A federal appeals panel has revived an investor class action against media production company Genius Brands for allegedly misleading investors about the success of its "Rainbow Rangers" children's TV show and other allegedly misleading claims that, when exposed, tanked Genius' stock prices.
On April 5, a three-judge panel of the U.S. Ninth Circuit Court of Appeals said a Los Angeles federal judge had erred in dismissing the entirety of a securities fraud class action lawsuit against Genius Brands International Inc. and two executives.
In the ruling, the appellate panel said the shareholder plaintiffs did enough to "adequately plead" the core of their complaint, as well as several of their other claims.
The lawsuit centers on stock losses suffered by Genius since 2019 and statements made by the company since then, allegedly overstating its performance and future business success prospects of one of its key properties, "The Rainbow Rangers."
The children's TV show premiered in 2018 on Nickelodeon, following the adventures of seven nine-year-old girls - the Rainbow Rangers - who dwell in the kingdodm of Kaleidoscopia with their unicorn friend, Floof, and are empowered by their leader to travel to Earth to aid wildlife and the Earth's ecosystem, usually when threatened by a caricatured capitalist foe.
The series was successful, and was renewed for two more seasons of 26 episodes each in 2020 and 2021. It now streams on Netflix, as well.
However, according to the lawsuit, during that period, Genius Brands allegedly hired securities promotion company, Pennystocks, to boost Genius through PR-based articles. Genius also issued press releases and other statements, boasting that Rainbow Rangers had been picked up to run 26 times per week.
Those statements boosted Genius' stock price by 25%, according to court documents.
However, in offering stocks, Genius allegedly did not inform investors that it had hired Pennystocks.
And in the months and years that followed, the lawsuit noted that other investors poked holes in Genius' statements, noting that Rainbow Rangers aired fewer than 26 times per week. They also exposed Genius' relationship with Pennystocks.
Even as Genius' stock value fell, Genius further allegedly misled investors by claiming that actor and former California governor Arnold Schwarzenegger would invest in the company, and then did not dispute a report that Disney or Netflix would acquire Genius.
However, Genius instead announced a partnership with a company affiliated with Marvel Comics luminary Stan Lee - a deal that then fell through. According to court documents, Genius did not disclose the demise of that arrangement.
Ultimately, Genius' stock price fell below $1 a share, according to court documents, prompting investors to file suit for fraud.
A L.A. federal district court judge dismissed the lawsuit, finding the investors' claims failed because the judge did not believe they had shown Genius actually made false statements about their business dealings.
On appeal, however, the Ninth Circuit judges said the investors had done enough to demonstrate Genius' statements about Pennystocks, in particular.
"When Genius stated that it 'ha[d] not . . . paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company,' it had employed PennyStocks to write and disseminate favorable articles about Genius," the judges wrote.
"The question, therefore, is whether writing and disseminating favorable articles amounts to 'solicitation' ... We conclude that it does."
And the judges further agreed with investors that Genius' statements regarding the frequency with which "Rainbow Rangers" aired led to inflation of stock prices, and that the information was not readily apparent, until it was revealed by a blog.
The judges further said they agreed shareholders could have a beef over Genius' retweet of an article that asserted the company could be acquired by Disney or Netflix within days, only to then stumble in the Stan Lee partnership venture.
"Standing alone, the Stan Lee announcement was, of course, good news. But the shareholders plausibly allege that the market understood the announcement as bad news because Genius’s failure to mention the Disney or Netflix buyout signaled that no such buyout would take place," the judges wrote.
The judges said the shareholders can proceed on their claims against Genius on all counts, except those related to the Schwarzenegger claim.
The opinion was authored by Ninth Circuit Judge Salvador Mendoza Jr.; Circuit Judge William A. Fletcher and U.S. District Judge Karen E. Schreier concurred in the decision. Schreier, of the U.S. District Court for the District of South Dakota, sat on the panel by designation.
The investors have been represented by attorneys Raymond D. Sulentic, Ex Kano S. Sams II and Robert V. Prongay, of the firm of Glancy Prongay & Murray LLP, of Los Angeles.
Genius has been represented by attorneys Michael L. Charlson, Elizabeth A. Matthews and Marisa Antonelli, of Vinson & Elkins LLP, of San Francisco and New York.