Leapfrog Fights Class Over Sales Forecasts

     SAN FRANCISCO (CN) – On the heels of a $72-million merger deal, Leapfrog on Tuesday tried to kill a class action claiming it misled investors about dwindling prospects for its children’s educational toys.
Lead plaintiff Abere Newett sued the toymaker in January 2015, claiming Leapfrog knowingly misstated holiday sales projections by more than $100 million in 2014.
In a hearing Monday, class attorney Willow Radcliffe told U.S. District Judge Edward Chen that Leapfrog knew several factors made its 2014 sales predictions unrealistic: It failed to account for decreasing consumer demand, inventory sitting idle on retail shelves, and delays in launching its latest tech toy, LeapTV, she said.
“LeapTV was considered the marquee product,” Radcliffe said. “They said it would drive holiday sales. They told investors this is the forecast.”
Despite knowing of delays in launching the product, Leapfrog announced in August that LeapTVs would reach retail stores by the end of September, but it didn’t hit shelves until mid-October.
That didn’t seem to hold much weight with the judge.
“I’m not impressed that there are misstatements being made on inventory of LeapTV shipping,” Chen said. “At the end of the day, it was two or three weeks later than expected. There were disclosures along the way.”
A minor delay in LeapTV shipments was not the reason sales projections missed their mark, Leapfrog attorney Jordan Eth told Chen.
Leapfrog also launched two new tablet products, but holiday sales for children’s tablets dropped across the industry for the first time since 2010, Eth said.
“No one in the entire industry expected such a drastic decline,” Eth said. “It was a really bad holiday season for Leapfrog and many other companies in this industry.”
Radcliffe replied that Leapfrog announced in June that year tablet sales were slowing down, and the firm should have factored that into its forecasts.
“They repeatedly indicated they knew tablet sales were having issues,” she said.
Though she rattled off a series of examples, Chen told Radcliffe she failed to point to an actual number or projected sales figure the company knew of but hid or distorted in its forecasts.
“This company makes projections to run its business,” Eth told the judge. “What was wrong with the projections other than they didn’t turn out?”
Eth said the plaintiffs must show the company had actual knowledge that the forecasts it issued were wrong or misleading, and no such evidence exists.
“They just say you couldn’t make any projections at all,” Eth said. “If we’re going to have an accusation that we couldn’t project how we’re going to do, what did we not account for?”
Radcliffe claimed that a sustained decline in the company’s stock price from August to November 2014 should have triggered a recalculation of the firm’s goodwill – a monetary measure of the company’s intangible value among the public, which it is required to represent accurately.
Eth countered that the company expected to bounce back with strong sales over the holiday season and therefore did not consider a revaluation of its goodwill necessary at the time.
“The company does goodwill testing at least annually,” Eth said. “It says if the holiday season doesn’t turn out well, we may have to test.”
Chen ended the hearing after two hours of debate, giving slight indications that the investors may lack evidence to prove the company knew its sales projections were off.
Last week, Leapfrog was acquired by another educational toys giant – VTech – in a deal that sparked a series of new lawsuits claiming the company failed to act in the best interest of investors.
Leapfrog’s board of directors “abdicated its duty” by allowing VTech to acquire Leapfrog for $1 per share, 10 percent less than a competing offer, investors claimed in a series of securities class actions filed this year. The merger was completed on April 4.
In early 2014, Leapfrog stock traded at more than $7 per share, according to a class action filed by lead plaintiff Pete Manger.
In March, Manger’s attorney withdrew a motion for a preliminary injunction to stop the merger, saying his client would instead “seek damages and pursue monetary remedies through post-closing litigation.”
Leapfrog had $185.4 million in assets and earned nearly $21 million in profits in the last nine months of 2015, according to an SEC filing .

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