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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 – Securities

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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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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