One of the more interesting developments in the securities litigation arena over the past several years has been the continuing influx of pandemic-related securities class action lawsuit filings. Here we are now approaching what will be the sixth year since the initial outbreak of COVID-19 in the U.S. and yet the pandemic-related suits are continuing to come in. In the latest example, last week a shareholder plaintiff filed a securities class action lawsuit against the toy company Hasbro, alleging that the company misled investors by claiming that the level of inventory it built up in response to pandemic lockdown-related consumer demand was appropriate, only to later announce it would have to incur substantial inventory reduction costs. A copy of the November 13, 2024, complaint against Hasbro can be found here.

Background

Hasbro manufactures and sells toys and games. At the outset of the pandemic, Hasbro, according to the complaint, “faced an increased demand as familied locked down in their homes, and global supply chain disruptions impacted numerous industries.” In response, the complaint alleges, Hasbro “overpurchased inventory to ensure that it could meet demand.”

In subsequent reporting periods, the complaint alleges, the company and its executives assured investors that its “inventory was of a high quality” and that the company was “appropriately building up its inventory to mitigate supply chain risk and meet consumer demand.” The complaint further alleges that the company reported in its SEC filings that the rising inventory levels “reflected outstanding and anticipated demand, rather than excess supply that outpaced waning demand.”

In January 2023, when the company previewed its 4Q02 financial results, the company disclosed that its revenue would decline 17% and that the company would be laying off 15% of its global work force. According to the complaint, the company’s share price declined about 8% on this news. Even as the company was reporting these disappointing results, the company, the complaint alleges, was continuing to make “false, reassuring statements to investors concerning the extent of the inventory buildup.”

On October 26, 2023, in announcing the company’s 3Q03 financial results, the company announced an 18% decline in consumer product revenues, and it also lowered its guidance for the remainder of the year. The company also announced that it was forecasting a “$50-ish million of onetime cost” to be incurred on “moving through inventory at the retailer level, extra marketing to move through the industry, and extra obsolescence cost” in its consumer product segment. According to the complaint, the company’s share price decline nearly 12% on this news.

The Lawsuit

On November 13, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Hasbro and certain of its executives. The complaint purports to be filed on behalf of a class of investors who purchased the company’s common stock between February 7, 2022, and October 25, 2023.

The complaint alleges that during the class period, the defendants’ statements “represented the quality of inventory and the appropriateness of the levels of inventories carried by Hasbro and its retailers compared to consumer demand. In truth, however, the Company had a significant buildup of inventory that it was struggling to manage and which far exceeded customer demand.” As a result, the complaint alleges, “Defendants’ statements about Hasbro’s inventory, and what inventory levels reflected regarding demand, were materially false and misleading and/or lacked a reasonable basis.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.

Discussion

At the top of this post, I noted the fact that pandemic-related securities suits continue to be filed even though the beginning of pandemic is now years in the past. However, it should also be noted that though this complaint has only just now been filed, it relates to events that allegedly took place some time ago. Indeed, the end of the class period is more than a year ago. So while this complaint is consistent with the observation that pandemic-related cases continue to be filed, it is also true that this case could be characterized as something of a vestige or remnant rather than as a reflection of current or continuing conditions and events.

That said, it is interesting to note, at least according to the plaintiff’s allegations in the complaint, the extent to which long-term effects of the pandemic lockdown disrupted corporate operations and financial results. The pandemic had a huge, long-term impact, economy-wide and at the individual company level. The pandemic’s disruptive effect not only has continuing reverberations, but it is also contributing to continuing securities class action lawsuit filing activity.

According to the Stanford Law School Securities Class Action Clearinghouse website, this new lawsuit is the 15^th pandemic related securities class action lawsuit to be filed so far this year, and the 80^th to be filed since the initial COVID-19 outbreak in the U.S. in March 2020. As I noted at the outset, it really is an interesting phenomenon that COVID-related filings continue to be such a significant factor in the overall number of securities suit filings. The 15 pandemic-related securities suits YTD represent roughly 8% of all securities class action lawsuit this year, making an important contributing factor to the total number of suits this year.