Waterford Twp. Police v. Mattel, Inc.

• Decision Date: 24 May 2018
• Docket Number: LA 17–cv–04732 VAP (KSx)
• Citation: 321 F.Supp.3d 1133
• Parties: WATERFORD TOWNSHIP POLICE and Fire Retirement System, Plaintiff, v. MATTEL, INC., et al., Defendants.
• Court: U.S. District Court — Central District of California

321 F.Supp.3d 1133

WATERFORD TOWNSHIP POLICE and Fire Retirement System, Plaintiff,

v.MATTEL, INC., et al., Defendants.

LA 17–cv–04732 VAP (KSx)

United States District Court, C.D. California.

Signed May 24, 2018

Danielle S Myers, David C. Walton, Robbins Geller Rudman and Dowd LLP, San Diego, CA, Robert Vincent Prongay, Glancy Prongay and Murray LLP, Adam Marc Apton, Adam C. McCall, Levi and Korsinsky LLP, Los Angeles, CA, Samuel H. Rudman, Pro Hac Vice, Robbins Geller Rudman and Dowd LLP, Melville, NY, for Plaintiff.

Achyut Jayant Phadke, Munger Tolles and Olson LLP, San Francisco, CA, John W. Spiegel, Robert L. Dell Angelo, Munger Tolles and Olson LLP, Los Angeles, CA, for Defendants.

Order GRANTING Defendants' Motion to Dismiss With Leave to Amend (Doc. No. 55).

Virginia A. Phillips, Chief United States District Judge

On January 24, 2018, Defendants Mattel, Inc. ("Mattel"), Richard L. Dickson ("Dickson"), Kevin M. Farr ("Farr"), Joseph P. Johnson ("Johnson"), and Christopher A. Sinclair ("Sinclair" and collectively "Defendants") filed their Corrected Motion to Dismiss ("Motion"), and a Request for Judicial Notice ("RJN"). (Doc. Nos. 55, 56). Lead Plaintiff Gilberto Castro ("Plaintiff") filed his opposition to Defendants' Motion on March 9, 2018, as well as an opposition to Defendants' RJN. (Doc. Nos. 57, 58). Defendants filed their reply in support of their Motion and a response in support of their RJN on April 9, 2018. (Doc. Nos. 59, 60).

After consideration of the papers filed in support of, and in opposition to the Motion, and the arguments raised during the May 21, 2018 hearing, the Court GRANTS Defendants' Motion with leave to amend.

I. SUMMARY OF ALLEGATIONS

Plaintiff alleges the following facts in his Consolidated Complaint for Violations of the Federal Securities Laws ("Consolidated Complaint"). (Doc. No. 50).

A. Parties

Mattel designs, manufactures, and markets a range of toy products for sale internationally. (Id. at ¶ 24). Its business is highly seasonal in nature, with the majority of its sales occurring during the September through December timeframe. (Id. at ¶ 25). Mattel's securities are listed and actively traded on the New York Stock Exchange, a highly efficient stock market. (Id. at ¶¶ 13, 31, 34).

Plaintiff is the lead plaintiff in this putative securities class action on behalf of purchasers of Mattel's publicly traded securities between October 20, 2016 and April 20, 2017 (the "Class Period"). (Id. at ¶ 1). He alleges that he purchased Mattel securities at artificially inflated prices during the Class Period and suffered damages as a result. (Id. at ¶ 14).

Sinclair was Mattel's Chief Executive Officer ("CEO") until February 2017, when he resigned as CEO and became Executive Chairman of Mattel's Board of Directors. (Id. at ¶ 16; see also, Doc. No. 56–14).

Dickson is, and was at all relevant times, Mattel's President and Chief Operating Officer ("COO"). (Doc. No. 50 at ¶ 17).

Farr was Mattel's Chief Financial Officer ("CFO") during the Class Period and resigned from this position in July 2017. (Id. at ¶ 18; see also, Doc. No. 56–15).

Johnson is, and was at all relevant times, Senior Vice President and Corporate Controller of Mattel. (Doc. No. 50 at ¶ 19).

B. Mattel's Cycle of Seasonally Overselling Inventory to Retailers

In the years leading up to the Class Period, Mattel began a downward trend in performance relative to its competitors. (Id. at ¶ 26). From 2013 to 2015, Mattel's profit margin declined from 18% to 9.5%. (Id. ). This decline was the result of deteriorating sales and gross margins as well as higher promotional spending levels. (Id. ). Mattel had fallen into a cycle of first overselling to retailers in an attempt to meet end-of-year sales targets and then offering concessions to retailers to make up for the inventory the retailers could not sell to consumers. (Id. at ¶ 96–97). To make matters worse, in 2015 Mattel lost the global rights to produce and sell toys based on Disney Princess® characters to its main competitor, Hasbro. (Id., ¶ 4, 98, 102, 117). This was a major loss for Mattel. (Id. ).

Sinclair and Dickson took control of Mattel's management in the spring of 2015 with the goal of improving Mattel's business. (Id. at ¶ 27). After the loss of the Disney Princess line of fashion dolls, Mattel set lower financial targets for 2015 but adopted a more bullish approach for 2016. (Id. at ¶ 102). As it had done in years past, Mattel offered generous incentives for retail customers to boost sales during the year-end holiday season, while giving retailers permission to sell products at a steep discount after the holiday season. (Id. at ¶¶ 106, 113, 115–19). Mattel told its retail customers that they would not be forced to keep excess inventory, and that Mattel would take it back in 2017 if it would not sell. (Id. ). Mattel put pressure on employees to enact this strategy, in part because upper management bonuses were calculated based on inventory levels. (Id. at ¶ 112, 114).

C. Q3 2016 Results

1. Mattel's October 19, 2016 Press Release

After the market closed on October 19, 2016, Mattel issued a press release announcing that for the financial quarter ending September 30, 2016 ("Q3 2016"), its worldwide net sales were up 2% year-over-year, on a constant currency basis, and its operating income had increased 5.5% over the comparable prior-year period. (Id. at ¶ 38).

2. Defendants' October 20, 2016 Statements

The day after the October 19, 2016 press release, Defendants made various statements about the outlook for Q4 2016 that were optimistic but excluded important information about Defendants' aggressive efforts to boost sales to retailers. (Id. at ¶¶ 45–46).

For example, Sinclair commented on Mattel's Q4 2016 outlook, saying "while we still have a critical fourth quarter to execute, we remain broadly on track to deliver our full-year outlook." (Id. at ¶ 38). Later, Sinclair held a conference call with securities analysts and investors to discuss Q3 2016 operating results, and stated "[w]e were especially encouraged by the momentum of our top line where our positive consumer takeaway [sales] is aligning nicely with [Mattel's] shipping. This increases our confidence as we get set for the holiday season and as we look to deliver on our challenging 2016 top-line objectives." (Id. at ¶ 39). Dickson and Farr made similar, optimistic statements on this call. (Id. at ¶¶ 40–43).

Following these statements, Mattel's stock rose more than 6%. (Id. at ¶ 44).

3. Mattel's October 27, 2018 SEC Filings

On October 27, 2016, Mattel filed its Form 10–Q with the SEC for Q3 2016 (the "Q3 Form 10–Q"). (Id. at ¶ 48). This form stated that "[t]here have been no material changes to the risk factors disclosed ... in Mattel's 2015 Annual Report on Form 10K" and that Mattel's disclosure controls were operating effectively. (Id. at ¶ 49).

The Q3 Form 10–Q also contained Sarbanes–Oxley Act of 2002 ("Sarbanes Oxley") certifications on Mattel's disclosure controls and procedures from Sinclair and Farr. (Id. at ¶ 51). The Q3 Form 10–Q noted that it "does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues." (Id. at ¶ 53).

4. Defendants' November 3, 2016 Analyst Day Statements

On November 3, 2016, Defendants conducted a presentation and question and answer session with investors and securities analysts for Mattel's 2016 Analyst Day ("Analyst Day"). (Id. at ¶ 54). As part of Analyst Day, Sinclair, Dickson, Farr made various positive statements about Mattel's financial condition, and projected positive performance for Mattel in the future. (Id. at ¶¶ 54–61).

D. Q4 2016 Results

1. Defendants' January 25, 2017 Statements

Mattel announced its Q4 2016 and year-end results in a press release on January 25, 2017. (Id. at ¶¶ 31, 62). Mattel reported that, on a year-over-year basis, worldwide net sales declined by 8% to $1.83 billion, gross margins declined by 14% to 47.0%, and operating income declined by 11% to $262.6 million. (Id. at ¶ 63). The press release pointed to several factors to explain these results, including "a significant U.S. toy category slowdown in the holiday period" and foreign currency issues which "triggered elevated retail promotional activity and decreased shipping. All of which had a significant impact on [Mattel's] gross margin." (Id. at ¶ 66).

Later that day, Defendants held a conference call with analysts and investors ("Q4 conference call") to discuss Mattel's disappointing Q4 2016 and year-end financial results. (Id. at ¶ 64). During this call, Sinclair stated that Mattel's gross margins were "significantly impacted by elevated sales adjustments and by heavier discounting" and that high levels of sales adjustments and discounting were necessary to liquidate excess inventory in the retail channel. (Id. ). Defendants characterized retail inventory levels as being "moderately" elevated, and explained that such inventory was within "a manageable range." (Id. at ¶ 69). For example, when asked about when Mattel would normalize inventory levels, Sinclair responded that he expected Mattel would "be in pretty decent shape on inventory as we get through the first quarter, and it's really in pockets. So this is not a horrendous issue at this point." (Id. at ¶ 70). Farr also stated that "we'll work through the extra inventory quickly, and I don't think we have to discount it." (Id. ).

In response to these statements, the price of Mattel stock fell $5.57 per share on heavy trading volume to close at $25.99 per share on January 26, 2017. (Id. at ¶ 65).

2. On January 30, 2017 Moody's Places Mattel's Credit On Review

Moody's put Mattel's credit on review for downgrade citing discounting at retail that contributed to narrow profit margins and lower cash flow. (Id. at ¶ 73). Mattel's stock price declined in response to Moody's announcement from $25.43 per share on January 27, 2017 to $25.27 per share on January 30, 2017, with further declines in the following days. (Id. at ¶ 74).

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