Hyperbolic comments did not mislead children’s network investors, judge rules

A federal judge on Monday dismissed a class action that accused a childrens' cartoon company of lying to investors by touting its new Kartoon Channel product as "the next Netflix for kids," saying she did not find any of the statements to be false.

"The comparison to Netflix is so "'exaggerated' or 'vague' that no reasonable investor would rely on it when considering the total mix of available information," U.S. Judge Dale S. Fischer wrote, citing a similar securities case from 2001. "This statement is hyperbole and did not convey a false or misleading impression of the future on which a reasonable investor would rely."

In August 2020, investors of Genius Brands International Inc. sued the company for violating federal securities laws by making false statements throughout the year. This came after Genius stock fell below $1 per share, threatening its status on the NASDAQ. Other allegedly false statements investors said Genius issued involved its purported deals with the entertainment company founded by Stan Lee, Gov. Arnold Schwarzenegger and Nickelodeon. The company also was accused of making misleading statements about potential risks of COVID-19 impacting its business. In re: Genius Brands International Inc. Securities Litigation, 2:20-CV-7457 (C.D. Cal., filed Aug. 18, 2020).

Fischer, of the Central District of California, found that Genius's statements in March and May of 2020 showed there was no way the company could know anything about COVID-19 and its consequences that the rest of the world did not.

"Defendants assert there is nothing inconsistent about the March 20 statement and May 18 risk disclosure statement. The Court agrees," Fischer wrote. "That Genius stated in May that it could be significantly impacted by Covid-19 establishes nothing about the truth or falsity of statements made almost two months earlier that animated cartoons' appeal is timeless and that cartoons have been shown to be insulated from factors such as the price of gold or Brexit."

After its stock price fell below $1, Genius had until March 2020 to maintain a minimum bid price to regain compliance. Genius began collaborating with third-party stock promoter PennyStocks to publish positive reports about the company, which Fischer found did not rise to stock price manipulation. From March to May 2020, investors claim Genius made false statements as part of its ongoing campaign to inflate prices, which it succeeded on May 28, 2020. But when third party publishers like Hindenburg, Seeking Alpha and Citron questioned the company's valuation and planned business ventures, stocks fell below $1 again in June.

Genius does not have a duty to respond or correct other publishers' pessimistic reports about its valuations and potential business deals, the judge noted.

"The defendants are very gratified to the court who agreed with our position that the complaint fell well short of the applicable pleading standard," said Michael L. Charlson, partner at Vinson & Elkins LLP who represents Genius. "Our clients denied and continue to deny having issued false and misleading statements, and we intend to continue to defend the case vigorously to the extent plaintiffs elect to file an amended complaint."

The plaintiffs have until Sept. 27 to file an amended complaint but cannot add new claims or new defendants. Ex Kano Sams II, partner at Glancy Prongay & Murray LLP who represents the lead plaintiff in the litigation, could not be reached for comment Monday.