained that Plaintiffs’ amended pleading did not remedy its earlier failure to identify any acts of the Company that stabilized or manipulated its stock, or any false or misleading statements in articles published by the Sponsors Company. In addition, the complainants’ amended claims that the articles were themselves misleading because they failed that the promotion company had received compensation from the company and that the company had reviewed the articles before they were published. be disseminated, also failed because (i) plaintiffs did not allege false or misleading statements in the promotion company’s articles of association, and (ii) the promotion company had no obligation to disclose that she received payments from the company.
Second, the court dismissed claims that the company made inaccurate statements about an impending takeover after an analyst report speculated that the company could be acquired by Netflix or Disney. The Court explained that the plaintiffs did not allege that any of the statements were untrue: the statement about the new board member and her credentials were true, and the statement that the company would announce a “development key business” (which turned out to be a joint venture) was “simply too vague to constitute a material statement of fact”. Further, the plaintiffs also failed to plead causation of the losses because the re-release of an analyst report containing buyout speculation did not lead to a rise in the stock price.
Next, the Court ruled that the plaintiffs’ claim based on the company’s upbeat statements regarding COVID-19 was protected by the PSLRA’s protection for forward-looking statements. The plaintiffs did not allege that the company was aware of any potential impact of COVID-19 which it did not disclose, and statements that the company eventually began to see the impact of the pandemic on its activities did not render the prior statements false or misleading when made. . The Court also found that the plaintiffs failed to plead falsity or causation of the losses with respect to various other alleged misstatements.
Finally, the Court noted that the plaintiffs had not remedied the deficiencies that the Court had identified with respect to the previous complaint and that the “verbose 289-paragraph, 84-page [complaint] violate[d] Rule 8″ which requires that the pleading contain a “short and clear statement of the claim” and dismissed the action with prejudice.
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