According to the Company’s FORM 10-Q for the quarterly period ended September 30, 2006, The Company, along with certain of its officers and directors, moved to dismiss the consolidated class action complaint, and in April 2006, the court granted the Company’s motion to dismiss on all claims. The court dismissed the claims relating to alleged material misstatements and omissions in connection with the Company’s initial public offering with prejudice, and dismissed the remaining claims without prejudice. On June 12, 2006, plaintiffs voluntarily served notice indicating that they intended to forego filing an amended complaint on the claims that the court had dismissed without prejudice. On June 27, 2006, the court entered a stipulated order dismissing the consolidated actions with prejudice.
As disclosed by the same SEC filing, on June 1 and August 1, 2005, eight purported shareholder class action lawsuits alleging violations of federal securities laws were filed against the Company and several of its officers and directors. Seven of those lawsuits were filed in the U.S. District Court for the Central District of California. The eighth lawsuit, which was originally filed in the Superior Court of the State of California, has been removed to U.S. District Court for the Central District of California, and all of the purported shareholder class actions are consolidated and pending before a single judge. After one of the actions was voluntarily dismissed, a lead plaintiff was appointed and a consolidated class action complaint was filed in the remaining actions. The consolidated class action complaint asserted that the Company and certain of its officers and directors made alleged material misstatements and omissions in certain press releases, SEC filings and other public statements, including in connection with the Company’s initial public offering in October 2004, and sought to recover damages on behalf of purchasers of the Company’s securities during the purported class period (October 28, 2004 to July 11, 2005).
The original Complaint alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market during the Class Period thereby artificially inflating the price of DreamWorks securities. The action names as defendants DreamWorks, its Chief Executive Officer and its Chairman of the Board.
Specifically, the Complaint alleges that starting on October 27, 2004 and continuing until May 10, 2005, defendants made a series of materially false and misleading statements regarding the about Dreamworks business and earnings. During the Class Period the Company filed its Form 10-K for its year ended December 31, 2004. In addition, the Company issued press releases on November8, 2004, March 17, 2005 and May 10, 2005. The Complaint alleges that throughout the Class Period, defendants failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: a) that sales of Shrek2 DVD's were declining;(b) retailers were returning to the Company massive amounts of unsold Shrek 2DVD inventory; (c) the Company was shipping products far in excess of the actual demand for those products; and (e) as a result of the foregoing, defendants' opinions and statements concerning the Company's current and future earnings lacked a reasonable basis at all times.
The complaint further alleges that on or around May 10, 2005, Dreamworks announced that Shrek 2 did not meet the company's retail sales expectations for the first quarter. The Company reported for the first time that the "sales shortfall resulted in a higher level of returns than expected. As a result, DWA recorded no revenue from Shrek 2 in the quarter other than from licensing and merchandising." On this news the price of DreamWorks stock dropped from $36.50 to close at $32.05.