WASHINGTON — Merry Go Round Enterprises has been dropped as a defendant in a shareholder class action complaint involving allegations of false financial information, but the company’s three top officers remain targeted.
Merry Go Round, based in Joppa, Md., cannot be sued because it is protected under Chapter 11 of the U.S. bankruptcy code, said Charles J. Piven, attorney for the six plaintiffs.
The complaint, which incorporates several earlier complaints filed separately, accuses MGR president Michael Sullivan, chairman and chief executive officer Leonard Weinglass and chief financial officer Isaac Kaufman of making misleading statements about the company’s financial situation.
It covers all investors who purchased MGR stock between Nov. 24 and Dec. 17, 1993. More than 90 million shares were traded during that period, Piven said.
The complaint stems from a Nov. 24 press release in which Sullivan stated that MGR had a “strong balance sheet, cash position and improving cash flow.”
On Dec. 17, company officers acknowledged that “bankruptcy could not be ruled out,” Piven said.
Merry Go Round declined comment Thursday.
Industry-watchers differ on the fate of the complaint.
One trade source said he doubts the plaintiffs can prove fraudulent intent based on the vague nature of MGR officers’ comments.
“They just kept saying that things will be getting better,” the source said, but did not give false earnings projections.
“If someone tells me, ‘Everything’s OK with this company,’ I wouldn’t base an investment on a statement like that,” the source added.
But Peter A. Chapman, editor of a series of newsletters focusing on specific bankruptcy cases, said the fact that the company paid very high attorney fees in the year before it filed for bankruptcy indicates that it might have known more about its impending financial collapse than it admits.
According to a document the company filed in bankruptcy court in early March, MGR paid the Washington law firm Swidler & Berlin $519,000 in the year preceding Jan. 11, the day MGR filed for bankruptcy protection. Of that amount, $200,000 was paid as a retainer and $319,000 was for additional work.
“That’s a lot of money even though Merry Go Round says, ‘Bankruptcy took us by surprise,”‘ Chapman said. “I’d say paying $319,000 to Swidler [on top of the retainer] proves it didn’t.”
A call to Swidler & Berlin was not returned Thursday.