Mattel Accused of Participating in Illegal Channel Stuffing
Purchasers of Mattel, Inc. (NasdaqGS: MAT) filed a securities class action complaint against the company’s officers and directors for alleged violations of the Securities Exchange Act of 1934 between October 20, 2016 and April 20, 2017. According to the complaint, Mattel deceived investors by engaging in the illegal practice of channel stuffing in order to artificially inflate revenue and conceal softening demand. Former Mattel employees stated that the impetus behind the scheme was the company’s loss of the global rights to produce and sell toys based on the Disney Princess characters to its main competitor, Hasbro—a loss that some analysts valued at $500 million annually. In carrying out its scheme, Mattel used promotions and discounts to over-supply its retailers with inventory in an effort to record as much revenue as possible during the 2016 holiday season. Even though Mattel knew that the retailers already had enough products and that much of them would need to be returned or steeply discounted, Mattel added inventory to its distribution channels to create a misleading impression of its financial health. On January 25, 2017, when Mattel finally admitted that worldwide net sales, gross margins, and operating income declined significantly due to elevated sales adjustments and heavier discounting, the company’s stock plummeted and has continued to fall, closing at $17.00 per share on February 7, 2018.