global asset allocation consultants l.l.c., et al. v. dove...
TRANSCRIPT
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1 LIONEL Z. GLANCY, ESQ. #134180 I s6. ...y„,/ ,.,.) fv1 44",0.1.- 5
PETER A. BINKOW, ESQ. #1738482 LAW OFFICES OF LIONEL Z. GLANCY
1801 Avenue of the Stars, Suite 308
3 Los Angeles, California 90067(310) 201-9150 .
H) 704 __
:---.LASKY & RIFKIND, LTD. H f -11
5 30 N. LaSalle Street, Suite 2140 1 r ., --- L:0Chicago, Illinois 60602
6 (312) 759-7670
... _.
7 GOODKIND LABATON RUDOFF& SUCHAROW LLP i
8 100 Park AvenueNew York, NY 10017
9 (212) 907-0700
10 GOULD & RATNER222 North LaSalle Street, #800
11 Chicago, Illinois 60601(312) 236-3003
12IN THE UNITED STATES DISTRICT COURT
13CENTRAL DISTRICT CALIFORNIA
14GLOBAL ASSET ALLOCATION CONSULTANTS, ) Civil Action No.
15 L.L.C., on behalf of themselves and all )others similarly situated,
)) • 9 7 - 6 2 5 3 9, K16Plaintiff, ) Jury Trial ' ilf)r)
17 ) Demanded- v. - )
18 ) COMPLAINT601AT6DOVE ENTERTAINMENT INC., MICHAEL VINER )-k.kkp_c--(0, '!-(13._n Li LD,
19 and DEBORAH RAFFIN VINER, ) CLASS ACTION# )
20 Defendants. ))
21 x
^\ 22 Plaintiff, by its attorneys, for its Class Action
1-. (3‘) 23 Complaint (the "Complaint"), alleges the following upon1
; 24 personal : knowledge as to itself and to its own acts, and upon
25 information and belief based upon the investigation of
26 plaintiff's attorneys as to all other matters. The1
1 27 investigation includes the thorough review and analysis of
28 public statements, publicly-filed documents of Dovei
. A
1 Entertainment, Inc. ("Dove" or the "Company"), press releases,
2 news articles and the review and analysis of accounting rules
3 and related literature.
4 INTRODUCTION
5 1. This is a class action brought on behalf of
6 those persons who purchased or acquired securities of Dove
7 Entertainment Inc) ("Dove" or the "Company") between July 25,
8 1995 and August 20, 1996 (the "Class Period") against Dove,
9 its President and CEO, Michael Viner ("Viner"), and its Vice
10 President and Secretary, Deborah Raffin Finer ("Raffin"),
11 complaining of defendants dissemination of false financial
12 statements and other false and misleading statements about the
13 success Dove was having with its printed book operations,
14 which statements were made for the purpose of inflating the
15 price of Dove stock to over $14 per share in order to raise
16 $6.3 million for Dove through the sale of newly issued Dove
17 securities, to sell $1.7 million of the individual defendants'
18 own Dove stock and to use Dove shares as currency to acquire
19 other companies. Defendants' claims during 1995 and 1996 that
20 Dove was experiencing "contilted . . growth and
21 profitabilit'e and that Dove was achieving "record" results
22 successfully drove the price of Dove stock up from $6-3/4 per
23 share to over $14 per share before defendants were forced to
24 reveal that the Company's printed book sales were weak and
25 that it would have to take huge write-downs relating to its
26 book inventory. As this information was revealed, the price
27I In 1997 Dove Audio Inc. changed its name to Dove
28 Entertainment Inc.
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1 of Dove stock collapsed to $3-7/8 per share and thereafter
2 continued to decline to as low as $1-1/8 per share as the
3 extent of defendants' weak printed book sales, its fraudulent
4 accounting practices and its impaired operating prospects
5 reached the market. Finally, in the second quarter of 1997,
6 defendants Viner and Raffin sold a substantial part of their
7 interest in the Company and vacated their management
8 positions.
9 OVERVIEW
10 2. Dove is an independent producer of audio and
11 printed books. Dove commenced business in 1985 and prior to
12 1994 primarily distributed audio taped versions of well-known
13 books. In 1994, Dove began publishing books in print,
14 including Nicole Brown Simpson; The Private Diary of a Life
15 Interrupted (the "Nicole Simpson Book"), the first of a series
16 of books published by Dove and designed to exploit public
17 attention surrounding high profile trials and/or
18 personalities. The timing of the publication and release of
19 the Nicole Simpson Book was designed to capitalize upon the4
20 public's fascination with the brutal murders of Nicole Brown
21 Simpson and Ronald Goldman and the subsequent trial of their
22 accused killer, Orenthal James Simpson.
23 3. In September 1994, in conjunction with the
24 planned release of almost 1 million audio and printed copies
25 of the Nicole Simpson Book and the acquisition of the rights
26 to a library of approximately 40 printed book titles, Viner
27 and his wife defendant Raffin retained Joseph Stevens E.,
28 Company, L.P., ("Stevens") to assist Dove in preparing and
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1 completing an initial public offering ("IPO" or "Offering") of
2 Dove common stock. Viner and Raffin jointly owned 67.7% of
3 Dove's outstanding shares and viewed an IPO as a way to
4 convert their holdings in an illiquid and unprofitable
5 investment into cash. Although Viner and Raft in structured the
6 IPO so that they would receive $300,000 cash from the proceeds
7 of the Offering their true objective was much more elaborate.
8 Defendants Viner and Raffin planned to pocket huge profits by
9 dumping large amounts of their Dove stock on the open market
10 subsequent to the IPO.
11 4. Because Dove's financial condition was
12 extremely precarious at the time of the IPO, defendants
13 retained a lawyer who had a substantial financial interest in
14 Dove to work closely with Stevens and its counsel to prepare
15 and file the required documentation with the SEC, thereby
16 ensuring that Dove's questionable practices and inadequate
17 controls would not be subject to the scrutiny of an objective
18 third party. Due in part to SEC questions about Dove's
19 offering documents, defendants were not able to actually
20 complete Dove's IPO until DeCember 1, 1994. Moreover, despite
21 the aggressive marketing of Dove stock by defendants and
22 Stevens, Stevens was not able to get investors to buy the more
23 than 1 million Dove shares to be sold in the Offering, absent
24 an agreement that Vi per and Raft in would "lock up" or agree
25 not to sell their 2.2 million Dove shares until at least March
26
27
28
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1 1, 1996. 2 nave's IPO was completed on December 1, 1994, and
2 resulted in net proceeds of $5.7 million, as the Company was
3 able to sell 1.09 million shares at only $6 per share.3
4 5. Subsequent to the Offering, the Company's
5 operations continued to perform poorly, as returns of copies
6 of the Nicole Simpson Book continued piling up at Dove's
7 headquarters by the hundreds of thousands. 4 By March 15,
8 1995, the Company had drawn down 100% of its credit line with
9 Bank of America and was in violation of its repayment
10 obligations. Then, for its first full quarter as a public
11 company, Dove was able to generate net income of a mere
12 $33,000 or $.01 per share, and was able to achieve this only
13 by overstating its inventory.
14 6. Throughout the Spring and early Summer of 1995,
15 rumors about Dove's poor financial health and the long term
16 viability of Dove circulated, causing the Company's stock to
17
18 2 In connection with many initial public offerings,underwriters require insiders to "lock up" their shares for
19 a specified period of time subsequent to an initial publicoffering in order to address ,concerns that company insiders
20 might otherwise dump the stock immediately after anoffering. Generally, company insiders agree that no shares
21 held by insiders will be sold for at least 180 dayssubsequent to an initial public offering. However, in order
22 to assure investors that defendants Viner and Raffin wouldnot utilize the IPO as a bailout, they were required to
23 agree to not sell their Dove shares for at least 15 months subsequent to the Company's December 1, 1994 IPO.
243 This figure includes the over-allotment option
25 exercised in January 1995.
26 4 Interestingly, Viner caused Brian Levenberg("Levenberg"), a senior auditor with Dove's outside auditor,
27 Kenneth Leventhal & Co., to be hired as Dove's controller inJanuary 1995, just as Dove was undergoing its first external
28 audit since becoming a public company.
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1 decline almost 30%, reaching a low of $6-3/4 per share by June
2 1995. The decline in Dove's stock price caused Viner and
3 Raffin great concern, as a large portion of their wealth
4 consisted of Dove securities. Of further concern to Viner and
5 Raffin was their agreement not to sell any of their Dove stock
6 until at least March 1, 1996. Consequently, in order to stem
7 the decline in the price of Dove stock and reinflate the price
8 of Dove stock so that they couid dump their Dove holdings and
9 obtain huge profits, defendants embarked upon the illegal
10 course of business complained of herein. Defendant Viner
11 began publicly stating that the Nicole Simpson Book would
12 ligenerate a seven-figure profit" as it had been on the New
13 York Times best seller list for 11 weeks in 1994 and had
14 already shipped a million copies. Viner also began
15 approaching entertainment companies, including television
16 production companies, in an attempt to acquire them which
17 would enable Dove to generate the revenue necessary to meet
18 Viner's growth projections, thereby giving the market the
19 impression that the Company was, in fact, a rapidly growing,
20 multifaceted and "integrated multi-media enterprise." Viner
21 needed to reinf late the price of Dove stock to above $10 per
22 share in order to convince investors of Dove' health so that
23 Dove could raise funds by isSuing additional securities and so
24 that Dove could acquire other companies using Dove stock
25 without issuing so many Dove shares that the acquisitions
26 would be dilutive to Dove's earnings per share ("EPS"). In
27 order to achieve these objectives, defendants embarked upon
28 the scheme complained of herein, pursuant to which Dove
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1 announced "continued increases in both the top and bottom
2 line" and asserted that Dove was experiencing increased sales
3 volume as a result of its recently strengthened product line,
4 including its recently published book titles, which would
5 allow Dove to generate strong EPS growth in 1996 and would
6 establish a firm foundation for Dove's "long term growth and
7 profitability."
8 7. By failing to write down impaired inventory and
9 otherwise misrepresenting the strength of the Company's
10 operating results and balance sheet, defendants successfully
11 reinflated the price of Dove stock from $6-3/4 per share in
12 June 1995 to over $11 per share in September 1995. However,
13 all was not well. Dove's problems were mounting as Dove's
14 performance was, contrary to its public assertions, rapidly
15 deteriorating. In early 1995, hundreds of thousands of copies
16 of the Nicole Simpson Book were being returned. In April
17 1995, CFO William Moody left the company because he was
18 unwilling to participate in defendants' accounting
19 shenanigans. By late June 1995, defendants realized that sales
20 of The Private Diary of Lyle Menendez: In His Own Words (the
21 "Menendez book") was also a complete disaster and would
22 further aggravate Dove's inventory problem.
23 8. The defendants' scheme almost collapsed when,
24 in July 1995, the Company's external auditor, Ernst & Young,
25 LLP ("E&Y"), in connection with its succession of Kenneth
26 Leventhal & Co. as Dove's independent auditor, undertook a
27 review of the Dove account and began asking questions about28 Dove's accounting policies and the results Dove was going to
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I release for Dove's second quarter of 1995. Because E&Y was
2 unwilling to sign off on Dove's bogus second quarter of 1995
3 financial results or to otherwise participate in Dove's
4 accounting fraud, defendants quickly and quietly encouraged
5 E&Y to "resign." On July 24, 1995, E&Y, successor to Kenneth
6 Leventhal & Co., resigned as Dove's auditors. The next day,
7 Dove issued its second quarter results, but concealed from the
8 public the fact that Dove had lost its auditors. Defendants
9 attempted to get another "Big 6" accounting firm to sign off
10 on Dove's accounting policies/procedures. By September 1,
11 1995, Dove engaged KPMG Peat Marwick, LLP as its independent
12 auditor. In October 1995, defendants replaced Levenberg, the
13 former Kenneth Leventhal & Co. auditor who had functioned as
14 Dove's acting CFO for only six months, with Lee Ruttenberg.
15 9. By the fourth quarter of 1995, defendants had
16 boosted the price of Dove stock back to the $10 level, but
17 defendants knew that completing a public offering would
18 require that Dove's massive inventory of returned and
19 overvalued books be subjected to heightened scrutiny by Dove's
20 auditors. Consequently, Viner took advantage of SEC
21 regulations and the inflated price of Dove stock, using Whale
22 Securities to assist him in arranging and completing private
23 placement of 950,000 Dove shares warrants in late 1995. The
24 private placement provided Dove with approximately $6.3
25 million in badly needed cash. It was this cash that enabled
26 defendants to complete their scheme by allowing them to make
27 acquisitions for Dove which, in turn, allowed defendants to
28 assert that Dove was successfully achieving its
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I growth/diversification efforts. Simultaneously, defendants
2 Viner and Raffin began dumping their Dove stock, realizing
3 that the artificial inflation in the price of Dove stock would
4 not last for long. After reporting earnings of over $500,000
5 for the first quarter of 1996, defendants began publicly
6 asserting that Dove was transforming itself into an
7 "integrated multi-media enterprise" and stated that Dove was
8 successfully positioning itself in the "global marketplace,"
9 and despite the fact that defendants had represented in Dove's
10 Registration Statement that Raffin and Viner would not be
11 selling any Dove shares until at least March 1, 1996, Raft in
12 and Viner began dumping their stock with a vengeance, selling
13 thousands of shares of Dove stock on an almost daily basis.
14 During the first five months of 1996 alone, Raft in and Viner
15 sold more than $1.7 million worth of Dove stock at prices as
16 high as $14-3/8 per share. At the same time defendants were
17 dumping their Dove shares, Viner was attempting to Induce the
18 shareholders of Four Point Entertainment, Inc. ("Four Point")
19 to sell their interest in Four Point in exchange for 427,273
20 shares of inflated Dove stock and $2.5 million in cash. As
21 part of their fraudulent misconduct, defendants deceived the
22 Four Point shareholders into accepting Dove stock as
23 consideration for their investment in Four Point. Defendants'
24 scheme continued throughout early 1996 and, as late as June
25 1996, Viner continued to publicly maintain that Dove would
26 generate positive earnings and "revenues of $50 million in
27 1996."
28
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1 10. Then on August 20, 1996, Dove shocked the
2 securities markets by disclosing that contrary to its public
3 representations, it had, in fact, suffered a huge loss of $2.5
4 million -- an amount more than twice the net earnings the
5 _p_Comanhadenernitse.ateddlatireubl:cistence -- as
6 a result of "weaker sales,"Lncreased costs attributable to
7 the Four Point transaction and "inventory write downs on
8 certain printed books." This caused the price of Dove stock to
9 drop to $3-7/8 per share, a more than 70% decline from its
10 Class Period high. Thereafter, as it was disclosed that the
11 Company's CFO and COO had both left the Company after only six
12 months on the job and that Dove had taken an additional
13 write-off of $1.4 million to reflect the impairment in the
14 value of its inventories of books, the price of Dove stock
15 dropped to as low as $1-1/8 per share.
16 11. The chart below illustrates Dove's results
17 prior to and during the Class Period and the magnitude of its
18 losses when the Company belatedly recorded the impairment in
19 the value of its inventory:
20
Dove Audio Quarterly Results
21 (In thousands, except EPS)
22 199403/31 06/30 09/30 12/31 Year
23
Revenues $1,317 $2,570 $2,267 $6,201 $12,355
24 Gross Profit 189 729 625 2,115 3,658Net Income ($464) $107 ($80) $575 $138
25 Earnings Per
26Share ($0.18) $0.04 ($0.03) $0.17 $0.04
27
28
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1
1 1995
2 03/31 06/30 9/30 12/31 Year
3 Revenues $2,218 $4,190 $3,371 $1,369 $11,148Gross Profit 883 1,550 1,488 (41) 3,880
4 Net Income $33 $261 $362 ($565) $91Earnings Per
5 Share $0.01 $0.06 $0.08 ($0.13) $0.02
6 tl996
7 03/31 06/30 09/30 12/31 Year
8 Revenues $7,397 $2,992 $5,594 $10,870 $26,853Gross Profit 2,076 (432) 1,940 61 3,645
9 Net Income $501 ($2,539) ($262) ($4,373) ($6,673)Earnings Per
10 Share $0.10 ($0.45) ($0.05) ($0.91) ($1.31)
11 1997
12 03/31 06/30 09/30 12/31 Year
13 Revenues $2,661Gross Profit (1,092)
14 Net Income ($3,424)Earnings Per
15 Share ($0.66)
16
17 12. The statements made by defendants during the
18 Class Period regarding Dove and its operating performance were
19 false and misleading as they misrepresented the true facts
20 and/or omitted to state facts necessary to make the statements
21 made not misleading, including:
22 (a) That Dove was carrying more than $1.0 million of
23 overvalued and/or returned inventory on its books, including
24 more than 300,000 copies of the Nicole Simpson Book;
25 (b) That Dove was not generating "increased sales
26 volume" from its printed book operations nor was it
27 experiencing "tremendous growth," but rather was achieving its
28
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1 "growth" by not properly accounting for inventory as stated in
2 1$52-58;
3 (c) That Dove's inventory of the Nicole Simpson Book
4 was overvalued by at least 60%;
5 (d) That by the third quarter of 1995, almost 80% of
6 the copies of the Menendez book distributed by Dove were in
7 the process of being returned;
8 (e) That Dove was suffering from weak and, in some
9 cases almost non-existent, sales of both audio and printed
10 books, including the Menendez book and Nicole Simpson Book;
11 (f) That Dove was not "one of the fastest growing
12 companies in the publishing industry," but rather was
13 experiencing revenue and earnings growth only because of
14 defendants' accounting manipulation;
15 (g) That Dove had not discontinued publication of
16 the hard cover version of You'll Never Make Love in This Town
17 Again in March 1996 because it wanted to generate demand for
18 the paperback version, but rather had done so to stem the
19 growth in unsaleable inventory at Dove's facilities;
20 (h) That because of (a)-(g) above, defendant Viner
21 had no basis to expect and did not, in fact, expect earnings
22 improvement in the last half of 1995;
23 (i) That, as a result of the foregoing, Dove's
24 forecast of strong revenue growth in 1996 to $50 million was
25 false, as such growth was impossible to achieve in light of
26 these undisclosed problems; and
27 (j) That defendants' positive forecasts and
28 projections regarding Dove's revenues and earnings growth
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1 during 1995-1997 and beyond were false as they were
2 inconsistent with and contradicted by the above negative
3 factors.
4
5 JURISDICTION AND VENUE
6 13. This Court has jurisdiction over this action
7 pursuant to Section 27 of the Securities Exchange Act of 1934
8 (the "1934 Act"), 28 U.S.C. 5§ 1331 and 1337. The claims
9 asserted herein arise under Sections 10(b) and 20(a) of the
10 1934 Act, 15 U.S.C. §§ 78j(b), 78(n), and 78t(a), and Rule
11 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder.
12 14. Venue is proper in this District pursuant to
13 Section 27 of the 1934 Act, 15 U.S.C. 78aa, and 28 U.S.C.
14 § 1391(b). Dove is headquartered in this District in Beverly
15 Hills, California, and many of the acts giving rise to the
16 violations complained of, including the dissemination of false
17 and misleading public statements and financial information,
18 occurred in this District.
19 15. In connection with the wrongs alleged herein,
20 defendants used the instrumentalities of interstate commerce,
21 including the United States mails, interstate wire and
22 telephone facilities, and the facilities of the national
23 securities markets.
24 16. The statutory safe harbor provided for forward-
25 looking statements under certain circumstances does not apply
26 to any of the allegedly false statements pleaded in this
27 Complaint.
28
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1 17. This action is timely and has been filed within
2 one year from the time that plaintiff could have discovered
3 the fraud in the exercise of reasonable diligence.
4
5 THE PARTIES
6 18. Plaintiff Global Asset Allocation Consultants,
7 L.L.C. purchased .5 Dove units consisting of 6,250 Dove common
8 shares and 6,250 warrants to purchase Dove common shares on
9 January 3, 1996 at $100,000 per unit.
10 19. Defendant Dove is a California corporation
11 which has its executive offices and principal place of
12 business in Beverly Hills, California. Dove is an independent
13 producer of audio and publisher of printed books. The
14 Company's audio books generally consist of audio recordings of
15 abridged and unabridged versions of books.
16 20. (a) Defendant Viner was, at all times prior to
17 his departure in June 1997, Chairman of the Board, President
18 and Chief Executive Officer of Dove. Because of defendant
19 Viner i s positions and control of Dove's operations, he knew
20 the adverse non-public information about Dove's business,
21 finances, products, markets and present and future business
22 prospects via access to internal corporate documents
23 (including the Company's operating plans, budgets and
24 forecasts and reports of actual operations compared thereto),
25 conversations and connections with other corporate officers
26 and employees, attendance at management and Board of
27 Directors' meetings and committees thereof and via reports and
28
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1 other information provided to him in connection herewith.
2 Viner approved and signed Dove's SEC filings.
3 (b) Defendant Raffin was, at all times prior
4 to her departure in June 1997, Vice President, Secretary and a
5 director of the Company. Because of defendant Raffin's
6 position and control of Dove's operations, she knew the
7 adverse non-public information about Dove's business,
8 finances, products, markets and present and future business
9 prospects via access to internal corporate documents
10 (including the Company's operating plans, budgets and
11 forecasts and reports of actual operations compared thereto),
12 conversations and connections with other corporate officers
13 and employees, attendance at management and Board of
14 Directors' meetings and committees thereof and via reports and
15 other information provided to her in connection therewith.
16 (c) Each of the defendants willfully
17 participated in the preparation of and/or made the false
18 statements alleged herein, which statements were made by the
19 defendants for the purpose of selling Dove securities, and had
20 the power to and did exercise control over Dove.
21 (d) Viner and Raffin are collectively referred
22 to herein as the Individual Defendants.
23 21. Plaintiff brings this action as a class action
24 pursuant to Rule 23(a) and 23(b) (3) of the Federal Rules of
25 Civil Procedure, individually and on behalf of all other
26 persons or entities who purchased or acquired Dove securities
27 during the period from July 25, 1995 through August 20, 1996,
28 inclusive (the "Class Period") and were damaged thereby,
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1 excluding the defendants herein, their affiliates and any
2 officers or directors of Dove or its affiliates, and any
3 members of immediate families and their heirs, successors and
4 assigns (the "Class").
5 22. The Class is so numerous that joinder of all
6 the members of the Class is impracticable. As of April, 1997,
7 the Company had approximately 5.2 million shares of common
8 stack outstanding held by 89 stockholders of record.
9 Plaintiff believes that there are hundreds of beneficial
10 holders of the Company's securities located throughout the
11 United States.
12 23. Plaintiff's claims are typical of the claims of
13 absent Class members. Members of the Class have sustained
14 damages arising out of defendants' wrongful conduct in
15 violation of the federal securities laws in the same way as
16 the plaintiff sustained damages from the unlawful conduct.
17 24. Plaintiff will fairly and adequately protect
18 the interests of the Class. Plaintiff has retained counsel
19 competent and experienced in class and securities litigation.
20 25. A class action is superior to other available
21 methods for the fair and efficient adjudication of the
22 controversy. The Class is numerous and geographically
23 dispersed. It would be impracticable for each member of the
24 Class to bring a separate action. The individual damages of
25 any member of the Class may be relatively small when measured
26 against the potential costs of bringing this action, and thus
27 make the expense and burden of this litigation unjustifiable
28 for individual actions. In this class action, the Court can
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1 determine the rights of all members of the Class with judicial
2 economy. Plaintiff does not anticipate any difficulty in the
3 management of this suit as a class action.
4 26. Common questions of law and fact exist as to
5 all members of the Class and predominate over any questions
6 affecting solely individual members of the Class. These
7 questions include, but are not limited to, the following:
8 (a) whether defendants' conduct as alleged
9 herein violated the federal securities laws;
10 (b) whether defendants' statements omitted
11 material facts necessary to make the statements made, in light
12 of the circumstances under which they were made, not
13 misleading;
14 (c) whether the press releases and statements
15 disseminated to the investing public during the Class Period
16 misrepresented Dove's financial condition and results;
17 (d) whether defendants acted knowingly or
18 recklessly in omitting and/or misrepresenting material facts;
19 (e) whether the market price of Dove
20 securities was artificially inflated during the Class Period;
21 and,
22 (f) whether the members of the Class have been
23 damaged, and if so, what is the proper measure of damages.
24 27. Plaintiff has retained counsel who are
25 experienced in class action securities litigation. Plaintiff
26 has no interests which are in conflict with those of other
27 Class members.
28
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1 28. Plaintiff's claims are typical of those of the
2 Class because plaintiff and the Class sustained damages as a
3 result of defendants' wrongful conduct alleged herein.
4 29. Plaintiff will adequately protect the interests
5 of the Class.
6
7 BACKGROUND TO THE CLASS PERIOD
8 30. In September 1994, in conjunction with the
9 planned release of almost 1 million audio and printed copies
10 of the Nicole Simpson Book and the acquisition of the rights
11 to a library of printed book titles, Viner and Raff in, with
12 the assistance of Joseph Stevens Isc Company, L.P., prepared
13 and completed an IPO of Dove common stock. Viner and Raft in
14 jointly owned 67.7% of Dove's outstanding shares at the time
15 of the IPO. Because they were locked into an illiquid
16 investment in a company with a book value of only $1.6 million
17 dollars, Raft in and Viner viewed the IP° as a way to make
18 substantial profits by taking Dove public and later selling
19 huge amounts of their Dove stock on the open market.
20 31. Because Dove's financial condition was
21 extremely precarious at the time of the IPO, the defendants
22 retained a lawyer who had a substantial financial interest in
23 Dove to prepare and file the required documentation with the
24 SEC, thereby assuring that Dove's questionable practices and
25 inadequate controls would not be subject to scrutiny of an
26 objective third party.
27 32. Dove's IPO was completed on December 1, 1994,
28 and resulted in net proceeds, including the over-allotment
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1 option exercised in January 1995, of only $5.7 million, as the
2 Company was able to sell 1.09 million shares at only $6 per
3 share. Although this was a disappointment for defendants
4 Viner and Raff in, they knew that if they could prop up the
5 price of Dove stock until early 1996, they would be free to
6 cash out by selling their 2.2 million Dove shares.
7 33. Subsequent to the Offering, Dove continued to
8 perform poorly, as returns at the Nicole Simpson Book began
9 piling up by the hundreds of thousands at Dove's headquarters.
10 Moreover, by March 15, 1995, the Company had drawn down 100%
11 of its credit line with Bank of America and was in violation
12 of its repayment obligations. Dove's cash flow problems were
13 aggravated because Viner was causing Dove to pay for
14 improvements to his Beverly Hills mansion. On April 21, 1995,
15 Dove reported its results for its first full quarter as a
16 public company. Dove reported net income of a mere $33,000 or
17 $.01 per share and was able to achieve this only by
18 overstating its inventory. Realizing that Dove's stock was not
19 rebounding, defendants embarked on the unlawful course of
20 business alleged herein.
21 DOVE'S UNLAWFUL COURSE OF BUSINESS
22 34. On July 25, 1995, Dove issued a release which
23 reported net revenue of $4.2 million and EPS of $0.07 for the
24 quarter ended June 30, 1995, stating:
25 'Dove Audio, Inc. today reported its results ofoperations for the second quarter ended June 30,
26 1995. Second quarter 1995 net revenues grew 62% to$4.2 million, compared to first quarter 1994
27 revenues of $2.6 million. Dove's second quarter 1995resulted in net income of $261,000 or $.07 per
28 share on a primary basis, compared to second quarter
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1 1994's net income of $107,000 or $.04 per share.These improved results were mainly attributed to the
2 success of specific titles in Dove's increasedproduct line including its recently published booktitles.
4 Michael Viner, chairman and president, stated, "Weare very pleased with the continued increase on
5 both the top and bottom line and building long-termgrowth and profitability. We will continue to
6 possess the most predominant audio library in thebusiness, and expand our corollary horizons."
735. On or about October 1, 1995, defendant Viner
8participated in an interview with Andrew Collier of
9Bloomberg Business News. During that interview, defendant
10Viner noted that Dove had earned $261,000 for the second
11quarter of 1995 and that he expected earnings to improve for
12both the third quarter and full fiscal 1995. Defendant Viner
13stated that "look[ing] at the year as a whole, and certainly
14looking at the first nine months compared with the
15previous years we are exceptionally pleased."
1636. On October 30, 1995, as part of defendants'
17efforts to convince the market that Dove was successfully
18executing defendants' plan to become an "integrated
19multi-media enterprise," Dove issued a release containing its
20results for the period ended September 30, 1995. The release
21stated:
22Dove Audio, Inc. today reported its results of
23 operations for the third quarter and nine monthsended September 30, 1995.
24Third quarter 1995 revenues grew 48% to $3.4
25 million, compared to third quarter 1994 revenues of$2.3 million. Dove's income before income taxes was
26 $677,000 for the third quarter 1995 compared to aloss of $(80,000) for the third quarter 1994. Dove's
27 third quarter 1995 resulted in net income of
28$362,000 or $.09 per share on a primary basis,
- 20
I compared to third quarter 1994's net loss of$(80,000) or $(.03) per share.
2Revenues for the nine months ended September 30,
3 1995 grew 59% to $9.8 million compared to revenuesof $6.2 million for the nine months ended September
4 30, 1994. Dove's income before income taxes was $1.3 million for the nine months ended Seotember 30, 1995
5 compared to a loss before income taxes of $(437,000)for the nine months ended September 30, 1994. Dove's
6 net income was $656,000 for the nine months endedSeptember 30, 1995 or $.15 per share compared to a
7 net loss of $(437,000) or $(.13) per share for thenine months ended Septembez' 30, 1994.
8results
9 increased sales volume from Dove's Product line including its recently published book titles. Net
10 audio and hook revenues alone increased 78% to $8.7million for the nine months ended September 30, 1995
11 compared to $4.9 million for the nine months endedSeptember 30, 1994.
12Michael Viner, Chairman and 'President, stated, "Our
13 latest results demonstrate Dove's ability to achieve Profits while we continut to increase our library
14 value of books audio books. film and other media."
15 37. On December 20, 1995, Dove issued a release
16 which stated that Dove was "one of the fastest growing
17 companies in the publishing industry" and that in order to
18 continue Dove's "tremendous growth over the Past year" the
19 Company had offered and sold $5..8 million of Dove stock in a
20 private equity offering orchestrated by Whale Securities, the
21 proceeds of which were to be used in part to acquire a new
22 building which was needed to house Dove's purportedly rapidly23 expanding operations and to fund acquisitions of existing
24 operations.
25 38. The statements contained in 1 41j34-37 issued by26 defendants between July 1995 and December 1995 concerning Dove27 were each false or misleading when made. The true facts, which28
-- 21 -
1 were then known by or available to defendants through their
2 access to internal Dove data, were:
3 (a) That Dove was carrying more than $1.0 million of
4 overvalued and/or returned inventory on its books, including
5 more than 300,000 copies of the Nicole Simpson Book;
6 (b) That Dove's inventory of the Nicole Simpson Book
7 was overvalued by at least 60%;
8 (c) That Dove had not generated earnings in the
9 second quarter of 1995, but in fact had suffered losses;
10 (d) That by the third quarter of 1995, almost 80% of
11 the copies of the Menendez book distributed by Dove were in
12 the process of being returned;
13 (e) That Dove was suffering from weak and, in some
14 cases almost non-existent, sales of both audio and printed
15 books, including the Menendez book and Nicole Simpson Book;
16 (f) That, absent the accounting chicanery detailed
17 in 1152-58. Dove had not generated positive earnings during
18 either the second quarter or third quarter of 1995, but had in
19 fact, suffered huge losses;
20 (g) That Dove was not generating "tremendous
21 growth," or "increased sales volume" from its books but rather
22 was reporting income because Dove was not properly accounting
23 for inventory as detailed in 1152-58; and
24 (h) That because of (a)-(g) above, defendant Viner
25 had no basis to expect and did not expect earnings improvement
26 in the last half of 1995.
27
28
- 22 -
1 39. On February 8, 1996, defendants issued a
2 release announcing that Dove had agreed to purchase two
3 television production companies. The release stated:
4 Dove Audio, Inc. announced Thursday a tentativeagreement to purchase two television production
5 companies, Four Point Entertainment, Inc. and TheProducers Entertainment Group.
6Under terms of the agreement, Dove Audio, Inc. will
7 purchase Four Point Entertainment for $9 million --$5 million in common stockand $4 million in cash.
8 TPEG will be purchased for $8 million in stock,subject to shareholder approval.
9Dove Audio, Inc. also announced that it will change
10 its name to Dove Entertainment, subject toshareholder approval. "This name clearly defines our
11 new direction of the company, which is to become an integrated multimedia enterprise," said Michael
12 Viner, president:
13 The acquisitions reflect Dove's strategy to expandits presence in the audio book, television and film
14 distribution marketplace, both in the U.S. andabroad. "The combined talent and capacities of Four
15 Point and TPEG will help position us in the global marketplace," he explained.
16
Both companies will relocate to Dove International's
17 new corporate headquarters in Hollywood. "As a result of our expansion and future growth glans we
18 man to announce the addition of several keyexecutives to our management team over the next few
19 months," Viner said.
20 40. During February and March 1996, Dove announced
21 the appointments of Simon R. Baker as Chief Financial Officer,
22 Gary J. Matus as a director and Charles J. Webber as Chief
23 Operating Officer.
24 41. Beginning on January 2, 1996, in violation of
25 the lock-up agreement, defendants Raffin and Viner began
26 dumping their Dove stock to take advantage of the inflation in
27 Dove's stock caused by their fraud. Defendants' selling binge
28 continued through May 1996 and proceeds totaled $1.7 million.
- 23 -
1 42. On March 14, 1996, defendants announced that
2 Dove had terminated its previously announced plan to acquire
3 The Producers Entertainment Group ("TPEG") because of
4 "substantive business issues," including the inability of TPEG
5 and Dove to agree on price.
6 43. On or about April 8, 1996, a story appeared in
7 the BP Report discussing defendants' operations, including the
8 scuttling of the TPEG acquisition. The article stated:
9 Los Angeles-based Dove Audio Inc. 's plans tospend $17 million on two television production
10 companies (BPR, Feb. 12) suffered a setback when itwas unable to reach agreement on a purchase price
11 with one of the companies, The ProducersEntertainment Group. Dove said it is still in the
12 process of acquiring Four Point Entertainment for $9million ($5 million in common stock and $4 in cash).
13TPEG said in a statement that the decision
14 resulted from the "inability to agree on certainsubstantive business issues, including the total
15 consideration which Dove would pay for TPEG." Thestatement said the companies are pursuing other
16 joint opportunities, including possible collaboration on future Production projects.
17 * * *
18 Dove spokeswoman Michele Samet said the company isnot actively looking for another seller. "Whatever
19 happens happens," she told BPR, noting that Dove's book and audio divisions have been growing and plans
20 to expand to multimedia "would just be addinganother division."
21Dove had planned to change its name to Dove
22 Entertainment and use the companies to translate itsbook library into TV movies and miniseries.
2344. The April 8, 1996 BP Report also discussed
24Dove's decision to halt production of You'll Never Make Love
25In This Town Again, stating:
26No More 'Make Love, In Hardcover
27Separately, in a likely bid to generate demand
28 for the paperback version of its bestselling You'll
- 24 -
I Never Make Love in This Town Again Dove Books is halting the presses on further hardcover copies of
2 the title. Dove said it will release the paperbackversion this fall with additional material.
3Released in January, You'll Never Make Love in
4 This Town Again was ranked seventh on The New YorkTimes bestseller list and fifth on The Los Angeles
5 Times list last week. It has sold approximately300,000 copies. The book contains scandalous
6 information on such celebrities as Warren Beatty,Jack Nicholson and Timothy Hutton.
7"It was just a publishing decision" to cease
8 publication of the hardcover version, Samet toldBPR. "We're lust going to sell what's in the stores
9 and wait until the fall."
10 45. On April 15, 1996, defendants announced that
11 Dove had finalized the Four Point acquisition. Defendants also
12 stated that the terms of the acquisition had been modified
13 such that defendants would be paying $2.5 million in cash in
14 addition to 427,273 shares and that the deal provided that
15 another 163,636 shares might also be paid in connection with
16 an earn-out provision contained in the agreement.
17 46. Also on April 15, 1996, defendants issued a
18 press release containing the Company's results for the year
19 ended December 31, 1995 and the quarter ended March 31, 1996.
20 The release stated:
21 Dove Audio, Inc. today reported results for the yearended December 31, 1995.
22Net revenues in 1995 were $11,140,000, compared to
23 net revenues of $12,355,000 in 1994. Of totalrevenues, net publishing revenue remained comparable
24 in 1995 to 1994. Net publishing revenue in the 1994 period benefited from approximately $4.0 million of
25 revenue from a single book, Faye Resnick's "NicoleBrown Simpson -The Private Diary of a Life
26 i ncome eas $0.02share - 1=-1as compared 3
27 share for the year ended December 31, 1994. Dove's 1995 per revenues were achieved despite a
28 substantial fourth quarter increase in allowance for
- 25 -
1 returns primarily relating to certain products fromthe Com.an 's new orinted book odlerations.
2* * *
3Dove also announced that it has entered into a
4 definitive acquisition agreement to acquire FourPoint Entertainment. The revised terms call for
5 payment by Dove of a total purchase price, based oncurrent market prices, of approximately $9.5
6 million, consisting of $2.5 million in cash and427,273 shares of Dove Common Stock and an earn-out
7 of up to an additional 163,636 shares of Dove CommonStock. Consummation of the agreement is subject to
8 delivery of customary closing documents and otherconditions and is expected to occur prior to the end
9 of April 1996.
10 Four Point is a profitable independent televisionproduction company, founded in 1984. The Company
11 develops and produces television series,movies-of-the-week, miniseries and infomercials for
12 network, cable and syndicated markets and operates afull service edit facility for post-production
13 services for its own and third party product.
14 * * *
15 Commenting on the acquisition and Dove's results,Chairman and CEO Michael Viner stated, "We are
16 steadily putting the money we raised in our recent successful private placement to work for us. We have
17 bolstered the management team, adding as COO CharlesJ. Weber and as CFO Simon Baker. We have acquired
18 Four Point, a leading independent televisionproduction company. We are excited about our results
19 for the 1996 first quarter."
20 47. On May 1, 1996, Dove issued a release prepared
21 by Simon Baker which contained Dove's results for the quarter
22 ended March 31, 1996. The release was titled "Dove Audio, Inc.
23 (Dove Entertainment) Announces Record First Quarter Results"
24 and stated:
25 Dove Audio, Inc. (Dove Entertainment) today reportedthe highest quarter revenues and pre-tax profits in
26 the Company's history for the first quarter endedMarch 31, 1996.
27First quarter 1996 total revenue grew by 230% to
28 $7,397,000, compared to $2,218,000 in the first
- 26 -
1 quarter of 1995. First quarter 1996 total publishingrevenue was $4,138,000 and total film revenue
2 $3,259,000. Dove's income before taxes was $832,000for the first quarter of 1996 compared to $53,000
3 for the first quarter of 1995, Dove's first quarterof 1996 net income was $501,000 or $0.10 per share,
4 compared to net income of $33,000 or $0.01 per sharefor the first quarter of 1995.
The Company benefited from a successful first
6 quarter with the publication of the company's latestNew York Times bestselling book, "You'll Never Make
7 Love in This Town Again." In its audio bookoperations, the Company sees continued strength in
8 sales with an impressive library of backlist titlesincluding "A Brief History of Time" by Stephen J.
9 Hawkings and "Bridges of Madison County" by RobertJames Waller. In addition, "Rush Limbaugh is a Big
10 Fat Idiot" has been at the top of all audiobestseller since its initial release in February
11 1996.
12 Dove also benefited from its highest ever firstquarter because of its contributing film operations.
13 The revenues from "Home Song," a CBS movie-of-the-week which aired in March, were responsible for
14 adding to Dove's profitable first quarter.
15 Dove has also announced that on April 30th, 1996 itclosed the acquisition of Four Point Entertainment,
16 an independent television company founded in 1984.The Company develops and produces television
17 series, movies-of-the-week, mini-series andinfomercials for network, cable and syndicated
18 markets. The acquisition incorporates all of theproduction and editing operations of Four Point.
19
Commenting on the record first quarter results, Dove
20 Audio, Inc. Chairman and CEO Michael Viner stated,"We are pleased that our Company has continued to
21 show strength in its publishing ventures and that new areas are proving to be profitable. Based on the
22 record first quarter results and our recentlycompleted acquisition, we look forward to meeting
23 our plan to achieve record revenues in 1996."
24 48. On June 17, 1996, an article written by Dan
25 Turner discussing Doves successes appeared in the Los Angeles
26 Business Journal. Quoting Viner, the article stated that Dove
27 "is projecting revenues of $50 million in 1996."
28
- 27 -
1 DEFENDANTS INSIDER TRADING
2 49. The chart below illustrates the attempt by
3 defendants to sell huge amounts of Dove stock before the truth
4 about Dove began to reach the marketplace:
5 .
INSIDER SHARES6 NAME DATE SOLD PRICE PROCEEDS
7 Viner, Michael& Deborah 01/02/96 50,000 $11.25 $562,500
8 01/24/96 2,000 $12.00 $24,00001/31/96 2,000 $12.00 $24,000
9 02/05/96 2,000 $12.00 $24,00002/05/96 2,000 $12.38 $24,760
10 02/06/96 4,000 $12.75 $51,00002108/96 2,000 $13.75 $27,500
11 02/08/96 2,000 $13.63 $27,26002/27/96 4,000 $11.00 $44,000
12 03/01/96 1,000 $12.00 $12,00003/04/96 1,000 $12.00 $12,000
13 03/05/96 1,000 $12.00 $12,00003/11/96 1,000 $12.13 $12,130
14 03/12/96 1,000 $13.75 $13,75003/15/96 1,000 $12.75 $12,750
15 03/18/96 4,000 $12.62 $50,52003/19/96 2,000 $12.25 $24,500
16 03/20/96 2,000 $11.75 $23,50003/21/96 2,000 $12.00 $24,000
17 03/22/96 2,000 $12.13 $24,26003/25/96 2,000 $12.00 $24,000
18 03/28/96 2,000 $12.50 $25,00003/28/96 2,000 $12.13 $24,260
19 03/29/96 2,000 $13.50 $27,00004/01/96 1,000 $14.38 $14,380
20 04/01/96 1,000 $14.00 $14,00004/01/96 2,000 $14.00 $28,000
21 04/02/96 1,000 $13.88 $13,88004/03/96 1,000 $13.75 $13,750
22 04/04/96 1,000 $813.25 $13,25004/1s/96 2,000 $11.88 $23,760
23 04/15/96 1,000 $11.88 $11,88004/16/96 2,000 $12.13 $24,260
24 04/16/96 1,000 $12.25 $12,25004/17/96 2,000 $12.38 $24,760
25 04/18/96 2,000 $11.63 $23,26004/19/96 2,000 $11.88 $23,760
26 04/19/96 1,000 $12.50 $12,50004/22/96 2,000 $12.25 $24,500
27 04/22/96 2,000 $12.75 $25,50004/23/96 2,000 $812.75 $25,500
28 04/24/96 2,000 $812.50 $25,000
- 28 -
1 05/01/96 25,000 511.25 $281,25005/15/96 900 $13.00 $11,700
2 05/15/96 100 S13.00 $1,300_TOTALS: 150,000 $1,779,130
3
4 UNDISCLOSED ADVERSE INFORMATION
5 50. The statements contained in 1130, 34-37, 39,
6 43-43, issued by defendants during the Class Period, including
7 those made between February 8, 1996 and August 20, 1996
8 concerning Dove were false or misleading when made. The true
9 facts, which were then known by or available to defendants due
10 to their access to internal Dove data, were:
11 (a) That Dove had not generated earnings in the
12 second quarter of 1995;
13 (b) That Dove was carrying more than $1.7 million of
14 overvalued and/or returned inventory on its books, including
15 more than 300,000 copies of the Nicole Simpson Book;
16 (c) That by the third quarter of 1995, almost 80% of
17 the copies of the Menendez book distributed by Dove were in
18 the process of being returned;
19 (d) That Dove's inventory of the Nicole Simpson Book
20 was overvalued by at least 60%;
21 (e) That Dove was suffering from weak and, in some
22 cases almost non-existent, sales of both audio and printed
23 books, including the Menendez book and Nicole Simpson Book;
24 (f) That, absent the accounting chicanery detailed
25 in 1152-58, Dove had not generated earnings in 1995 and, in
26 fact, Dove suffered losses for each quarter of the Class
27 Period;
28
- 29 -
1 (g) That because of (a)-(f) above, defendant Viner
2 had no basis to expect and did not expect earnings improvement
3 in the last half of 1995;
4 (h) That Dove was not "one of the fastest growing
5 companies in the publishing industry," but rather was
6 experiencing revenue and earnings growth only because or
7 defendants' accounting manipulation;
8 (i) That, as a result or the foregoing, Dove's
9 forecasts of strong revenue and earnings growth were false, as
10 such growth was impossible to achieve in light of these
11 undisclosed problems; and
12 (j) That defendants lacked a reasonable basis for
13 their positive forecasts and projections regarding Dove's
14 revenues and earnings growth during 1995 and 1996 which
15 statements were, in fact, false as they were inconsistent with
16 the above negative factors.
17 51. On August 20, 1996, Dove shocked the market by
18 disclosing that it had suffered a huge loss of more than $2.5
19 million, or $0.45 per share for the quarter ended June 30,
20 1996, claiming that weaker sales in the second quarter of
21 printed and audio hooks combined with increased costs
22 attributable to the Four Point acquisition and the purchase of
23 and relocation of the Company into Dove's new West Hollywood
24 facility caused the large loss. Defendants also revealed to
25 the market that the loss was due in part to the write-down of
26 certain printed books carried in Dove's inventory. The loss,
27 which was more than twice Dove's total earnings since becoming
28 a public company, caused Dove stock to drop to $3-7/8 per
- 30 -
1 share, a decline of more than 70% from its Class Period high
2 of $14-5/8 per share. Thereafter, as it was revealed that
3 Dove's CFO Simon Baker and COO Charles Weber had both abruptly
4 left the Company for "personal reasons" after less than six
5 months on the job, that certain directors had resigned Board
6 membership after being confronted with Viner's fraudulent
7 misconduct, that Dove would take an additional $1.4 million
8 write-down to inventory for various books related to O.J.
9 Simpson and for "excess" costs, and that Dove was in violation
10 of financial covenants entered into with Dove's lenders, the
11 price of Dove stock dipped as low as $1 1/8 per share,
12 resulting in tens of millions of dollars of damages to
13 plaintiff and the Class. Thereafter, after their fraud had
14 decimated Dove's shareholders, Viner and Raffin negotiated a
15 sweetheart deal for themselves which allowed Viner and Raffin
16 to sell their preferred shares to certain investors for
17 additional profits, allowing Raffin and Viner to, in Viner's
18 own words, "come out very nicely."
19 FALSE FINANCIAL STATEMENTS
20 52. During the Class Period, the Individual
21 Defendants caused Dove to report false financial results due
22 to the Company's failure to properly and accurately report
23 inventory and film costs, causing the financial statements
24 for the quarters ended June 30, 1995, September 30, 1995,
25 December 31, 1995 and March 31, 1995, to be presented in
26 violation of Generally Accepted Accounting Principles
27 ("GAAP") and SEC rules.
28
- 31 -
1 53. GAAP are those principles recognized by the
2 accounting profession as the conventions, rules and
3 procedures necessary to define accepted accounting practice at
4 the particular time. Regulation S-X (17 C.F.R.
5 §210.4-01(a)(1)) states that financial statements filed with
6 the SEC which are not prepared in compliance with GAAP are
7 presumed to be misleading and inaccurate, despite footnote or
8 other disclosure.
9 54. GAAP, as set forth in Accounting Research
10 Bulletin NO. 43, Chapter 4 (Statement 5), requires inventory
11 to he written down when the value of inventory is impaired:
12 Statement 5
13 A departure from the cost basis of pricing theinventory is required when the utility of the goods
14 is no longer as great as its cost. Where there isevidence that the utility of goods, in their
15 disposal in the ordinary course of business, will beless than cost, whether due to physical
16 deterioration, obsolescence, changes in pricelevels, or other causes, the difference should be
17 recognized as a loss of the current period. This isgenerally accomplished by stating such goods at a
18 lower level commonly designated as market.
19 (Emphasis added and in original.)
20 Statement 6
21 As used in the phrase lower of cost or market theterm market means current replacement cost (by
22 purchase or by reproduction, as the case may be)except that:
23(1) Market should not exceed the net realizable
24 value (i.e., estimated selling price in theordinary course of business less reasonably
25 predictable cost of completion and disposal);and
26 (2) Market should not be less than net realizablevalue reduced by an allowance for an
27 approximately normal profit margin.
28
- 32 -
I Statement 7
2 The purpose of reducing inventory to market is toreflect fairly the income of the period. The mostcommon practice is to apply the lower of cost ormarket rate separately to each item of the
4 inventory.
5 FASB Statement of Concepts No. 5 "Recognition and Measurement
6 in Financial Statement of Business Enterprises" also addresses
7 inventory valuation:
8Current market value is also generally used for
9 assets expected to he sold at prices lower thanprevious carrying amounts.
10Net realizable (settlement) value. Short-term
11 receivables and some inventories are reported attheir net realizable value, which is the
12 nondiscounted amount of cash, or its equivalent,into which an asset is expected to be converted in
13 due course of business less direct costs, if any,necessary to make that conversation.
14167(d). Furthermore, Statement of Financial Accounting
15Standards No. 5 ("SFAS No. 5"), "Accounting for
16Contingencies," requires that a reserve (charge to expense) be
17established if it is probable that an asset has been impaired
18or a liability has been incurred and, if the amount of the
19
loss or impairment of the asset can be reasonably estimated.20
Thus, based on SEAS No. 5, a reserve is required to be21
22 recorded if inventories would be overstated due to impending
returns of product, or excess, slow moving or obsolete23
products whose cost exceeds net realizable value.24
2555. In 1994, Dove significantly increased its
printed book publishing business which resulted in a26
significant increase in its inventory and its risk of27
28inventory valuation losses. Substantially all of Dove's
- 33
1 products are subject to return by distributors and retailers
2 if not resold to the public. With the introduction of several
3 new books, including the Nicole Simpson Book, Dove began to
4 ship a huge amount of products to customers which had an
5 unconditional right to return unsold products. Thus, Dove had
6 a corresponding increased risk of excess inventory should
7 these unsold books be returned because Dove would not recover
8 its costs in producing those books. In fact, during the Class
9 Period, the amount of inventory on hand at Dove increased over
10 225% from $1.7 million at December 31, 1994, to $4.0 million
li at March 31, 1996, and the amount of inventory at Dove's
12 customers which was not resold and thus was likely to be
13 returned exceeded $5 million. By the beginning of the Class
14 Period, Dove's insiders knew that Dove had millions of dollars
15 of inventory, the value of which was substantially impaired.
16 Nevertheless, in order to report stronger earnings during the
17 Class Period, the Individual Defendants caused Dove to fail to
18 adequately reserve for over valued and/or excess inventory as
19 required by GAAP.
20 56. Thus, Dove reported the following earnings:
21 06/30/95 09/30/95 12/31/95 03/31/96
22 Revenue $ 4.2M $ 3.4M $ 1.4M $ 7.4MGross Profit $ 1.55M $ I.49M (-$ 41,000) $ 2.1M
23 Net Income $261,000 $362,000 (-$565,000) $501,000Earnings Per
24 Share $ .06 $ .08 ($ .13) $ .10
25 These results were false and misleading as the Company had
26 failed to adequately accrue for excess and overvalued
27 inventory during these quarters.
28
- 34 -
1 57. Defendants were unable to indefinitely continue
2 to misrepresent Dove's results and conceal its inventory
3 impairment as defendants' sales of new hooks were not as
4 strong as Dove had hoped for. As a result, in the quarter
5 ended June 30, 1996, Dove was able to report only $2.99
6 million in revenue and was forced to reveal that its inventory
7 was not as valuable as it had previously represented,
8 including the large amount of product that was still in the
9 channel that was being returned as well as inventory on hand
10 at Dove. Thus, in the second quarter ended June 30, 1996, Dove
11 was forced to accrue a $500,000 reserve for excess inventory,
12 and in the quarter ended December 31, 1996, Dove recorded
13 additional charges of $1.4 million for inventory costs due to
14 the "diminished market interest" in O.J. Simpson-related
15 books. Thus, between June 30, 1996 and December 31, 1996 Dove
16 wrote off more than $1.7 million in inventory. This
17 represented more than one-third of all the gross Profit Dove
18 reported during the Class Period. In fact, if Dove had
19 properly reported its inventory, it would nave reported
20 a substantial net loss during each quarter during the class
21 Period.
22 58. Due to these improprieties, the Company
23 presented its results for the quarters ended June 30, 1995,
24 Sept. 30, 1995, Dec. 31, 1995 and March 31, 1996, in a manner
25 which violates GARP. Further, the undisclosed adverse
26 information concealed by defendants during the Class Period is
27 the type of information which, because of SEC regulations,
28 regulations of the national stock exchanges and customary
- 35 -,
1 business practice, is expected by investors and securities
2 analysts to be disclosed and is known by corporate officials
3 and their legal and financial advisors to be the type of
4 information which is expected to be and must be disclosed.
5 COUNT I
6 VIOLATIONS OF SECTION 10(b) OF THE EXCHANGEACT AND RULE 10b-5 PROMULGATED THEREUNDER
7 (AGAINST ALL DEFENDANTS)
8 59. Plaintiff repeats and realleges each and every
9 allegation contained in paragraphs 1 through 60 above as if
10 fully set forth herein.
11 60. At all relevant times, defendants individually
12 and in concert, directly and indirectly, by the use and means
13 of instrumentalities of interstate commerce and/or of the
14 mails, engaged and participated in a continuous course of
15 conduct whereby they knowingly and/or recklessly made and/or
16 failed to correct public representations which were or had
17 become materially false and misleading regarding Dove's
18 financial results. This continuous course of conduct resulted
19 in the defendants allowing Dove to publish public statements
20 which they knew, or were reckless in not knowing, were
21 materially false and misleading, in order to artificially
22 inflate the market price of Dove securities and which operated
23 as a fraud and deceit upon the members of the Class.
24 61. Defendant Dove is a direct participant in the
25 wrongs complained of herein. Viner and Raft in are liable as
26 direct participants in and as controlling persons of the
27 wrongs complained of herein. By virtue of their positions of
28 control and authority as officers of Dove, Viner and Raffin
- 36 -
1 were able to and did, directly or indirectly, control the
2 content of the aforesaid financial statements relating to the
3 Company, and/or the failure to correct those statements in
4 timely fashion once they knew or were reckless in not knowing
5 that those statements were no longer true or accurate. Viner
6 and Raf fin caused or controlled the preparation and/or
7 issuance of public statements and the failure to correct such
8 public statements containing misstatements and omissions of
9 material facts as alleged herein.
10 62. Viner and Raffin had actual knowledge of the
11 facts making the material statements false and misleading, or
12 acted with reckless disregard for the truth in that they
13 failed to ascertain and to disclose such facts, even though
14 same were available to them.
15 63. In ignorance of the adverse facts concerning
16 Dove's business operations and earnings, and in reliance on
17 the integrity of the market, plaintiff and the members of the
18 Class acquired Dove securities at artificially inflated prices
19 and were damaged thereby.
20 64. Had plaintiff and the members of the Class
21 known of the materially adve-rse- -information—Fie disclose-d- by
22 the defendants, they would not have purchased Dove Common
23 securities at all or not at the inflated prices paid.
24 65. By virtue of the foregoing, defendants have
25 violated Section 10(b) of the 1934 Act and Rule 10b-5
26 promulgated thereunder.
27
28
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1 COUNT II
2 VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT(AGAINST vINER AND RAFFIN)
366. Plaintiff repeats and realleges each and every
4allegation contained in paragraphs 1 through 67 above as if
5fully set forth herein.
667. This count is asserted against Viner and Raffin
7and is based upon Section 20(a) of the 1934 Act.
868. Viner and Raft in, by virtue of their offices,
9stock ownership and specific acts were, at the time of the
10wrongs alleged herein and as set forth in Count I, controlling
11persons of Dove within the meaning of Section 20(a) of the
121934 Act. Viner had the power and influence and exercised the
13same to cause Dove to engage in the illegal conduct and
14practices complained of herein by causing the Company to
15disseminate the false and misleading information referred to
16
above. Moreover, Viner owned or controlled substantial17
amounts of the Company's stock.18
69. Viner's and Raffin's position as officers made19
20 them privy to and provided them with actual knowledge of the
material facts concealed from plaintiff and the Class.21
2270. By virtue of the conduct alleged in Count I,
Viner and Raffin are liable for the aforesaid wrongful conduct23
24 and are liable to plaintiff and the Class for damages
suffered.25
26
27
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1 PRAYER FOR RELIEF
2 WHEREFORE, plaintiff demands judgment:
3 A. Determining that the instant action is a proper
4 class action maintainable under Rule 23 of the Federal Rules of
5 Civil Procedure;
6 B. Awarding compensatory damages and/or rescission
7 as appropriate against defendants, in favor of plaintiff and all
8 members of the Class for damages sustained as a result of
9 defendants' wrongdoing;
10 C. Awarding plaintiff and members of the Class the
11 costs and disbursements of this suit, including reasonable
12 attorneys', accountants and experts' fees; and
13 D. Awarding such other and further relief as the
14 Court may deem just and proper.
15 JURY DEMAND
16 Plaintiff demands a trial by jury.
17
18 Dated: August 20, 1997 LAW OFFICES OF LIONEL Z. GLANCY
19
20 ByLionel Z. Glancy, Esquire
21 Peter A. Binkow, Esquire
22 1801 Avenue of the StarsSuite 308
23 Los Angeles, California 90067(310) 201-9150
24
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1 LASKY & =KIND, LTD.30 N. LaSalle Street
2 Suite 2140Chicago, Illinois 60602
3 (312) 759-7670
4 GOODKIND LABATON RUDOFF& SUCHAROW LLP
5 100 Park AvenueNew York, NY 10017
6 (212) 907-0700
7 GOULD & RATNER222 North LaSalle Street, #800
8 Chicago, Illinois 60601(312) 236-3003
9Attorneys for Plaintiff
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08/19/97118:09 - 40 -
GAAC M/HCEY SOZ44904 t. .ingtIZT. LLt-
OV.srwN
PialaZF-rLIL-C=MTSULON
John A. Mincey, on behalf of plaintiff Global Asset
Allocation Consultants, L.L.C., hereby certifies that the followinq
is true and correct to the best of his knowledge, information and
belief:
1. I am a principal of Global Asset Allocation
Consultants, L.L.C. ( n nobal") and, ae such, an fully familiar with
the matters set torth herein And an authorized to make this
certification on behalf of Global.
2 I have reviewed the complaint prepared by oounsel in
this action (the n eemplaint") and have authorized the filing
thereof.
3. Global is willing to aerve as a representative party
on behalf of the proposed class (the H CIa ge) defined in tne
complaint, including providing testimony at deposition and trial,
if necessary.
4. Global did not purcttase shares of Dove k;ntertairiment
Inc. (Dove) at the direction of its counsel or in order to
participate in any private aotion under tho federal securities
laws,
5. alobal ia willing to serve as a representative party
on behalf of a class, including providing testimony at deposition
and trial, if necessary.
6. The . following is a dosoription of all of Global's
transactions dmring the class period opeciPied in the complaint in
14Wt3.I
GAAC MINGEY
the Securities of Doves
Pato Nature of ErA2-2_EIZ_MbIU Irate' agnsaction
1/3/96 ought $100,00 .5
7. Global has filed no other actioni within the three
year period preceding ths date hereof ih which it sought to server
or served, as a representative party on behalf of a class in any
action brought under the federal securities laws,
8. Global Will not accept any payment for serving as
representative party on behalf of a clams beyond iti g pro rata share
of any recovery, except as ordered or approved by the Court.
declare under penalty of perjury that the foregoing is
true and correct.
Dated: August 19, 197 4111A1101011John A, Mincey
on behalf of plaintiffGlobal Asset AllocationConsUltants, L.L.C.
Each unit consists of 12,5oo shares of bOMMOhstook end 12,500 warrants to purchase Dove stock.
AOMA 2 -