This shareholder derivative action is brought on behalf of Mattel against certain of its former and current directors and officers for breaching their fiduciary duties of loyalty, care, and disclosure for making and covering up known, material misstatements in the Company’s financial results and severe deficiencies in the Company’s internal controls from at least August 2, 2017 through August 8, 2019 (the “Relevant Period”).
Plaintiff also brings this action, on behalf of Mattel, against PricewaterhouseCoopers (“PwC”) and one of its former auditors for aiding and abetting breaches of fiduciary duty for its role in covering up these known, material misstatements in Mattel’s financial results and severe deficiencies in the Company’s internal controls during the Relevant Period.
As the demand for children’s toys has fallen sharply in the age of the internet and – after experiencing a series of setbacks and multiple changes in leadership starting in 2015 – Mattel announced disappointing financial results for the first two quarters of 2017. In September 2017, a month before the Company was set to release its third quarter results, the Company’s biggest client Toys “R” Us filed for bankruptcy. As a result, Mattel faced significant pressure to report optimistic results in the third and fourth quarters of 2017, and for the full year 2017.
At the time, however, Mattel was riddled with severe internal control deficiencies, including in the way it calculated its publicly reported financials and in the way issues, errors, and material weaknesses were reported to the Board and the Audit Committee. These deficiencies contributed to multiple material misstatements in the Company’s financial reports starting in the third quarter of 2017, and enabled Mattel management, along with its longtime auditor PwC, to cover up those misstatements.
As alleged, specifically, the Company’s internal control deficiencies led it to miscalculate a tax valuation allowance and to understate Mattel’s quarterly loss in the Company’s third-quarter 2017 Form 10-Q by approximately $109 million. Subsequently, in a conspiracy to avoid admitting that the Company suffered these deficiencies, and to avoid a restatement of its miscalculated third quarter results, Mattel and PwC manufactured a plan to institute a fraudulent change in accounting for intangible assets in its 2017 Form 10-K by artificially increasing its net loss for the fourth quarter of 2017 by $109 million –sweeping the tax valuation error under the rug, at least for a time.
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