Genius Brands International Inc. and its CEO face a proposed class action in which an investor claims stockholders have been harmed financially after the company’s exposure as “little more than a kid-friendly front for a pump and dump scheme” to enrich insiders.
The 21-page complaint says Genius, a multimedia company that licenses entertainment content for children, has been “thinly traded” for “nearly its entire history,” with shares recently trading as low as $0.0520 in mid-March 2020. According to the case, Genius artificially inflated its stock price through misstatements concerning its flagship “Rainbow Rangers” show and the launch of its Kartoon Channel! app, as well as press releases littered with exaggerated statements, buzzwords, and “tenuous connections” to celebrities and household-name brands.
Once the investing public realized it was all a ruse, stockholders were injured by the resulting share price plummet while long-standing investors and executives cashed out their shares before the fall, the lawsuit, filed in California federal court, alleges.
Throughout March and May, Genius conducted several direct share offerings to “long-standing investors” who purchased shares at prices below the publicly traded market rate, the lawsuit says. For instance, the company sold on March 24, 2020 four million shares in a direct offering for proceeds amounting to roughly $1 million, with long-standing investors acquiring shares for as little as $0.25 each despite the then-current market price being $0.31 per share, according to the complaint.
Around the same time, Genius began conducting a “nonstop campaign of hype and press releases” in order to boost company share prices, the case continues. In one such press release issued March 17, Genius touted its “Rainbow Rangers” cartoon, stating that Nickelodeon had “significantly increased” the number of weekly broadcasts of the show to 26 airings per week during “favorable time slots.”
Additionally, Genius released numerous press releases leading up to the launch of its Kartoon Channel! app, repeatedly referring to the app as “Netflix for Kids, but Free” and an “Economic Cure for Covid,” the case says, claiming the announcements worked to the defendants’ desired benefit.
“These releases had their intended effect,” the complaint avers, noting that the price of Genius shares “skyrocketed” to several dollars per share, reaching a trading high of $11.72 on June 3, 2020.
On June 5, however, Hindenburg Research published a report entitled “A Bagholder’s Guide to Why We Think Genius Brands Will Be a $1.50 Stock Within a Month,” in which the firm questioned Genius’s valuation and highlighted inaccurate public statements, the lawsuit notes. For example, the suit says, the report pointed out that “Rainbow Rangers” actually aired only nine times per week—daily at 3:49 a.m. and twice on Sunday mornings at 6:00 a.m. and 6:30 a.m.—starkly contrasting Genius’s press release in which it touted 26 airings per week and broad coverage.
Though the price of Genius stock dropped 13 percent upon the release of the Hindenburg report, stocks remained artificially inflated, the lawsuit says. On June 11, the defendant registered 60 million shares for sale by a group of “selling shareholders,” which the case claims are “the same long-standing investors” that purchased the company’s stock in the March through May direct offerings. Just prior to the launch of the Kartoon Channel!, these investors were able to “cash out” their investment at inflated prices, the suit alleges.
With the announcement of the slate of content for the Kartoon Channel!, investors began to realize that Genius’s statements were “more hype than substance,” the lawsuit alleges. According to the case, the content revealed the channel was not, as the defendants put it, the new “Netflix for Kids” and was instead “just another app in a crowded space.”
On June 16, 2020, the suit says, Genius stock price declined by 14 percent following the company’s announcement of the app’s programming lineup.
Moreover, investors were “disappointed to learn” that the Kartoon Channel! app would not be free as the defendants represented, the complaint continues. Instead, users wishing to download and use the app through Amazon Prime, which Genius often listed first when discussing the app’s potential reach, would be forced to pay a $3.99 monthly fee, according to the case.
Genius stock prices jumped once again with a “vague” July 2 press release informing investors that a “Key Business Development” would be announced on July 6, the case says. On this date, however, the defendants released another “exaggerated press release” in which they announced a joint venture with POW! Entertainment regarding intellectual property created by Stan Lee after his time at Marvel, the lawsuit relays. Genius’s CEO reportedly stated that “[t]he potential value in this single asset, is greater than any IP anywhere in Hollywood.”
According to the case, these “exaggerated statements” led investors to realize that “the gig was up and that there was little substance behind the hype.” Following the July 6 announcement, the price of Genius stocks dropped to $2.66 from $3.55 on the previous day, the lawsuit says.
The lawsuit claims Genius share prices plummeted after the company was exposed as “little more than a kid-friendly front for a pump and dump scheme to enrich long-term investors and Company executives.” Since investors began to learn the truth, the company has lost nearly 80 percent of its value, according to the suit.
As a result of Genius’s “wrongful acts and omissions,” investors have suffered “significant losses and damages,” the lawsuit alleges. The plaintiff proposes to cover a class of anyone who purchased or otherwise acquired Genius securities between March 17, 2020 and July 5, 2020 and were damaged thereby.
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