While a potential class complaint filed against Mattel and its auditor PwC by a group of Mattel investors currently sits in the U.S. District Court for the Central District of California, a separate lawsuit against directors of the global toy giant’s board and PwC was filed on May 21 in Delaware Chancery Court by a shareholder who claims the company’s management and the audit firm covered up a tax error that understated by $109 million Mattel’s late-2017 income and loss, which resulted in a nearly 16% stock fall.
Law360 reported on May 24:
The five-count, proposed class complaint filed late Friday by lead stockholder Robert Colton Andersen, names 13 current or former officers and directors of the business along with PricewaterhouseCoopers LLP, Mattel’s longtime independent auditor. All counts claim breaches of fiduciary duty or aiding and abetting breaches.
According to the suit, Mattel — already the target of a direct class complaint in the U.S. District Court for the Central District of California — overstated an allowance for offsets to deferred tax assets that resulted in a $109 million understatement of its tax liabilities and an understatement of its net loss for the third quarter of 2017. Instead of immediately correcting, those involved were accused of lining up an overstatement of the company’s loss to cover up the initial error.
The alleged scheme came to light only in August 2017, when an anonymous whistleblower complaint detailed the company’s actions and PwC’s lack of independence in conduct as auditor in connection with the alleged cover-up.
Both the California lawsuit and this new shareholder lawsuit mention that after Mattel disclosed on Aug. 8, 2019 that it had received an anonymous whistleblower letter and then canceled a $250 million debt offering that had been scheduled to close that day, stock prices plummeted about 15.8% in one day from $13.43 a share to $11.31.
The different legal actions taken against Mattel and PwC stem from the duo allegedly burying accounting issues related to the value of the Thomas & Friends show for kids.
Here’s how the Wall Street Journal explained it in November 2019:
The accounting error had to do with Mattel’s ownership of “Thomas & Friends,” an animated children’s show. The error was tied to a $562 million valuation allowance that Mattel created against its deferred tax assets in September 2017. Ultimately, the allowance was reduced by $109 million, which came from deferred tax liabilities related to Mattel’s acquisition of HIT Entertainment in 2011. Reducing this allowance lowered Mattel’s loss during the quarter.
The finance team, according to the Journal, had discussed fixing the error and then restating its earnings, but Mattel would need to admit that there were shortcomings in its accounting and reporting procedures.
Brett Whitaker, who was Mattel’s director of tax reporting at that time, told the Journal that the finance execs and PwC decided to change the accounting treatment of the Thomas asset and not tell Mattel’s then-chief executive or its board.
According to Law360, separate counts in the Andersen lawsuit name former Mattel CFO Joseph H. Euteneuer and former CEO Margaret H. Georgiadis individually for breaches of duty. Three board members who served on the company’s audit committee also were accused in a separate count, and other directors were named as well.
P. Dubs is accused of aiding and abetting the director and officers’ failures based on allegations that it “knowingly assisted the individual defendants’ breaches of fiduciary duty in connection with the cover-up of the valuation allowance error in third quarter 2017 by retroactively reclassifying the Thomas asset,” Law360 reported.