Mattel Investors Seek Class Cert. Over Understated Tax Bill

May 3, 2021 — Mattel investors asked a California federal judge to grant them class status in their securities suit accusing the toymaker of understating its income tax expenses by $109 million for the 2017 tax year, saying courts routinely grant certification in securities cases involving the common questions they face.

The investors said on Friday that Mattel stock was traded in an open, well-developed and efficient market, and that a common methodology may be used to determine the class-wide damages resulting from Mattel Inc. and PricewaterhouseCoopers LLP’s misconduct.

“Like most securities-fraud actions, this one is ideally suited for class treatment because it arises from common misrepresentations that harmed thousands of investors in Mattel’s stock during the class period in a like manner,” the investors said.

They added: “As detailed in the complaint, Mattel’s senior executives knew that Mattel materially misstated its financial results and suffered from internal control deficiencies. Rather than admit those facts, they conspired with Mattel’s auditor, PwC, to conceal them from investors.”

Investors sued Mattel and its independent accounting firm PwC in California federal court in December 2019 and January 2020. Per the complaints, Mattel and PwC allegedly manipulated the company’s accounting to conceal a massive tax error reported for the third quarter of 2017. When it all came to light, Mattel stock prices tanked and investors lost money, they said.

In their suits, investors claimed Mattel incorrectly reported a tax valuation allowance of $561.9 million in 2017. That value was understated by $109 million, and the company later overstated its losses by $109 million on its annual report for that year to cover up the first error, they said.

PwC also worked with the toy manufacturer to make false statements on tax forms to conceal the company’s understatement of losses, the investors said. PwC, which had been registered as Mattel’s independent accounting firm since 1974, worked with it to “deceive the investing public,” per the January 2020 complaint.

After Mattel disclosed on Aug. 8, 2019, that it had received an anonymous whistleblower letter exposing PwC’s alleged concealment, and that it was canceling a $250 million debt offering that had been scheduled to close that day, stock prices took an approximately 15% dive in one day from $13.43 a share to $11.31, the investors said.

In April 2020, U.S. District Judge AndrĂ© Birotte Jr. consolidated the cases, appointed DeKalb County Employees Retirement System and New Orleans Employees’ Retirement System as lead plaintiffs, and approved their selection of plaintiffs firm Bernstein Litowitz Berger & Grossmann LLP as lead counsel.

The Friday motion said the investors meet all the requirements for certification under Rule 23, including numerosity, as there were approximately 342 million shares of Mattel common stock outstanding throughout the class period and between 1.2 million to 89.2 million shares traded daily.

Common issues of law facing the proposed class are if the defendants’ public statements during the class period misrepresented or omitted material facts, if they acted knowing their actions were wrong, and if the misstatements and omissions caused investors’ losses and if the class suffered damages, the investors said.

The proposed class’ counsel, Bernstein Litowitz, is “among the most experienced securities class action law firms in the country,” the investors said.

The presumption of classwide reliance established under the 1988 Supreme Court case Basic v. Levinson is also met, including because the securities were traded in an efficient market, the investors said.

Included with the motion is an expert report from S.P. Kothari, a professor of accounting and finance at the Massachusetts Institute of Technology‘s Sloan School of Management, who wrote the Mattel stock was traded in an efficient market, making the claims entitled to the “fraud-on-the-market” presumption of reliance and supporting a finding of predominance, the investors said.

Counsel for the parties didn’t immediately return requests for comment.

The investors are represented by John Rizio-Hamilton, Matthew Traylor, Jonathan D. Uslaner and Lauren M. Cruz of Bernstein Litowitz Berger & Grossmann LLP.

Mattel was represented in January by John W. Spiegel, John M. Gildersleeve and Lauren C. Barnett of Munger Tolles & Olson LLP.

PwC is represented by Jenny Pelaez, Joshua Vittor and Timothy J. Perla of WilmerHale.

The case is In re: Mattel Inc Securities Litigation, case number 2:19-cv-10860, in the U.S. District Court for the Central District of California.