Central District Of California Dismisses With Prejudice Suit Against Children’s Cartoon Company And Finds That The Complaint Violated Rule 8 Of The Federal Rules Of Civil Procedure
On July 15, 2022, the United States District Court for the Central District of California granted a motion to dismiss a putative class action 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. Litig., CV 20-7457 DSF (RAOx) (C.D. Cal. July 15, 2022). In a second amended complaint, plaintiffs alleged that the Company made materially false and misleading statements and omissions about the Company’s engagement of 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 failure to adequately plead falsity or materiality, and further held that the complaint of 289 paragraphs and 84 pages violated Rule 8 of the Federal Rules of Civil Procedure that requires a “short and plain statement” of the claims.
Plaintiffs alleged that between March 11, 2020, through March 30, 2021, the Company made a series of materially misleading statements and omissions. Although the complaint alleged an assortment of misstatements and omissions, the Court’s decision focused on statements based on two topics. First, plaintiffs alleged that the Company failed to disclose that it had engaged a third-party stock promotion company (the “Promotion Company”) to issue favorable reports about it. According to plaintiffs, this omission rendered materially misleading the Company’s statements that: (i) the Company had not “taken any action designed to cause or to result . . . in the stabilization or manipulation of” the Company stock price; (ii) it had “[not] paid or agreed to pay to any person any compensation for soliciting another to purchase any” Company stock; and (iii) its “stock price may be subject to substantial volatility, and a stockholder may lose all or a substantial part of their investment.” Second, plaintiffs alleged that the Company made a series of statements that purposefully misled the investors into believing that it would be acquired by Netflix or Disney when the Company (i) re-posted on its social media account an analyst report that speculated about a potential buyout; (ii) announced a new board member who built a successful children’s network that was subsequently acquired by Disney; and (iii) announced it was scheduling a conference call to discuss a “key business development.” Plaintiffs also alleged that the Company variously made materially misleading statements regarding its resilience to the impact of COVID-19 and other topics. The Court dismissed all claims with prejudice.
First, the Court held that the Company’s alleged failure to disclose its engagement of the Promotion Company was not actionable. The Court explained that plaintiffs’ amended pleading did not correct its prior deficiency of failing to identify any act by the Company that stabilized or manipulated its stock, or any false or misleading statements in the articles published by the Promotion Company. Additionally, plaintiffs’ amended allegations that the articles were themselves misleading because they omitted that the Promotion Company received compensation from the Company and that the Company reviewed the articles before they were disseminated, also failed because (i) plaintiffs failed to allege any false or misleading statements in the Promotion Company’s articles, and (ii) the Promotion Company had no duty to disclose that it was receiving payments from the Company.
Second, the Court rejected claims that the Company made misstatements about an impending buyout after an analyst report speculated that the Company might be acquired by Netflix or Disney. The Court explained that plaintiffs had failed to allege that any of the statements were false: the statement about the new board member and her credentials were true, and the statement that the Company would announce a “key business development” (which turned out to be a joint venture) was “simply too vague to constitute a material statement of fact.” Furthermore, plaintiffs also failed to plead loss causation because the re-posting of an analyst report containing buyout speculation did not result in a stock price increase.
Next, the Court held that plaintiffs’ claim based on the Company’s optimistic statements regarding COVID-19 was protected under the PSLRA’s safe-harbor for forward-looking statements. Plaintiffs failed to allege that the Company knew about any potential impact of COVID-19 that it did not disclose, and statements that the Company eventually started to see the impact of the pandemic on its business did not make the prior statements false or misleading when made. The Court also held that plaintiffs failed to plead falsity or loss causation with respect to various other alleged misstatements.
Finally, the Court noted that plaintiffs had failed to remedy the deficiencies that the Court had identified with respect to the prior complaint and that the “prolix 289-paragraph, 84-page [complaint] violate[d] Rule 8” that requires that the pleading contain a “short and plain statement of the claim” and dismissed the action with prejudice.