Lawsuit Over DreamWorks’ Turbo Highlights Need For Strict Adherence To SEC Standards
When a movie fails, many investors will look for ways to get their money back. While no one expects a project to be unsuccessful, producers and film studios should carefully guard their words and projections to investors, lest they find themselves in legal trouble.
DreamWorks’ Turbo Fails
DreamWorks Animation Studios produced Turbo, an animated film about a snail with dreams of winning the Indy 500. Following profitable and similar films like Cars, many people expected the movie to be a success. However, the film was a commercial failure, which lead to the studio taking a $13.5 million drop down, causing DreamWorks’ stock price to fall 12%.
After the movie flopped, investors began scrutinizing DreamWorks’ projections. Shareholders filed a class action lawsuit against the company, claiming that the studio failed to disclose the movie’s poor performance in a timely fashion, and alleged that the studio’s executives wrongly led them to believe that it would be a profitable film.
Last month, a judge looked at these claims and dismissed the lawsuit, vindicating DreamWorks.
Why DreamWorks Won
The shareholders claimed that DreamWorks’ executives misled them during an earnings call. At the time, Jeffrey Katzenberg, DreamWorks’ CEO, told investors that “based on the data that we have to date, we do believe that Turbo will be a profitable film.”
The plaintiffs in the lawsuit latched onto this statement, claiming that it was incorrect and misleading. However, the judge presiding over the case noted that the shareholders had not accused DreamWorks of using false data to make these claims, but instead were accusing the company of being too optimistic. While the movie ultimately was less successful than shareholders and the studio had hoped, DreamWorks was relying on accurate data that was available at the time.
According to the judge, the shareholders were attempting to make a case using “fraud by hindsight,” to show that the data should have been interpreted differently. The plaintiffs had no evidence that DreamWorks had done anything wrong, and could provide no motive as to why the company would make such claims.
What Film Companies Should Learn
Any studio, no matter how big or small, should learn from how DreamWorks approached its investors. The studio used a set of reasoned factors and all available evidence to make a projection about the film’s potential. While this projection ended up being a little too optimistic, optimism in itself is not a violation of securities law.
Before you speak with investors about the potential of your film project, remember that your words could come back to haunt you. Rather than overestimating a film’s potential, learn from DreamWorks’ CEO who used words like, “we believe” and “based on our evidence,” rather than words that convey certainty. Make sure that your evidence backs up your projections, and try to stay within the realm of probability, not hopeful possibilities.
If you are concerned about what you can and cannot say to investors, consult with the experienced securities law attorneys at Pierce Law Group LLP. As one of Los Angeles’ premiere entertainment law firms, we can provide you with the advice you need to keep your film company in compliance with the law.
For your free consultation, call (310) 274-9191, or visit http://www.piercelawgroupllp.com.
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