Pokémania on Wall Street

[00:00:00]"The most unlikely fad, Pokémon.

[00:00:02]And Pokémon is now in full mania."

[00:00:05]It’s 1999, and North America was in the middle of Pokémania. But while most people were focused on watching the anime, playing the games, or collecting trading cards, businesses were focused on acquiring something else: licensing rights. For any company that was trying to sell products to kids and their parents, there were two media franchises that they all wanted to get their hands on: Teletubbies and Pokémon. 4Kids Entertainment, through their licensing agency Leisure Concepts, was acting as Nintendo’s agent in North America. In the first half of 1999, they had already signed several agreements. From a publishing deal with Golden Books, to a toy line with Hasbo. And it looked like Pokémania was spreading to the stock market.

[00:00:37]The biggest beneficiary was 4Kids Entertainment, whose stock price had been on the rise since March, but started skyrocketing in July. Initially, it looked like 4Kids might be an outlier, but their success appeared to lift up other companies. There was Hasbro, with their previously mentioned toy line. Topps, who started distributing Pokémon cards later in the year alongside Wizards of the Coast–which was bought by Hasbro in September. But Pokémania on Wall Street didn’t stop with large, well-known companies. It looked like investors were willing to pour money into any company as long as it had some association with Pokémon. And it appeared to be paying off. Because the stock prices of lesser-known companies appeared to get an even bigger boost. There was Toymax International, which sold Pokémon branded candy and bubble gum, whose stock price increased by more than 40%. Paradise Music & Entertainment, the company that produced the soundtracks for both the anime and the first Pokémon movie that was coming out that November. Its stock price rose from less than $2 a share in January, to more than $7 by the middle of the year. And there was Zindart, a company that made and marketed collectables, whose stock price shot up more than 30% after announcing that they would be making something for Pokémon.

[00:01:32]However, even though there appeared to be a lot of enthusiasm about this group of Pokémon related companies, many analysts didn’t think that it would last. It looks like a lot of people thought that this Pokémon thing was just a fad, but just weren’t sure how long it would last. And even if they thought that the Pokémania would stick around for a while, that didn’t change how they viewed some of these companies. Because of how much their stock prices had risen, analysts didn’t think that it was possible for them to sell enough Pokémon related merchandise to justify the high prices.

[00:01:54]And there was another company whose stock price exploded because of Pokémon. In the summer of 1999, Grand Toys International–a Canadian distributor of toys, stationary, and other household objects–had a big announcement to make. On August 4th, Grand Toys announced that they had acquired a license to manufacture and distribute Pokémon products. According to their press release, “Grand Toys International, Inc. … today announced that it has entered into an exclusive licensing agreement with Nintendo Co. Ltd. to manufacture and distribute a line of products in Canada based on the popular Gameboy game and television series, Pokémon. The Pokémon products, which will be included in our fall 1999 line-up, will include balls, kites and an extensive range of back-to-school items such as pens, pencils, portfolios, binders, organizers and stationery sets.”

[00:02:33]Investors heard the news and started buying up the company’s stock. Its price on the NASDAQ continued to rise after the announcement. After a 50% price increase on August 24th, it hit a record high on the 25th. And the company’s stock had more than doubled in value in just a few weeks.

[00:02:45]But market analysts had the same doubts about Grand Toys that they had with the other companies.

[00:02:48]And one analyst made a prediction about the company’s future share price. In a statement to The Street, Charles Payne–the president and chief analyst at Wall Street Strategies–said, “I guarantee you a year from today, Grand Toys will be down 75% from where it closes today.

[00:03:00]No matter how hot this Pokemon thing gets, it's a fad. It's a temporary hysteria.”

[00:03:05]The day after that prediction was published, Grand Toys had another announcement to make. On August 26th, they put out a press release to clarify the details of their agreement with Leisure Concepts.

[00:03:14]“Grand Toys International, Inc. … announced that it had entered into a contract through Nintendo of America's exclusive agent, Leisure Concepts, Inc. … to acquire a license for Nintendo's popular property, POKEMON. At the time of the announcement, the contract had not been fully executed. However, since the announcement, a fully executed non-exclusive contract has been entered into between Grand Toys International, Inc. and Nintendo of America."

[00:03:34]Shortly after this clarification, Grand Toys’ stock price did fall but it didn’t collapse. And the price briefly rebounded at the end of the year. But by the start of the new millennium, the hype around Pokémon stocks had started to dry up. 4Kids Entertainment’s stock price began to collapse around when the Pokémon movie hit North American theaters and continued to fall into the new year. And while Grand Toys, Toymax, Zindart, and Paradise Music’s share prices didn’t crash immediately, they all steadily declined over the first several months of the new year. And as their prices continued to fall, some investors weren’t too happy with how things went.

[00:04:02]On April 7, 2000, a class action lawsuit was filed against Grand Toys International and several company insiders on behalf of investors who bought shares in the company between August 4th and August 25th, 1999. The complaint was filed in the Southern District of New York and made three allegations: that the defendants had artificially inflated the company’s stock price with misleading information, that they illegally sold their stock at those inflated prices, and then, after making millions of dollars, decided to correct the misleading information. The misleading information that they’re referring to is whether or not Grand Toys had an exclusive license to sell Pokémon products in Canada. And they were pointing to the announcement Grand Toys made on August 4, 1999, and the clarification that they released on August 26th. What we haven’t covered yet is the alleged illegal insider selling. In November of 1999, the Wall Street Journal reported that insiders at Pokémon-related companies, including Grand Toys, were selling their shares. The Securities and Exchange Commission (SEC) defines insiders as, “officers, directors, and those that hold more than 10% of any class of a company’s securities.” All of the insiders that were named in the class action lawsuit submitted disclosures to the SEC that they had sold stock in Grand Toys in August of 1999. So the question wasn’t about the sale of the stock itself, but whether or not the sale of the stock was illegal.

[00:05:06]Grand Toys didn’t think that any of the claims against them were valid. Regarding the misleading information at the heart of the claims, the company maintained that it was just a simple clarification. According to The Globe and Mail, “Grand Toys says the Aug. 26 statement was made simply to clarify the Nintendo rights held by a U.S. company and that Grand Toys did indeed hold the Canadian rights to some Pokemon products.” The legal battle continued throughout 2000 and well into 2001 until both sides decided to settle that summer. On August 13, 2001, Grand Toys announced that a preliminary settlement agreement had been reached. “Grand Toys International, Inc. … today announced that a federal judge for the United States District Court for the Southern District of New York had preliminarily approved the settlement of a purported class action lawsuit filed against Grand [Toys] for $1,975,000. … The settlement was effected without any admission of liability on the part of the Grand [Toys] defendants, and each of them expressly deny any wrongdoing or liability whatsoever. … The settlement will result in minimal cost to the Company as a result of coverage under the Company's Directors and Officers (D&O) liability insurance policy [Edited for Clarity].” The nearly two million dollar settlement appeared to be significantly less than the original claim. Tania Clarke, the company’s executive vice-president and chief financial officer, told The Globe and Mail that the original suit was asking for around $15 million. But even if this was a win for Grand Toys in the courtroom, the company was still trying to climb its way back to its pre-Pokémania stock price. At the time the settlement was announced, you could buy a share of Grand Toys for less than 50 cents.