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SEC Investigating DreamWorks
July 13, 2005

By James L. Hirsen, J.D., Ph.D.
contributor to

The makers of "Shrek 2" are in some legal hot water.

It's the timing of sales of DreamWorks Animation stock that has prompted a class action lawsuit and probe into the studio's dealings by the Securities and Exchange Commission.

DreamWorks Animation has acknowledged that the SEC is looking into the way its stock was traded.

It all started last fall when DreamWorks SKG spun off its animation unit to the public, placing the new entity, DreamWorks Animation, under the jurisdiction of the SEC. In June 2005 a class action lawsuit was filed against DreamWorks. The suit alleges that the public company "flooded the market" with DVDs of "Shrek 2" shortly after the spin off and exaggerated the DVD sales in order to inflate the value of the company's stock.

The suit also claims that by the time the real condition of the company was revealed (May 2005), which caused the stock to plummet, principals had already sold their shares at a tidy profit leaving investors holding the bag.

Officials are now investigating whether executives had knowledge of an impending price drop and illegally sold off stock.

This brings up the specter of insider trading and corporate greed.

The mainstream press and Hollywood trade publications are shying away from the story.

Public records indicate that two chief operating officers and another corporate officer sold off $4.5 million worth of DreamWorks Animation stock in April 2005 at a time when the stock price was at a high.

Two weeks later, after the disappointing sales of "Shrek 2" DVDs became public knowledge, the stock began its descent.

One week after the previously mentioned spin off, Paul Allen, a Microsoft founder, sold off almost 5 million shares of stock and made over $130 million in profit. (Allen, an outside director, is not named as a defendant in the class action suit.)

The non-animated non-public DreamWorks SKG, headed by David Geffen, is not part of the class action lawsuit or the SEC probe.

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James L. Hirsen, J.D., Ph.D.

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