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Wake-up call at D’Works

Co. faces SEC investigation, lawsuits

Just six months into its life as a publicly traded company, DreamWorks Animation is having to fend off unexpected flack.

Last week, the studio became the subject of a Securities & Exchange Commission probe into its stock market trading. Such inquiries are fairly common when a stock suddenly, and noticeably, slips — and that indeed is what’s happened in “Shrek”-ville.

Along with Pixar, DreamWorks has over the last couple of months discovered that its rosy projections on DVD sales of its animated features were, well, way too rosy.

Pixar, however, was savvy, or lucky, enough to announce its bad news about “The Incredibles” far in advance of the day of its earnings report; news about the dip in revenues for “Shark Tale” and “Shrek 2” leaked out literally the day before DWA’s Q2 earnings report, which may be why eyebrows have now been raised.

The stock in DWA fell 5% the day the company unveiled its earnings (May 10), and declined another 12% after the earnings announcement.

In the wake of the Martha Stewart case, the SEC is primed to ask questions about insider trading. To wit: Did anyone inside the company give investor friends an obvious heads-up that earnings would disappoint before results were announced? And did anyone sell their stock as a direct result?

Obvious is the operative word because there are a lot of gray areas in this particular case: For one, when does lamenting aloud the unexpected return of a bunch of “Shrek” DVDs amount to a hint to dump shares? Many in the biz have been genuinely flummoxed by the recent DVD downturn (and the yakking about it is non-stop.)

Some folks who invested in the company are angry enough to have sued over the DVD disappointment. Six class-action lawsuits have been filed. (DWA says the suits are without merit and will fight them.)

This is the company that a year ago could boast the highest-grossing animated pic of all time in “Shrek 2” and had would-be investors lining up at the door. Most importantly, this is the company led by the Dream Team of creatives Steven Spielberg, David Geffen and Jeffrey Katzenberg.

The stock of DreamWorks Animation has slid to $22 a share from a high of $38 shortly after its IPO last October. At least for the moment, some are no longer buying the dream.

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