robbins geller rudman & dowd llp spencer a....

Case 2

:14-cv-06053-SJO-E Document 42 Filed 11/25/14 of 42 Page ID #:407

ROBBINS GELLER RUDMAN & DOWD LLP

SPENCER A. BURKHOLZ (147029) DANIELLE S. MYERS (259916) 650 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) [email protected] [email protected]

Lead Counsel for Plaintiffs

[Additional counsel appear on signature page.]

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION

ROOFERS LOCAL NO. 149 PENSION ) Lead Case No. 2:14-cv-06053-SJO(Ex)

FUND, Individually and on Behalf of ) All Others Similarly Situated, ) CLASS ACTION

) Plaintiff, ) CORRECTED CONSOLIDATED

vs.

DREAMWORKS ANIMATION SKG, INC., JEFFREY KATZENBERG, and LEWIS W. COLEMAN,

COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

Defendants. DEMAND FOR JURY TRIAL

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TABLE OF CONTENTS

Page

INTRODUCTION..................................................................................................... 1

JURISDICTIONAND VENUE ................................................................................ 5

PARTIES................................................................................................................... 6

RELEVANT ACCOUNTING STANDARDS ......................................................... 8

Primary Accounting Standard for Films ......................................................... 8

Film Costs Capitalization and Amortization...................................................9

Ultimate Revenue Estimates ........................................................................... 9

Valuation and Related Impairment Assessment of Film Costs .................... 10

I BACKGROUND TO THE CLASS PERIOD ......................................................... 11

DEFENDANTS’ FALSE AND MISLEADING CLASS PERIOD STATEMENTS.............................................................................................14

2Q13 Earnings Release and Conference Call ............................................... 14

3Q13 Earnings Release, Conference Call and Form 10-Q ........................... 17

INVESTORS BEGIN TO LEARN THE TRUTH .................................................. 23

DreamWorks’ CAO Resigns ......................................................................... 24

DreamWorks Reveals SEC Investigation into Write-Down of Turbo and that Turbo Will Not Generate a Material Amount of Gross Profit in the Future .............................................................................. 25

LOSSCAUSATION ............................................................................................... 26

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE........................................................................30

CLASS ACTION ALLEGATIONS........................................................................31

PRAYER FOR RELIEF .......................................................................................... 37

JURYDEMAND ..................................................................................................... 37

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Lead Plaintiff Roofers Local No. 149 Pension Fund alleges the following based

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upon personal knowledge as to itself and its own acts, and upon an investigation

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conducted by and through its attorneys, which included, among other things, a review

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of Securities and Exchange Commission (“SEC”) filings by DreamWorks Animation

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SKG, Inc. (“DreamWorks” or the “Company”), Company releases, conference calls,

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public statements issued by defendants, media reports, analyst reports, and

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consultation with persons familiar with DreamWorks’ business and industry. Lead

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Plaintiff believes that substantial additional evidentiary support will likely exist for the

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allegations set forth herein after a reasonable opportunity for discovery.

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INTRODUCTION

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1. This is a securities fraud class action on behalf of all purchasers of

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DreamWorks common stock between July 31, 2013 and July 29, 2014, inclusive (the

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“Class Period”) against DreamWorks, its Chief Executive Officer (“CEO”), and its

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former Chief Financial Officer (“CFO”) for making materially false and misleading

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statements in violation of §10(b) and §20(a) of the Securities Exchange Act of 1934

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(the “1934 Act”) and SEC Rule 10b-5 promulgated thereunder.

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2. DreamWorks creates and exploits branded family entertainment,

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including computer-generated animated feature films, television specials and series,

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live entertainment properties and related consumer products. The Company has

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theatrically released about 30 animated feature films including Shrek , Madagascar,

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Kung Fu Panda and How to Train Your Dragon .

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3. DreamWorks released only two feature films during 2013: The Croods

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and Turbo . The next film after Turbo , Mr. Peabody & Sherman , was not slated for

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release until March 2014, increasing the pressure on Turbo to generate sufficient

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revenue to meet the Company’s operating needs over the next eight months until its

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next feature film release. This was particularly important as DreamWorks’ selling,

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general and administrative expenses (“SG&A”) during fiscal 2013 were already

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I trending 30% higher than the fiscal 2012 quarterly average, at approximately $42.8

I million per quarter.

4. Despite DreamWorks’ efforts to boost Turbo ’s chances at the box office,

the film misfired when it was released on July 17, 2013. Heading into the 2Q13

earnings conference call on July 31, 2013, analysts were bracing for an indication that

“a substantial write-down on the film” would be taken during 3Q13, Turbo ’s quarter

of release, based on domestic opening weekend box office gross and the fact that

DreamWorks had recorded a substantial impairment charge on Rise of the Guardians

which had a better opening weekend than Turbo , yet was written down five weeks

after release in its quarter of release. 1

5. Thus, the market was surprised when defendant Jeffrey Katzenberg,

I DreamWorks’ CEO, informed investors on July 31, 2013 that “based on the data that

we have to date, we do believe that Turbo will be a profitable film.” After receiving

I this news, analysts were “encouraged” that there would be “ no Turbo write-down .”

6. In light of defendants’ unexpectedly positive statements during the July

31, 2013 conference call, it was curious that DreamWorks’ Chief Marketing Officer,

Anne Globe, resigned mere weeks after Turbo ’s domestic release. It was also

perplexing that DreamWorks announced a $300 million offering of 6.875% senior

notes due 2020 on August 5, 2013, the net proceeds of which would be used to repay

the $200 million outstanding on the Company’s $400 million revolving credit facility

which had a far lower 2.7% interest rate.

7. Notwithstanding defendants’ positive statements during the 2Q13

I conference call, Turbo ’ s sluggish box office never gained momentum. Based on box

I office results for July through October, analysts warned heading into the

I announcement of 3Q13 results – the quarter of Turbo ’s release – that the film had

1 DreamWorks’ quarterly financial periods end on March 31, June 30, September 30 and December 31. The abbreviated periods used throughout signify the quarter and year. For example, the second fiscal quarter of 2013 is represented as 2Q13.

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I “[s]talled [o]ut” and investors should again “brace for a potential impairment on

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I Turbo .”

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8. Analysts’ concerns were not unwarranted. For companies like

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DreamWorks, accounting rules require that if a film’s estimated ultimate revenues are

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insufficient to recover the unamortized film costs, the unamortized film costs must be

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written down to fair value and an impairment charge must be recorded. DreamWorks

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regularly monitored, reviewed and revised a film’s ultimate revenues on a monthly

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basis. And, DreamWorks had previously taken an impairment charge on one of the

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Company’s 2012 films, Rise of the Guardians, in the same quarter of its theatrical

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release (4Q12). In fact, Rise of the Guardians had only been in theaters about five

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weeks when the impairment charge was recorded.

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9. The market was again surprised on October 29, 2013 when defendant

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Katzenberg told investors that “[b]ased on the information we have today, we believe

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that Turbo is a profitable movie,” thus giving the investing public no inkling there

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would be a write-down. As with the July 2013 statement, an analyst noted that “ the

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lack of an impairment on Turbo was the major surprise .”

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10. As investors would learn just a few short months later, however,

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defendants’ unqualified statements that “ Turbo is a profitable movie” were materially

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false and misleading because defendants knew or recklessly disregarded that Turbo ’s

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unamortized costs exceeded its ultimate revenues and required a significant

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impairment charge in 3Q13, the quarter of release.

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11. Indeed, investors were stunned on February 25, 2014 when DreamWorks

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announced “an impairment charge of $13.5 million, or a loss of approximately $0.12

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cents of earnings per share on a fully diluted basis, related to the Turbo feature film.”

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Notably, the Turbo impairment, $0.12, was the same amount by which DreamWorks

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had beat analysts’ estimates in 3Q13 when they failed to record a write-down.

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12. Thereafter, analysts commented that the Turbo impairment “came as a

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I surprise given that Turbo was deemed to be profitable last quarter .” Equally as

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troubling, Turbo was not written down in 3Q13, the quarter of release, as it should

have been under pertinent accounting rules and SEC regulations. 2 In response to this

news, DreamWorks’ stock price declined over 12% on heavy volume, damaging

investors as the artificial inflation caused by defendants’ materially false and

misleading statements began to leak out of the stock price.

13. The other shoe dropped on July 29, 2014, when DreamWorks informed

investors that the SEC’s Division of Enforcement began conducting an investigation

into the write-down of film inventory relating to Turbo and related matters two

months before in May 2014, and that DreamWorks did not expect to generate a

material amount of gross profit from Turbo in the future. The puzzling May 2014

resignation of the Company’s Chief Accounting Officer (“CAO”), Heather O’Connor,

now made sense. In response to this news, DreamWorks’ stock price once again

declined nearly 12% on extremely heavy volume.

14. The July news further revealed the missing pieces of information about

Turbo ’s 4Q13 impairment charge: the write-off was not taken in 3Q13, the quarter of

release, when defendants knew or recklessly disregarded that the film’s ultimate

revenues were not sufficient to recover its unamortized costs and DreamWorks was

required to record an impairment charge for Turbo pursuant to the applicable

accounting rules. In addition, defendants revealed that, contrary to their prior

statements, Turbo would not contribute material gross profit going forward.

15. The February and July 2014 disclosures inflicted substantial damage on

I DreamWorks investors as the artificial inflation caused by defendants’ materially false

and misleading statements came out of the stock:

2 DreamWorks’ two other unsuccessful films, Rise of the Guardians and Mr. Peabody & Sherman , were both written down in the quarter of release, five and three weeks after their theatrical release, respectively.

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01/14(2014

07/30/2014 10/0712013

04/23/2014

JURISDICTION AND VENUE

16. This Court has jurisdiction over the subject matter of this action pursuant

to 28 U.S.C. §1331 and §27 of the 1934 Act (15 U.S.C. §78aa) as the claims asserted

herein arise under and pursuant to §10(b) and §20(a) of the 1934 Act (15 U.S.C.

§78j(b) and §78t(a)) and SEC Rule 10b-5 promulgated thereunder (17 C.F.R.

§240.10b-5).

17. Venue is proper in this District pursuant to 28 U.S.C. §1391(b) and §27

of the 1934 Act because DreamWorks’ headquarters are located at 1000 Flower

Street, Glendale, California 91201, certain of the defendants reside in this District and

defendants’ wrongful acts occurred in this District. Most of the evidence exists in this

District and the harm caused by defendants emanated from and had effects in this

District.

18. In connection with the acts and conduct alleged in this Complaint,

defendants, directly or indirectly, used the means and instrumentalities of interstate

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a) $28

0

$26 Cl)

$24

$22

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$18 07/0112013

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commerce, including, but not limited to, the United States mails, interstate telephone

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I communications, and the facilities of the national securities exchanges and markets.

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PARTIES

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19. Lead Plaintiff Roofers Local No. 149 Pension Fund purchased

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I DreamWorks common stock at artificially inflated prices during the Class Period and

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I suffered damage as a result of defendants’ alleged misconduct as described in the

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I Certification previously filed (Dkt. No. 24-2) and incorporated herein.

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20. Defendant DreamWorks’ common stock is listed and widely traded on

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I NASDAQ, an efficient market, under the ticker DWA. As of August 1, 2013, there

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I were 75.8 million shares of Class A common stock and 7.8 million shares of Class B

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common stock outstanding.

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21. Defendant Jeffrey Katzenberg is DreamWorks’ co-Founder and served as

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its CEO and member of its Board of Directors during the Class Period. As CEO,

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defendant Katzenberg spoke on DreamWorks’ behalf in releases, conference calls and

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SEC filings. Pursuant to §906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1350,

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defendant Katzenberg certified the Company’s Forms 10-Q filed with the SEC on

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August 1, 2013, October 30, 2013 and July 30, 2014, and the Form 10-K filed with the

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SEC on February 26, 2014. Defendant Katzenberg and entities controlled by him own

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100% of DreamWorks’ Class B common stock, constituting 60% of the voting power

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of the outstanding shares of stock. DreamWorks’ 2012 Form 10-K acknowledged that

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“[s]o long as Jeffrey Katzenberg or entities controlled by him continue to collectively

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own shares of our Class B common stock with significant voting power, Jeffrey

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Katzenberg or entities controlled by him, will continue collectively to be able to

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strongly influence or effectively control our decisions.”

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22. Defendant Lewis W. Coleman was, throughout the Class Period,

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I DreamWorks’ President, CFO and a member of its Board of Directors, and also

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I became its acting CAO in June 2014. Effective August 1, 2014, Coleman was named

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I Vice-Chairman of the Board and no longer served as President. Effective August 18,

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2014, Coleman no longer served as CFO. As CFO during the Class Period, defendant

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Coleman spoke on DreamWorks’ behalf in releases, conference calls and SEC filings.

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Pursuant to §906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1350, defendant

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Coleman certified the Company’s Forms 10-Q filed with the SEC on August 1, 2013,

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October 30, 2013 and July 30, 2014, and the Form 10-K filed with the SEC on

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February 26, 2014.

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23. Defendants Katzenberg and Coleman are sometimes referred to herein as

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I the “Individual Defendants.” The Individual Defendants and DreamWorks are

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collectively referred to herein as “defendants.”

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24. During the Class Period, the Individual Defendants, as senior executive

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officers and/or directors of DreamWorks, were in possession of confidential and

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proprietary information concerning the Company, its operations, business prospects,

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and overall financial condition. By reason of their positions within the Company, the

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Individual Defendants obtained, had access to and/or were in possession of material,

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adverse nonpublic information concerning DreamWorks via internal corporate

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documents and communications with other corporate officers and employees,

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attendance at management and/or Board of Directors meetings (and committees

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thereof), and via the reports, presentations and other information provided to them in

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connection therewith. Because of their possession of such information, the Individual

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Defendants knew or recklessly disregarded that the adverse facts specified herein had

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not been disclosed to, and were being concealed from, the investing public.

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25. As senior executive officers and controlling persons of a publicly traded

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company whose common stock was and is registered with the SEC pursuant to the

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1934 Act, and was and is traded on NASDAQ and governed by the federal securities

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laws, the Individual Defendants had a duty to promptly disseminate accurate and

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truthful information regarding DreamWorks’ operations, business, financial

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statements, and financial metrics such as revenues and net profits, and to correct any

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previously issued statements that had become materially misleading or untrue, so that

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6053-SJO-E Document 42 Filed 11/25/14 of 42 Page ID #:416

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the market price of DreamWorks common stock would be based upon truthful and

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accurate information. Defendants’ materially false statements and omissions during

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the Class Period violated these requirements and obligations.

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RELEVANT ACCOUNTING STANDARDS

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26. During the Class Period, DreamWorks purported to prepare its financial

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statements in accordance with U.S. generally accepted accounting principles

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(“GAAP”), principles recognized by the accounting profession as the conventions,

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rules and procedures necessary to define accepted accounting practices at a particular

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time. Pursuant to SEC Regulation S-X, “[f]inancial statements filed with the [SEC]

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which are not prepared in accordance with [GAAP] will be presumed to be

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misleading or inaccurate , despite footnote or other disclosures.” 17 C.F.R. §210.4-

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01(a)(1). Regulation S-X also requires that interim financial statements must also

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comply with GAAP, with the exception that interim financial statements need not

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include disclosures that would be duplicative of disclosures accompanying annual

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disclosures. See 17 C.F.R. §210.10-01(a).

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27. On June 30, 2009, the Financial Accounting Standards Board (“FASB”)

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issued SFAS No. 168, The FASB Accounting Standards Codification and the

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Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB

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Statement No. 162 (“ASC”). FASB ASC became the source of authoritative U.S.

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accounting and reporting standards for non-governmental entities, in addition to

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guidance issued by the SEC, effective for financial statements issued for reporting

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periods that ended after September 15, 2009. The ASC did not change existing U.S.

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GAAP. This Complaint uses the ASC references because the Class Period begins

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after September 15, 2009.

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Primary Accounting Standard for Films

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28. In June 2000, the American Institute of CPAs issued Statement of

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Position 00-2: Accounting by Producers or Distributors of Films (“SOP 00-2”), which

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provided accounting guidance to “all producers or distributors that own or hold rights

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to distribute or exploit films.” SOP 00-2 at 4. This accounting guidance from SOP

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00-2 was codified in the FASB ASC under Topic 926, Entertainment – Films .

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DreamWorks was obligated to comply with ASC 926 as it provided the relevant

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GAAP during the Class Period.

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Film Costs Capitalization and Amortization

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29. Under ASC 926, a company is allowed to capitalize costs that are

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incurred in bringing a film to the market as a separate asset on its balance sheet.

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Typical costs that are capitalized by a company when producing a movie include

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compensation of the employees and departments involved in production of the film,

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equipment and other direct operating costs relating to the production and interest

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expense to the extent amounts can be properly capitalized. DreamWorks reported

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$127 million in capitalized production costs in 2Q13 for films completed but not

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released, which “consist[ed] primarily of the Company’s feature film Turbo ,” and

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reported it as an asset on its balance sheet under the heading Film and Other Inventory

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Costs.

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30. ASC 926 mandates that a company should amortize film costs using the

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individual-film-forecast computation method, which amortizes such costs in the

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proportion that a title’s current revenue (numerator) bears to its ultimate revenue

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(denominator). Therefore, the amount of capitalized production costs that is

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amortized each period will depend on the ratio of current revenue to ultimate revenue.

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A company should begin amortization of capitalized film costs when a film is released

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and it begins to recognize revenue from that film. ASC 926-20-35-1.

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Ultimate Revenue Estimates

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31. DreamWorks’ ultimate revenue estimates typically included “estimates of

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revenue that will be earned over a period not to exceed 10 years from the date of

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initial release.” At DreamWorks, ultimate revenue typically included theatrical, post-

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theatrical, licensing and merchandising.

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32. ASC 926 establishes limitations on how companies can estimate their

ultimate revenues for a film. ASC 926-20-35-5 a-g. For example, ultimate revenue

estimates should not estimate any revenues that would exceed ten years from the date

of the film’s initial release. Also, ultimate revenue estimates should only include

revenues for which persuasive evidence exists that such revenue will occur, or if a

company can demonstrate a history of earning such revenues based on past

experience. ASC 926-20-35-5 a-d.

Valuation and Related Impairment Assessment of Film Costs

33. On a quarterly basis, ASC 926-20-35-12 requires a company to test

unamortized capitalized film costs for impairment whenever events or changes in

circumstances indicate the possibility that the fair value of a film may be less than its

current unamortized capitalized film costs ( i.e. , carrying value). One example of an

event or change in circumstance that requires a company to test for impairment is

whether a film’s actual performance subsequent to release fails to meet that which had

been expected prior to release. ASC 926-20-35-12 f.

34. If an event or change in circumstance indicates that a company should

assess whether or not a film is impaired, the company should determine the fair value

of the film typically by using a discounted cash flow model and estimating the

remaining future cash flows expected to be generated for the film. If the fair value

estimated from the discounted cash flow model is less than the film’s unamortized

capitalized costs, the difference should be written off to the income statement as an

impairment charge. ASC 926-20-35-13.

35. In estimating the remaining future cash flows expected to be generated

from a film, a company should consider the following factors pursuant to ASC-926-

20-35-15: (a) if previously released, the film’s performance in prior markets; (b) the

public perception of the film’s story, cast, director or producer; (c) historical results of

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similar films; (d) historical results of the cast, director or producer on prior films; and

(e) running time of the film.

36. Also, in determining a film’s fair value, it is necessary to consider the

cash outflows necessary to generate the film’s cash inflows. For example, any future

exploitation and participation costs such as marketing, advertising, publicity,

promotion and other distribution expenses must be incorporated into estimating a

film’s fair value. ASC 926-20-20; ASC 926-20-35-15. Additionally, the relevant

future cash inflows and outflows should represent the Company’s estimate of the

“most likely” cash flows it expects from the film. ASC 926-20-35-16.

BACKGROUND TO THE CLASS PERIOD

37. DreamWorks derives revenue from its distributors’ worldwide

exploitation of feature films in theaters and in post-theatrical markets such as home

entertainment, digital, pay and free broadcast television, as well as other ancillary

markets like consumer products. Beginning with the theatrical release of The Croods

in March 2013, DreamWorks began deriving revenue from Twentieth Century Fox

Film Corporation’s (“Fox”) worldwide exploitation of its films in the theatrical and

various post-theatrical markets. 3 Pursuant to the distribution agreement with Fox,

before reporting any revenue for one of DreamWorks’ feature films to the Company,

Fox is entitled to: (i) retain a fee of 8% of all gross receipts and home video gross

receipts, except in connection with certain pay television and video-on-demand rights

and other digital distribution rights, for which the fee will be 6%; and (ii) recoup all of

its permissible distribution and marketing costs with respect to the exploitation of a

particular DreamWorks film on a film-by-film basis.

38. Under that distributor agreement, each film’s total expenses and fees are

offset against that film’s revenues on a worldwide basis across all markets, and

3 DreamWorks’ films are distributed in China and South Korea by Oriental DreamWorks Holding Limited (“ODW”) and C.J. E&M Corporation (“C.J.”), respectively. The Company holds a 45.45% equity interest in ODW.

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DreamWorks’ distributor reports no revenue to the Company until the first period in

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which an individual film’s cumulative worldwide gross revenues exceed its

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cumulative worldwide gross distribution fee and costs. Additionally, the cumulative

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revenues and cumulative costs for each individual film are commingled between all

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markets and geographical territories and DreamWorks’ distributors only report

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additional revenue to the Company for a film in those reporting periods in which that

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film’s cumulative worldwide gross revenues continue to exceed its cumulative

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worldwide gross costs. DreamWorks’ reported revenues in any period are often a

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result of gross revenues with respect to an individual film generated in one or several

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territories being offset by the gross costs of both related and unrelated territories, as

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well as markets, for such film.

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39. In addition, beginning with The Croods (released on April 19, 2013 in

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China), the Company began deriving revenue from ODW’s exploitation of the

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Company’s feature films in the Chinese theatrical and post-theatrical markets.

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Pursuant to the master distribution agreement entered into with ODW, before

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reporting any revenue for one of the Company’s feature films, ODW is entitled to: (i)

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retain a fee of 8% of all gross receipts; and (ii) recoup all of its permissible

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distribution and marketing costs with respect to the exploitation of a DreamWorks

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film on a film-by-film basis.

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40. Feature films historically comprised a substantial percentage of

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DreamWorks’ revenue (77.3% in fiscal 2012 and 78.1% in fiscal 2011). Unlike most

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other major film studios, DreamWorks releases only two to three animated feature

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films per year. DreamWorks’ limited production obviously increases the pressure on

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executives for any given film to recoup its costs and be profitable for the Company.

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41. DreamWorks’ finance and accounting departments, overseen by the

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Company’s CFO and CAO, are responsible for the ultimate revenue estimates for each

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film released. Once a film is released theatrically, the ultimate revenue estimate is

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revised to reflect opening weekend box office results. Thereafter, a film’s ultimate

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revenue estimate is monitored, reviewed and revised on a monthly basis, typically

within a few days after the month’s end when a film’s results are ascertainable.

Capitalized production costs are also reviewed regularly for impairment each

reporting period on a film-by-film basis. If estimated remaining revenue is

insufficient to recover the unamortized capitalized production costs for a particular

film, the unamortized capitalized production costs will be written down to fair value

as an impairment charge.

42. Every DreamWorks animated film had been profitable for the Company

until the November 2012 release of Rise of the Guardians which resulted in an $87

million impairment charge recorded in the same quarter of release.

43. After the commercially successful release of The Croods in March 2013,

DreamWorks released its only other feature film for 2013, Turbo , a 3D comedy about

a snail who dreams of competing in the Indy 500. Pre-opening expectations were that

Turbo would gross $500 million worldwide, comprised of $170 million domestically

and $330 million internationally. Defendants were looking to Turbo to sustain

DreamWorks’ revenues until its next release, Mr. Peabody & Sherman , which was not

scheduled to occur until eight months later in March 2014.

44. Notwithstanding the substantial fanfare preceding Turbo ’s release, the

film grossed less than $6 million on its opening day in the United States (July 17,

2013).4 The film’s opening weekend fared no better, yielding just $21.3 million in

box office receipts, one of the lowest openings in DreamWorks’ history. Also

alarming was the fact that Turbo ’s domestic opening weekend box office gross was

less than Despicable Me 2 ’s weekend box office gross, which film had been in release

for three weeks already. Just a day after its release, analysts were already bracing for

4 Defendant Katzenberg hosted Turbo ’s world premiere on June 24, 2013 at the CineEurope film distributors’ convention in Barcelona, Spain. Turbo debuted in Macau on July 13, 2013 and was released in China on September 18, 2013.

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“a substantial write-down on the film” which negatively impacted DreamWorks’ stock

2

price heading into the 2Q13 earnings announcement.

3

DEFENDANTS’ FALSE AND MISLEADING CLASS PERIOD STATEMENTS

4 2Q13 Earnings Release and Conference Call

5

6 45. The Class Period begins on July 31, 2013, when defendants announced

7 DreamWorks’ 2Q13 financial results for the quarter ended June 30, 2013 after the

8 market closed. Defendants convened a teleconference with investors and analysts

9 during which defendant Katzenberg said that despite the film’s “soft opening,” “ based

10 on the data that we have to date , we do believe that Turbo will be a profitable film

11 us .” Katzenberg further reassured investors, noting that internationally “ Turbo is

off to an excellent start” and has “been a tremendous success.” 12

13 46. Defendants DreamWorks and Katzenberg’s July 31, 2013 statements

14 were materially false and/or misleading when made. The true facts, which were then

15 known to or recklessly disregarded by defendants DreamWorks and Katzenberg,

were: 16

17 (a) That Turbo’s opening weekend (July 19-21, 2013) domestic box

18 office gross established to defendants that the film’s ultimate revenues could not

19 exceed its production costs and allow the film to be profitable. Simply stated, the

20 domestic opening weekend box office gross figure allowed DreamWorks to estimate

21 with reasonable accuracy the worldwide box office gross and determine the

22 anticipated distributor revenues and fee, thereby allowing the Company to assess

23 shortly after release whether a film could recoup its prints and advertising (“P&A”)

24 and production costs in the near future. And, if a film’s domestic opening weekend

25 box office gross indicated the film could not recoup its costs, the film would not be

26 profitable and DreamWorks would be required to record an impairment charge

27 pursuant to the accounting rules.

28

- 14 - 985050_1


(i) The opening domestic weekend gross for every

DreamWorks film since 2011 represented an amount no less than 22.8% of the total

domestic box office gross for the film as detailed below:

Film Domestic Opening % of Total Weekend Box Office Domestic Gross

Kung Fu Panda 2 $47.6 million 28.8%

Puss in Boots $34 million 22.8%

Madagascar 3 $60.3 million 27.9%

Rise of the Guardians $23.7 million 23%

The Croods $43.6 million 23.3%

Based on Turbo ’s $21.3 million opening weekend box office and the fact that the

smallest ( i.e. , most favorable) portion the domestic opening weekend could represent

of total domestic gross was 22%, defendants had no reasonable basis to expect (and

did not in fact expect) that Turbo could even gross $100 million in the domestic box

office. 5 This figure was key, because defendants were likewise well aware that

DreamWorks had derived around 30% of its worldwide box office receipts from the

domestic box office over the prior two years. Thus, after its opening weekend,

defendants had no reasonable basis to expect and (did not in fact expect) Turbo to

even gross $230 million in the international box office, or $330 million worldwide.

This was substantially below earlier expectations of $500 million worldwide. See ¶43.

(ii) Based on what DreamWorks estimated Turbo could gross

using its opening weekend box office, defendants were also able to ascertain the

distributors’ interest and fee to compare the film’s revenues to its costs. Indeed, the

5 The fact that defendants knew Turbo was opening in an overcrowded market with four other animated films – including sequels Despicable Me 2, Monsters University and Smurfs 2 and original film Epic – instead of the usual two to three films, made it dramatically less likely, and therefore less reasonable to expect, that the film’s opening weekend box office could represent a smaller portion of total domestic box office gross rather than a larger portion. Turbo ’s second domestic weekend box office gross was even more alarming than its first: Turbo grosssed only $13.7 million, nearly 17% lower than Despicable Me 2 , despite Turbo playing on 330+ more screens.

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Case 2:


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Company acknowledged that its distributors’ percentage of box office receipts ranged

2

between 49%-56% domestically and 37%-44% internationally. Thus, defendants

3

were aware that, even under the best-case scenario, the distributor’s portion of Turbo ’s

4

worldwide box office gross would be tens of millions of dollars short of Turbo ’s

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estimated P&A budget and the distributor’s 8% fee, which the distributor was

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permitted to recoup before reporting any revenue to DreamWorks. See ¶37, supra.

7

Unable to even recoup its distribution costs and fees, Turbo was likewise far from

8

being in a position to recoup its production costs ($127 million) and the ancillary

9

revenue streams would not be sufficient to allow the film to be profitable. In short, by

10

opening weekend, defendants had no basis to expect (and did not in fact expect) Turbo

11

to be profitable or generate ultimate revenues sufficient to avoid recording a write-

12

down in 3Q13.

13

(b) That because defendants reviewed Turbo ’s ultimate revenues on a

14

monthly basis, defendants knew or recklessly disregarded that the film would not

15

meaningfully contribute to DreamWorks’ revenues over the next several quarters.

16

This was problematic because the Company’s next film would not be released until

17

eight months later and its cash/cash equivalents had dwindled by more than 60%

18

between 1Q13 ($76.2 million) and 2Q13 ($28.8 million) as DreamWorks’ SG&A

19

expenses were rising:

20

SG&A

21

FY 2012 $32.8 million per quarter average

22

1Q13 $42.79 million

23

2Q13 $49.71 million

24

25 While the Company had another $200 million remaining on its $400 million credit

26 facility pursuant to an agreement dated August 10, 2012 (the “Revolver”) at an

27 interest rate of 2.7%, defendants knew or recklessly disregarded that DreamWorks

28 was in a bind based on its burn rate, Turbo ’s poor performance and the fact that its

- 16 - 985050_1


next film would not be released until March 2014. To avoid exhausting the Revolver,

defendants inexplicably raised $300 million via the sale of debt at almost 7%, or more

than 400 basis points higher than the interest on the Revolver.

47. The Company’s Form 10-Q for the period ended June 30, 2013 was filed

with the SEC on August 1, 2013.

48. After DreamWorks’ 2Q13 results were announced, analysts were

“encouraged” that there would be “no Turbo write-down.”

49. Notwithstanding defendants’ positive statements during the 2Q13

conference call, they were each aware that Turbo ’s sluggish box office continued to

significantly underperform their original expectations and the levels necessary for

Turbo to be a profitable film. A few weeks after the film’s domestic release,

DreamWorks’ Chief Marketing Officer, Anne Globe, curiously resigned effective

immediately. The same day, August 5, 2013, DreamWorks announced the suspicious

$300 million offering of 6.875% senior notes due 2020.

50. Based on box office receipts between July and October, analysts were

concerned heading into the announcement of 3Q13 results – the quarter of Turbo ’s

release – that the film had “[s]talled [o]ut” and investors should “brace for a potential

impairment on Turbo.”

3Q13 Earnings Release, Conference Call and Form 10-Q

51. On October 29, 2013, defendants announced DreamWorks’ 3Q13

financial results for the quarter ended September 30, 2013 after the market closed.

The Company announced four new reporting segments that consisted of feature films,

television series and specials, consumer products and all other. For 3Q13, the

Company reported total film and other inventory costs of $922 million, net income of

$10.1 million, earnings per share (“EPS”) of $0.12 on a fully diluted basis and costs of

revenues for the quarter of $91.7 million. The feature film segment comprised 78% of

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total revenue and contributed gross profit of $55.4 million to the third quarter. The

Company beat analysts’ consensus EPS estimates for the quarter by $0.12.

52. Also on October 29, 2013, defendants convened a teleconference with

investors and analysts led by defendant Katzenberg who emphasized that “ [b]ased on

the information we have today , we believe that Turbo is a profitable movie .”

Defendant Coleman also stated that “ we believe that Turbo was a profitable film on

an ultimate basis .”

53. The Company’s Form 10-Q for the period ended September 30, 2013 was

filed with the SEC on October 30, 2013. The Form 10-Q was signed by defendant

Coleman and included Sarbanes-Oxley certifications signed by defendants Katzenberg

and Coleman. The Form 10-Q repeated the statements made on October 29, 2013 that

DreamWorks reported film and other inventory costs of $922 million, net income of

$10.1 million, costs of revenues for the quarter of $91.7 million and EPS of $0.12 on a

fully diluted basis. The Form 10-Q also stated that:

During the three months ended September 30, 2013, Turbo contributed

$6.4 million, or 4.1%, of revenues, primarily earned in the Chinese and

South Korean theatrical markets, which are distributed outside of our

arrangement with Fox. During the three months ended September 30,

2013, Fox did not report any revenue to us for Turbo as they had not yet

recouped their marketing and distribution costs, largely as a result of

Turbo’s box office performance. We anticipate that Fox will recoup

their marketing and distribution costs from their future on-going

distribution of Turbo in the theatrical and post-theatrical markets

covered by the Fox Distribution Agreement . Our distributors in the

Chinese and South Korean theatrical markets recouped their distribution

and marketing costs during the three months ended September 30, 2013,

as their respective costs relative to Turbo’s theatrical performance in

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28


their specific distribution territories are lower relative to the costs

incurred by Fox in other territories.

54. Defendants DreamWorks, Katzenberg and Coleman’s October 29-30,

2013 statements concerning the Company’s financial statements, Turbo ’s profitability

and that Fox would recoup its costs were materially false and/or misleading when

made. The true facts, which were then known to or recklessly disregarded by

defendants, were:

(a) That since its opening weekend, defendants had known that

Turbo ’s ultimate revenues were not going to exceed its costs (¶46, supra). Indeed,

Turbo ’s domestic box office had been stagnant at 1% growth since its sixth week of

release at the end of August and had only grossed $81.7 million by September 26,

2013 and $82.6 million by the 3Q13 earnings release and conference call. Turbo ’s

international box office gross, while stronger, had similarly fallen short of

expectations, grossing only $163.5 million by the 3Q13 earnings release and

conference call. 6 Importantly, by the end of 3Q13 (September 30, 2013), Turbo had

already opened in 75% of markets worldwide and, by the end of October 2013, Turbo

had opened in 100% of worldwide markets. Turbo ’s actual box office results through

3Q13 were now far worse than its opening weekend box office results, at which time

defendants had lacked a reasonable basis to expect (and did not expect) Turbo to even

gross $330 million worldwide or recoup its distribution and production costs. See

¶46(a). Because Turbo ’s box office results through 3Q13 indicated it would gross

substantially less (about 10%-15% lower) than the opening weekend estimate, the film

was even farther from recouping its P&A and production costs than it was in July

2013. Id. Accordingly, by 3Q13, defendants had no basis to expect (and did not in

6 DreamWorks historically derived about 67% of its worldwide box office receipts from foreign countries. Turbo’s foreign box office was in line with this historical estimate by the 3Q13 conference call, further confirming that defendants lacked a reasonable basis to expect (and did not in fact expect) Turbo ’s trajectory to meaningfully deviate from the previous 15 weeks when they announced DreamWorks’ 3Q13 results and stated “ Turbo is a profitable movie.”

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fact expect) Turbo to generate enough revenues to recoup its unamortized capitalized

costs, i.e. , be profitable, thereby requiring the Company to record a significant

impairment charge in 3Q13.

(b) That the home entertainment, consumer products and television

segments associated with Turbo would not contribute sufficient revenue to

compensate for the film segment’s shortfall to justify not recording a substantial

impairment charge in 3Q13. Indeed, defendants knew or recklessly disregarded that

the domestic box office figures were used to compile the conversion ratios for the

non-theatrical segments and, because Turbo ’s actual domestic box office lagged far

behind all expectations, the non-theatrical segments could not fill the gap left by the

box office gross in the film’s ultimate revenues in an amount sufficient to avoid taking

a write-down in 3Q13. 7 Indeed, Turbo only contributed $3.9 million in consumer

product revenues in 3Q13, far less than necessary to avoid recording an impairment

charge.

(c) That because Turbo ’s revenues were not sufficient to recover its

unamortized production costs, DreamWorks was required to write down the

unamortized costs to fair value and timely record an impairment charge pursuant to

GAAP and SEC regulations. See ¶¶26-36. A proper impairment analysis performed

by DreamWorks would have shown that a significant impairment charge needed to be

recorded for Turbo in 3Q13. DreamWorks violated GAAP by overstating Turbo ’s

ultimate revenues, which in turn, overstated the remaining future cash flows of the

film so that its fair value remained higher than its unamortized production costs,

thereby avoiding an impairment charge.

(i) Specifically, defendants knew or recklessly disregarded,

based on Turbo ’s disappointing worldwide box office results that, similar to Rise of

7 Like its theatrical release, Turbo ’s home entertainment release was similarly crowded, with The Croods , Monsters University and Planes releasing in October and November 2013 as well. Given the increased competition, it would not be reasonable to assume Turbo could exceed historical averages. See ¶¶32, 35-36.

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Case 2:


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the Guardians, Turbo would not recoup its costs in an acceptable time frame to

2

generate enough revenues and be a profitable movie. For example, both Rise of the

3

Guardians and Turbo did not record any revenue from Paramount or Fox in the

4

quarter of the film’s initial release. Yet, unlike Rise of the Guardians , which recorded

5

an $86.9 million impairment charge in its quarter of initial release, defendants delayed

6

the Turbo impairment charge until the quarter after the film’s initial release.

7

(ii) ASC 926-20-35-15 states that two of the factors a company

8

should consider in performing an impairment test are: “if previously released, the

9

film’s performance in prior markets” and “historical results of similar films.” ASC

10

926-20-35-15 a, c. In violation of ASC 926, defendants failed to adequately consider

11

these factors when performing the 3Q13 impairment test and overstated Turbo ’s

12

ultimate revenues for the film to avoid a significant impairment charge. Defendants

13

had the necessary information when performing the 3Q13 impairment test to know

14

that Turbo ’s disappointing box office results, similar to Rise of the Guardians ,

15

demonstrated that the film’s revenues would be insufficient to cover its unamortized

16

costs. See ¶54(a). Defendants ignored the current performance of Turbo , which

17

included a release date that was saturated with other animated films, and improperly

18

overstated the film’s ultimate revenue to show the film would be profitable, thereby

19

avoiding a 3Q13 impairment charge.

20

(d) That because defendants knew Turbo would not be (and was not)

21

profitable or meaningfully contribute to revenues in 3Q13, the Company was forced to

22

raise $300 million in a debt offering to enable DreamWorks to continue funding its

23

operations, which included increasing SG&A expenses of nearly $50 million per

24

quarter. In fact, defendants were so intent on raising the necessary cash, they agreed

25

to pay a rate of interest more than double the rate of its Revolver to ensure adequate

26

funds were available to operate over the eight-month period between Turbo and the

27

Company’s next film, Mr. Peabody & Sherman , which would be released in March

28

2014.

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Case 2


1

(e) That by failing to record a timely impairment charge for Turbo ,

2

defendants caused DreamWorks to falsely report its 3Q13 financial results in violation

3

of GAAP and SEC rules by materially overstating the Company’s assets, net income

4

and EPS and materially understating the Company’s costs of revenues for 3Q13. If

5

DreamWorks had timely recorded the $13.5 million impairment charge in 3Q13, the

6

Company would have reported negative net income and an EPS loss .

7

(f) That DreamWorks failed to timely record an impairment charge for

8

Turbo when it had previously timely recorded an $87 million impairment charge on

9

Rise of the Guardians, representing 60% of its estimated production cost ($145

10

million), just five weeks post-release after earning only $6.1 million in revenue during

11

the quarter of release (4Q12). 8 Rise of the Guardians performed better than Turbo

12

worldwide:

13

Rise of the Guardians Turbo

14

Opening Weekend $23,773,465 $21,312,625

15

Opening % of Total 23% 25.7%

16

Domestic Gross $103,412,758 $83,028,128

17

Foreign Gross $203,528,912 $199,542,554

18

Worldwide Gross $306,941,670 $282,570,682

19 Foreign % of Worldwide 66.3% 70.6%

20 Domestic % of Worldwide 33.7% 29.4%

21

22 (g) The short, two-month window between defendants’ October 29-30,

23 2013 statements and the end of 4Q13 (December 31, 2013) when DreamWorks’

24 impairment of Turbo was recorded further demonstrates that defendants were aware

25 that their October statements were false when made. This is particularly so

26 considering that Turbo had opened in 75% of markets worldwide by the end of 3Q13

27

28 8 Turbo likewise earned $6.4 million in its quarter of release.

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Case 2:


1

(September 30, 2013) and 100% of worldwide markets by the end of October 2013

2

when the 3Q13 results were announced.

3

55. After the conference call, analysts noted that “[m]anagement continues to

4

expect Turbo to be profitable” and commented that “the lack of an impairment on

5

Turbo was the major surprise.” Similarly, another analyst raised its rating on

6

DreamWorks to “buy,” noting the Company was “[w]ithout the overhang of a

7

potential Turbo write-down.”

8

INVESTORS BEGIN TO LEARN THE TRUTH

9

56. After the market closed on February 25, 2014, the Company announced

10

its 4Q13 and fiscal year 2013 financial results, revealing that the “Company’s fourth

11

quarter 2013 results included an impairment charge of $13.5 million, or a loss of

12

approximately $0.12 cents of earnings per share on a fully diluted basis, related to the

13

Turbo feature film, as a result of its performance during the last two months of the

14

quarter.” The impairment charge had a material adverse impact on DreamWorks’

15

4Q13 net income, reducing earnings by more than 40%.

16

57. During a conference call with investors later that evening, defendant

17

Coleman stated in pertinent part that:

18

As Jeffrey mentioned, at the end of the fourth quarter we revised

19

our estimates of Turbo’s ultimate revenues and future net cash flows and

20

recorded a film-related impairment charge of approximately $14 million,

21

or $0.12 of earnings per share on a fully diluted basis. Our revised

22

ultimate took into account lower than previously expected performance

23

in international theatrical markets and worldwide home entertainment

24

markets. In addition to the impairment, we recorded approximately $4

25

million of amortization expense in the quarter related to Turbo.

26

58. On February 26, 2014, the Company filed its annual financial report on

27

Form 10-K with the SEC for the period ended December 31, 2013 and was signed by

28 11 defendants Katzenberg and Coleman. The Form 10-K confirmed defendants’

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Case 2:


1

February 25, 2014 statements that “[d]ue to Turbo’s performance in the international

2

theatrical market during the last two months of the quarter ended December 31, 2013,

3

we recorded an impairment charge totaling $13.5 million (of which $11.9 million and

4

$1.6 million was allocated to the Feature Film and Consumer Products segments,

5

respectively).” Defendants also represented that the Turbo impairment charge could

6

increase by $5-$10 million if certain “components of [its] future revenues (e.g., those

7

related to international home entertainment sales and some consumer products

8

licensing activity) [did] not materialize as [then] currently expected.”

9

59. DreamWorks missed analyst consensus EPS estimates in 4Q13 by $0.12.

10

Notably, in 3Q13 when Turbo was released and no impairment charge was recorded,

11

DreamWorks beat analyst consensus EPS estimates by $0.12.

12

60. This news “came as a surprise” to analysts “given that Turbo was deemed

13

to be profitable last quarter.” The announcement was also unexpected because the

14

write-down was revealed seven months after Turbo ’s theatrical release; by contrast,

15

Rise of the Guardians was written down five weeks after its release in the same

16

quarter of release.

17

61. When the market opened on February 26, 2014, DreamWorks’ stock

18

price declined more than $4 per share, dipping to an intra-day low of $30.02 per share,

19

ultimately closing at $30.91 per share on extremely high trading volume of almost

20

seven million shares traded, a 12% decline from the prior day’s close.

21

DreamWorks’ CAO Resigns

22

62. On May 22, 2014, DreamWorks announced that Heather O’Connor, the

23

Company’s CAO since February 2010, had tendered her resignation on May 19, 2014,

24

effective as of June 13, 2014. Thereafter, defendant Coleman assumed the title of

25

acting CAO.

26

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Case 2


DreamWorks Reveals SEC Investigation into Write-Down of Turbo and that Turbo Will Not Generate a Material Amount of Gross Profit in the Future

63. After the market closed on July 29, 2014, DreamWorks announced its

2Q14 financial results and hosted a conference call with investors during which

Richard E. Sullivan, the Company’s Deputy CFO, disclosed that “the amortization

rate for Turbo is significantly higher than a typical DreamWorks original film;

therefore, depending on its future performance, including in consumer products and

licensing, we do not expect to generate a material amount of gross profit in the

future.” Sullivan also announced that “[d]uring the second quarter, the Company

learned that the US Securities and Exchange Commission is conducting an

investigation related to the write-down of film inventory on Turbo. The Company is

cooperating with the SEC in this matter.”

64. The next day, July 30, 2014, DreamWorks filed a Form 10-Q with the

SEC for the second quarter ended June 30, 2014, revealing that Turbo had “a higher

rate of amortization due to its lower projected Ultimate Revenues.” The Form 10-Q

also disclosed that “[i]n May 2014,” – the same month the Company’s CAO resigned

without explanation – “the Company learned that the Division of Enforcement of the

U.S. Securities and Exchange Commission (‘SEC’) is conducting an investigation into

the writedown of film inventory relating to Turbo and related matters.” 9

65. On this news, the price of DreamWorks’ stock price again declined

almost 12%, or $2.68 per share, on July 30, 2014, on extremely high trading volume

of approximately 9.5 million shares traded, almost 10 times the average daily trading

volume over the preceding 10 trading days.

9 Counsel for Lead Plaintiff has confirmed that the SEC’s investigation of DreamWorks was ongoing as of November 12, 2014. Given the continuing nature of the investigation, the SEC is withholding records related to its investigation into the write-down of Turbo and related matters.

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1 66. Reports following the revelation of the SEC’s investigation focused on

the fact that Turbo ’s write-down did not occur in 3Q13, the quarter of release:

. “‘Turbo’ may have been about the world’s fastest snail, but the studio

behind it couldn’t have been slower about taking a writedown on the

animated feature. The delay now has the studio, DreamWorks

Animation SKG, in the crosshairs of the [SEC] . . . . Investors,

meanwhile, have already been punished twice. On Feb. 25, when

DreamWorks finally announced a $13.5 million writedown on a film

released seven months earlier, the market reacted by sending its stock

down 12 percent. And on July 29, when the studio disclosed the same

writedown had prompted an SEC investigation, the market shaved its

shares another 12 percent.” Richard Morgan, SEC probes DreamWorks

‘Turbo’ writedown , N.Y. Post, Aug. 8, 2014. 10

67. After the Class Period, DreamWorks recorded another $2.1 million

impairment charge on Turbo in 3Q14. As with the earlier write-down, this charge had

a similarly material adverse impact on DreamWorks’ 3Q14 net income, reducing

earnings by 15%.

LOSS CAUSATION

68. During the Class Period, as detailed herein, defendants engaged in a

scheme and wrongful course of business that was designed to and did artificially

inflate DreamWorks’ stock price, which misconduct operated as a fraud and deceit on

Class Period purchasers of the Company’s common stock. Defendants did this by

issuing materially false and misleading statements regarding Turbo ’s profitability and

DreamWorks’ financial statements which were impacted by the Company’s failure to

10 The article also noted that “DreamWorks’ most recent box-office bomb, ‘Mr. Peabody and Sherman,’ opened in March and received a $57 million write-down in April. ‘Rise of the Guardians,’ which opened in November 2012, absorbed an $87 million write-off in February 2013. The elapsed time before these two charges – one month in one case, three in the other – was swift compared to ‘Turbo’s’ seven months.”

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Case 2


1

record a timely impairment charge on Turbo . When the falsity of defendants’

2

statements was revealed, DreamWorks’ stock price fell on February 26, 2014 and on

3

July 30, 2014, as detailed in ¶¶61 and 65, as the artificial inflation dissipated. As a

4

result of their purchases of artificially inflated DreamWorks common stock during the

5

Class Period, Lead Plaintiff and other Class members suffered significant damages as

6

a result thereof.

7

69. The market for DreamWorks common stock was open, well-developed

8

and efficient at all relevant times, with average daily trading volume of almost one

9

million shares during the Class Period. As a result of the materially misleading

10

statements and failures to disclose the true state of the Company’s business

11

performance and financial circumstances, DreamWorks stock traded at artificially

12

inflated prices. Lead Plaintiff and other Class members purchased DreamWorks

13

common stock relying upon the integrity of the market relating to DreamWorks

14

common stock and suffered economic loss as a result thereof.

15

70. Defendants’ false or misleading statements had the intended effect and

16

caused DreamWorks stock to trade at artificially inflated levels.

17

71. On February 25, 2014, news of DreamWorks write-down of Turbo was

18

disclosed to the market, partially revealing the Company’s materially false and

19

misleading statements concerning the profitability of the film and the state of the

20

Company’s financial statements. On that news, DreamWorks stock dipped to an intra-

21

day low of $30.02 per share on February 26, 2014, ultimately closing at $30.91 per

22

share, down 12% from the prior day’s close. This was a significant decline that

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cannot properly be attributed to any market or industry event or force, but rather was

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caused by the disclosure:

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Case 2


1 Compare: IErT 1i1E. I I Edd II Dow Jones kJ Nasdaq FOXA DIS I?: VIAB II [CF nli:ire

Zrn: td 5d Lm 3m Gm YTD Iv 5y low All

Feb 242OL4- Feb 26,2014

•LGF-I.s1% VIAB-D.23% FOXA-I.33% LflS-ci cI% 0 Dow Jones

-4c

2L

Mr Feb 24

Tu Feb

Wed

2':' L 3

20L4

RI

72. The final disclosure concerning the nature and timing of DreamWorks’

impairment of Turbo and its future profitability occurred after the market closed on

July 29, 2014 when the Company revealed that the SEC is conducting an investigation

related to the write-down of film inventory on Turbo and that DreamWorks did not

expect to generate a material amount of gross profit from Turbo in the future. On this

disclosure, DreamWorks stock dipped to an intra-day low of $19.20 per share on July

30, 2014, ultimately closing at $19.98 per share, down 12% from the prior day’s close.

This was a significant decline on heavy trading volume of more than nine million

shares – a decline that cannot properly be attributed to any market or industry event or

force, but rather was caused by the disclosure:

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Case 2


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Compare: Ert- .::- 1;1 Dow jcines 4: Nasdaq i'i FOXA ii DIS Il VIAB :' LGF rnc're :

Zoom: id 5d tm 3m Gm YTQ ly 5Y LOY L11

Jul 28, 2014 - Jul 30, 2 014

0 LGF-2.24b OVIAB-i FOXA-2.47 DS-i.i3% • Dow JcInes-I.47, 0 Nda1 -+ I.I% 0 DWA--14.cje%

-4%

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73. These stock price declines removed the artificial inflation from

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DreamWorks’ stock price, causing real economic loss to investors who had purchased

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DreamWorks stock during the Class Period.

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74. The declines in DreamWorks’ stock price near and at the end of the Class

15

Period were the direct result of the nature and extent of defendants’ prior false

16 statements and material omissions being revealed to and/or leaking into the market.

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The timing and magnitude of DreamWorks’ significant stock price declines negates

18 any inference that the loss suffered by Lead Plaintiff and other Class members was

19 caused by changed market conditions, macroeconomic or industry factors, or

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Company-specific facts unrelated to defendants’ fraudulent conduct.

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75. The economic loss Lead Plaintiff and other members of the Class

22 suffered was caused by defendants’ fraudulent scheme to artificially inflate

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DreamWorks’ stock price and maintain that price at artificially inflated levels, as was

24 revealed by the subsequent and significant declines in the value of DreamWorks stock

25 when defendants’ earlier misrepresentations and omissions became publicly available.

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Case 2


1

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

2

3 76. During the Class Period, DreamWorks had approximately 76 million

4 Class A shares of common stock outstanding, which shares traded in an efficient

5 market on the NASDAQ under the ticker DWA. DreamWorks was followed by

6 dozens of stock analysts and stock rating agencies and was in communication with the

7 markets and investors in quarterly conference calls. DreamWorks also filed periodic

8 public reports with the SEC and regularly issued press releases to the financial press.

77. At all relevant times, the market for DreamWorks common stock was an 9

10 efficient market for at least the following reasons:

11 (a) DreamWorks common stock met the requirements for listing, and

12 was listed and actively traded on the NASDAQ, a highly efficient and automated

13 market;

14 (b) The Company had approximately 76 million Class A shares

15 outstanding as of February 14, 2014. During the Class Period, on average, more than

16 900,000 shares of DreamWorks common stock was traded on a daily basis,

17 demonstrating a very active and broad market for DreamWorks common stock and

18 permitting a very strong presumption of an efficient market;

19 (c) DreamWorks claimed to be qualified to file a less comprehensive

20 Form S-3 registration statement with the SEC that is reserved, by definition, to well-

21 established and largely capitalized issuers for whom less scrutiny is required;

22 (d) As a regulated issuer, DreamWorks filed periodic public reports

23 with the SEC;

24 (e) DreamWorks regularly communicated with public investors via

25 established market communication mechanisms, including regular disseminations of

26 press releases on the national circuits of major newswire services, the Internet and

27 other wide-ranging public disclosures, such as communications with the financial

28 press and other similar reporting services;

- 30 - 985050_1

Case 2:


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(f) DreamWorks was followed by many securities analysts who wrote

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reports that were distributed to the sales force and certain customers of their respective

3

firms during the Class Period and each of these reports was publicly available and

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entered the public marketplace;

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(g) Numerous National Association of Securities Dealers member

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firms were active market-makers in DreamWorks common stock during the Class

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Period; and

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(h) Unexpected material news about DreamWorks was rapidly

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reflected in and incorporated into the Company’s stock price during the Class Period.

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78. As a result of the foregoing, the market for DreamWorks common stock

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promptly digested current information regarding DreamWorks from publicly available

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sources and reflected such information in DreamWorks’ stock price. Under these

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circumstances, all purchasers of DreamWorks common stock during the Class Period

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suffered similar injury through their purchase of DreamWorks common stock at

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artificially inflated prices, and a presumption of reliance applies.

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CLASS ACTION ALLEGATIONS

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79. This is a class action on behalf of all purchasers of DreamWorks

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common stock between July 31, 2013 and July 29, 2014, inclusive (the “Class”).

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Excluded from the Class are defendants, the Company’s officers and directors at all

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relevant times, as well as their immediate families, legal representatives, heirs,

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successors or assigns, and any entity in which defendants have or had a controlling

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interest.

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80. The Class members are so numerous and geographically dispersed that

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joinder of all members is impracticable. DreamWorks common stock was actively

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traded on the NASDAQ exchange. Record owners and other members of the Class

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may be identified from records maintained by DreamWorks or its transfer agent and

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may be notified of the pendency of this action by mail, using the form of notice

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similar to that customarily used in securities class actions. While the exact number of

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Case 2


1

Class members is unknown to Lead Plaintiff, DreamWorks reported more than 16,485

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Class A shareholders of record as of February 15, 2013 and more than 16,850 Class A

3

shareholders of record as of February 14, 2014. Accordingly, Lead Plaintiff

4

reasonably believes that there are thousands of members in the proposed Class.

5

81. Lead Plaintiff’s claims are typical of the claims of the members of the

6

Class as all members of the Class are similarly affected by defendants’ wrongful

7

conduct in violation of federal law that is complained of herein.

8

82. Lead Plaintiff will fairly and adequately protect the interests of the

9

members of the Class and have retained counsel competent and experienced in class

10

and securities litigation.

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83. Common questions of law and fact exist as to all members of the Class

12

and predominate over any questions solely affecting individual members of the Class.

13

Among the questions of law and fact common to the Class are:

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(a) Whether the federal securities laws were violated by defendants’

15

acts as alleged herein;

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(b) Whether statements made by defendants to the investing public

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misrepresented or omitted material facts about the business, operations and financial

18

conditions of DreamWorks;

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(c) Whether the price of DreamWorks common stock was artificially

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inflated during the Class Period; and

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(d) To what extent the Class members have sustained damages and the

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proper measure of damages.

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84. A class action is superior to all other available methods for the fair and

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efficient adjudication of this controversy as joinder of all members is impracticable.

25

Furthermore, as the damages suffered by individual Class members may be relatively

26

small, the expense and burden of individual litigation make it impossible for members

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of the Class to individually redress the wrongs done to them. There will be no

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difficulty in the management of this action as a class action.

985050_1 - 32 -

Case 2


COUNT I

For Violation of §10(b) of the 1934 Act and Rule 10b-5 Against All Defendants

85. Lead Plaintiff repeats and realleges each and every allegation above as if

fully set forth herein.

86. Defendants are liable for making false statements and failing to disclose

adverse facts known to them about DreamWorks. Defendants’ fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of DreamWorks

common stock was a success, as it: (i) deceived the investing public regarding

DreamWorks’ business and financial condition; (ii) artificially inflated the price of

DreamWorks common stock; and (iii) caused Lead Plaintiff and other members of the

Class to purchase DreamWorks common stock at inflated prices.

87. During the Class Period, defendants participated in the preparation of

and/or caused to be disseminated the false or misleading statements specified above,

which they knew or recklessly disregarded were materially false or misleading in that

they contained material misrepresentations and failed to disclose material facts

necessary in order to make the statements made, in light of the circumstances under

which they were made, not misleading.

88. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:

(a) Employed devices, schemes and artifices to defraud;

(b) Made untrue statements of material facts or omitted to state

material facts necessary in order to make statements made, in light of the

circumstances under which they were made, not misleading; or

(c) Engaged in acts, practices, and a course of business that operated

as a fraud or deceit upon Lead Plaintiff and others similarly situated in connection

with their purchases of DreamWorks common stock during the Class Period.

89. Defendants, individually and together, directly and indirectly, by the use,

means or instrumentalities of interstate commerce and/or the mails, engaged and

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985050_1

Case 2:


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participated in a continuous course of conduct to conceal the truth and/or adverse

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material information about DreamWorks’ business, operations and financial condition

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as specified herein.

4

90. The defendants employed devices, schemes and artifices to defraud,

5

while in possession of material, adverse, nonpublic information, and engaged in acts,

6

practices, and a course of conduct as alleged herein by, among other things,

7

participating in the making of untrue statements of material fact and omitting to state

8

material facts necessary in order to make the statements made about the Company and

9

its business operations and financial status, in the light of the circumstances under

10

which they were made, not misleading, as set forth more particularly herein, and

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engaged in transactions, practices, and a course of business which operated as a fraud

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and deceit upon the purchasers of DreamWorks common stock during the Class

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Period.

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91. The defendants had actual knowledge of the misrepresentations and

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omissions of material fact set forth herein, or recklessly disregarded the true facts that

16

were available to them. Defendants’ misconduct was engaged in knowingly or with

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reckless disregard for the truth, and for the purpose and effect of concealing

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DreamWorks’ operating condition and financial status from the investing public and

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supporting the artificially inflated price of its common stock.

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92. As a result of the dissemination of the materially false or misleading

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information and failure to disclose material facts, as set forth above, the market price

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of DreamWorks common stock was artificially inflated during the Class Period. In

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ignorance of the fact that the market prices of the Company’s stock were artificially

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inflated, and relying directly or indirectly on the false and misleading statements, or

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upon the integrity of the market in which the Company’s stock traded, and/or on the

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absence of material adverse information that was known to or recklessly disregarded

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by defendants, but not disclosed in defendants’ public statements during the Class

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Period, Lead Plaintiff and the other Class members acquired DreamWorks common

- 34 - 985050_1

Case 2:


1

stock during the Class Period at artificially high prices and were ultimately damaged

2

thereby.

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93. At the time of said misrepresentations and omissions, Lead Plaintiff and

4

other Class members were ignorant of their falsity, and believed them to be true. Had

5

Lead Plaintiff and other Class members and the marketplace known the truth

6

regarding the problems that DreamWorks was experiencing, which defendants did not

7

disclose, Lead Plaintiff and other Class members would not have purchased or

8

otherwise acquired their DreamWorks common stock, or, if they had acquired its

9

stock during the Class Period, would not have done so at the artificially inflated prices

10

which they paid.

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94. In addition to the duties of full disclosure imposed on DreamWorks and

12

the Individual Defendants as a result of their affirmative false and misleading

13

statements to the investing public, defendants had a duty to promptly disseminate

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truthful information with respect to DreamWorks’ operations and performance that

15

would be material to investors in compliance with the integrated disclosure provisions

16

of the SEC, including with respect to the Company’s revenue and earnings trends, so

17

that the market price of the Company’s securities would be based on truthful,

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complete and accurate information. SEC Regulations S-X (17 C.F.R. §210.01 et seq .)

19

and S-K (17 C.F.R. §229.10 et seq .).

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95. By reason of the foregoing, defendants have violated §10(b) of the 1934

21

Act and Rule 10b-5.

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96. As a direct and proximate result of these defendants’ wrongful conduct,

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Lead Plaintiff and the other Class members suffered damages in connection with their

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Class Period purchases of DreamWorks common stock.

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- 35 - 985050_1

Case 2


COUNT II

For Violation of §20(a) of the 1934 Act Against the Individual Defendants

97. Lead Plaintiff repeats and realleges each and every allegation above as if

fully set forth herein.

98. The Individual Defendants acted as controlling persons of DreamWorks

within the meaning of §20(a) of the 1934 Act:

(a) By reason of their positions as executive officers and/or directors,

their participation in and awareness of the Company’s operations and intimate

knowledge of the false statements and omissions made by the Company and

disseminated to the investing public, the Individual Defendants had the power to

influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the

various statements which Lead Plaintiff contends are false and misleading;

(b) By virtue of his 100% ownership of the Class B shares, defendant

Katzenberg (and entities controlled by him) represents 60% of the total voting power

of DreamWorks common stock. Accordingly, defendant Katzenberg (and entities

controlled by him) has the ability to control the Company;

(c) The Individual Defendants participated in conference calls with

investors and were provided with or had unlimited access to copies of the Company’s

reports, press releases, public filings, and other statements alleged by Lead Plaintiff to

be misleading before or shortly after these statements were issued and had the ability

to prevent the issuance of the statements or cause the statements to be corrected; and

(d) Because of their positions as CEO and CFO, the Individual

Defendants directly participated in the Company’s management and were directly

involved in DreamWorks’ day-to-day operations. The Individual Defendants also

controlled the contents of DreamWorks’ quarterly reports and other public filings,

press releases, conference calls, and presentations to securities analysts and the

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investing public. The Individual Defendants prepared, reviewed and/or were provided

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with copies of the Company’s reports, press releases and presentation materials

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alleged to be misleading, before or shortly after their issuance, and had the ability and

4

opportunity to prevent their issuance or cause them to be corrected and failed to do so.

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99. By reason of such conduct, the Individual Defendants are liable pursuant

6 to §20(a) of the 1934 Act.

7

PRAYER FOR RELIEF

8

WHEREFORE, Lead Plaintiff prays for judgment as follows:

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A. Declaring that defendants are liable pursuant to the 1934 Act;

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B. Determining and certifying that this action is a proper class action and

11

certifying Lead Plaintiff as a Class Representative and Lead Plaintiff’s counsel as

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Class Counsel pursuant to Rule 23 of the Federal Rules of Civil Procedure;

13

C. Awarding compensatory damages in favor of Lead Plaintiff and the Class

14

against defendants, jointly and severally, for damages sustained as a result of

15

defendants’ wrongdoing, in an amount to be proven at trial;

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D. Awarding Lead Plaintiff and the Class pre-judgment and post-judgment

17

interest as well as reasonable attorneys’ fees, costs and expenses incurred in this

18

action; and

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E. Awarding such other relief as the Court may deem just and proper.

20

JURY DEMAND

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Lead Plaintiff demands a trial by jury.

22

DATED: November 25, 2014 ROBBINS GELLER RUDMAN & DOWD LLP

23

SPENCER A. BURKHOLZ DANIELLE S. MYERS

24

25 s/ SPENCER A. BURKHOLZ

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SPENCER A. BURKHOLZ

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- 37 - 985050_1

Case 2


1 650 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)

Lead Counsel for Plaintiffs

SULLIVAN, WARD, ASHER & PATTON, P.C. MICHAEL J. ASHER 1000 Maccabees Center 25800 Northwestern Highway Southfield, MI 48075-1000 Telephone: 248/746-0700 248/746-2760 (fax)

Additional Counsel for Plaintiff

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Case 2


CERTIFICATE OF SERVICE

I hereby certify that on November 25, 2014, I authorized the electronic filing of

the foregoing with the Clerk of the Court using the CM/ECF system which will send

notification of such filing to the email addresses denoted on the attached Electronic

Mail Notice List, and I hereby certify that I caused to be mailed the foregoing

document or paper via the United States Postal Service to the non-CM/ECF

participants indicated on the attached Manual Notice List.

I certify under penalty of perjury under the laws of the United States of America

that the foregoing is true and correct. Executed on November 25, 2014.

s/ SPENCER A. BURKHOLZ SPENCER A. BURKHOLZ

ROBBINS GELLER RUDMAN & DOWD LLP

655 West Broadway, Suite 1900 San Diego, CA 92101-8498 Telephone: 619/231-1058 619/231-7423 (fax)

E-mail: [email protected]

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985050_1

Mailinkaffiá1id i-cY- v. Dreamworks Animation SKG, Inc. et al

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

• Spencer Alan Burkholz [email protected] ,[email protected],[email protected]

• Evan R Chesler [email protected]

• Patrick V Dahlstrom [email protected]

• Karin A DeMasi [email protected],[email protected],[email protected]

• Bertram Harris Fields [email protected]

• Lionel Zevi Glancy [email protected]

• Michael M Goldberg [email protected] ,[email protected],[email protected]

• Jeremy A Lieberman [email protected]

• Francis P McConville [email protected]

• Tricia L McCormick [email protected]

• Aaron J Moss [email protected],[email protected]

• Danielle S Myers [email protected],[email protected]

• Robert Vincent Prongay [email protected],[email protected],[email protected],[email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require

manual noticing). You may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients.

•(No manual recipients)

robbins geller rudman & dowd llp spencer a....

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