May 12, 2011
LOS ANGELES, CALIF.–MGA Entertainment, a Los Angeles-based toymaker best known for its Bratz product line, filed a lawsuit against several large European banks over their alleged concealment of accounting fraud at French toymaker Smoby prior to MGA’s purchase of the company. Because the banks manipulated Smoby’s internal finances, the lawsuit says MGA now stands to lose as much as $300 million because of the acquisition. MGA Entertainment Inc. v. Deutsche Bank AG, BC458341 (Los Angeles Super. Ct., filed May 9, 2011).
Smoby was France’s leading toy manufacturer, with a wealthy French family holding the controlling stake. The Breuil family, according to the complaint, had connections to the French legal and financial community. In or around 2002, Jean-Christophe Breuil was appointed CEO of Smoby Group. “It was at that time that Breuil began embezzling hundreds of millions of Euros from the company,” says A. Barry Cappello, attorney for MGA and managing partner of Cappello & Noël, a nationally known lender liability law firm. The French government has since opened a criminal investigation into Breuil’s actions.
“Breuil was siphoning much of the money into offshore accounts,” says Leila Noël, plaintiff’s co-counsel and partner at Cappello & Noël. “Breuil’s actions could not have gone unnoticed by the banks because they held a dominant position of control and oversight of Smoby.”
None of Breuil’s alleged embezzlement, fraud and related money laundering were known to MGA when Breuil called MGA owner Isaac Larian in 2007, asking him if he was interested in buying Breuil family shares in Smoby. Larian was interested and MGA began its due diligence into the sale.
“The banks’ conduct during the sale’s due diligence period led MGA to believe that Smoby was a valuable, legitimate enterprise,” says Cappello. “MGA relied on financial data provided by Smoby that turned out to be falsified. It also relied on analysis by Ernst & Young and statutory auditors Grant Thornton that stated Smoby financial statements for 2005 and 2006 were accurate and true. In fact, they were not.”
Based on this inaccurate information, MGA went ahead with the acquisition in May 2007. “Smoby’s lenders saw the acquisition as the perfect opportunity to shift their huge exposure from Smoby to MGA,” says Noël. “Not surprisingly, Smoby underperformed and now the banks are suing MGA for all the debt Smoby acquired prior to MGA’s ownership of the company.”
The banks named in the lawsuit are: Deutsche Bank, Barclays Bank, Credit Agricole Corporate and Investment Bank, Caisse Regionale de Credit, Agricole de Franche Compte, Commerzbank Aktiengesellschaft, Deutsche Bank Luxenbourg and Societe Generale.
“While this is a classic case of lender liability, it goes one step further,” says Cappello. “These banks intentionally duped MGA into buying Smoby–and then tried to go after MGA’s assets to recoup their losses. Unfortunately for the banks, that’s against the law.”