Dreamworks Insider Trading?

DreamWorks Insider Trading Scandal?Suspicious sales of DreamWorks Animation stock could be at the core of the Securities and Exchange Commission's look into the studio's dealings. Monday morning, in a planned conference call for investors, DreamWorks Animation officials conceded that the SEC had questions about the way the company's stock was traded. (DreamWorks recently spun off its animation company, thus creating stock and a public entity open to scrutiny not accorded the main company, which is privately held.) The company also announced that it had dropped plans to pursue a new stock offering to raise $500 million.

Officials also said that for the last eight weeks, they'd been conducting an analysis of their DVD sales. On the conference call, which is available on the Internet, DreamWorks Animation officials said that things were so bad that even if the company's planned fall release of "Wallace and Gromit" made a projected $170 million at the box office, it still wouldn't help the bottom line. But industry insiders apparently knew this was coming because of a class-action suit filed against DreamWorks on June 10, 2005.

The lawsuit named DreamWorks' Jeffrey Katzenberg ? who is not accused of profiting from stock sales ? as well as company officers Ann Daly and Kristina M. Leslie as defendants. Katzenberg is named because he is the head of the company.
The suit claims that the defendants "flooded the market" with DVDs of "Shrek 2" last fall, and followed the release with false claims of success, thus inflating the newly formed DreamWorks Animation company's stock price.
The suit alleges that the company's insiders knew this, and that when the "truth" was revealed on May 10 of this year, the stock price tumbled. By then, according to the suit, all the principals had cashed out and made handsome profits, leaving holders of the common stock to fend for themselves.
For some reason, just about no one covered this story in the mainstream business press or Hollywood trade publications. But the suit ? filed on behalf of the class by Milberg Weiss, the same law firm that represented Disney stockholders in the Mike Ovitz suit ? is eye-opening. It alleges what this column and just about any business analyst could confirm: that major sales of stock by DreamWorks insiders look timed to predate announcements of bad news and tumbling stock prices. This could be construed as insider trading, which is what the lawsuit suggests. But insider trading would have to be alleged either by stockholders who bought or sold stock on the same day as the principals, or by the SEC itself, says a well-placed source.
Publicly available records show that the company's two chief operating officers, defendants Daly and Leslie, as well as another officer, Katherine Kendrick (who is not a defendant), sold DreamWorks Animation stock totaling $4.5 million on April 27, 2005, when the stock price was at a high.
Two weeks later, after news that the sales of "Shrek 2" DVDs had not been as strong as promised, the stock began a downward slide. More surprising is a monumental sale of stock last November by Paul Allen , Microsoft co-founder and investor in DreamWorks from its inception in 1995.
Allen cashed in 4,901,858 shares of stock on Nov. 4, 2004 and pocketed an astounding $137,252,024. (The Milberg Weiss lawsuit claims Allen actually made almost $184 million that day.)
That was only a week after DreamWorks Animation had been spun off into a public entity, but around the time the "Shrek 2" DVD went on sale to much hoopla.
Allen, an outside director, is not named as a defendant in the class-action suit.
Also on Nov. 2, 2004, Lee Entertainment ? owned by the same Korean family that owns Samsung ? sold 775,213 shares of DreamWorks Animation stock and claimed $21,705,964.
When Allen and Lee sold in November, the stock was at $28. When the three officers took their money in April, the stock had gone up to $37.62.
But on Monday morning, DreamWorks Animation stock was selling at $23 a share.
Ironically, DreamWorks' live-action studio, run by David Geffen and not part of the class-action lawsuit, is on the verge of a big summer. On Sunday night, the studio premiered "The Island," directed by Michael Bay ("Armageddon," "Pearl Harbor"), starring Ewan McGregor and Scarlett Johansson (see above).
This fall it'll release what's said to be Woody Allen 's best movie in almost a decade, "Match Point."
And Steven Spielberg is now filming his movie about the 1972 Munich Olympics massacre and the Israeli assassinations of Palestinian terrorists that followed, due in time for Christmas.

"Life is sweet and small. The rest is just talking. Let everyone live."
Dimitris Ouzounidis