The Mattel Scandal - From Founder to Fraud?

[Music] it's hard to even choose a starting point when talking about Mattel we all know them if for nothing else they're the company that's responsible for the Barbie doll along with dozens of other popular toys and games over the past 70 plus years what I'd like to focus on today is a lesser-known scandalous part of their history if you can believe that it involves the founders so let's go back to the beginning I'm fairly confident that there's a lot of people watching this with the ambition to do something big maybe start a business but lack direction you want to do something big but don't exactly know what that is that's how I would describe Ruth and Elliott Handler back in the 1940s especially Elliott he was an industrial engineer looking to start his own business where he could utilize some of those skills he started by designing light fixtures that quickly changed to building furniture in his garage which eventually shifted into costume jewelry actually of all things that one was sort of successful he brought on some partners to raise some capital but then started fighting with them about the direction of the business and ended up selling his portion of it meaning after all that he was right back where he started so he started a new business this time with his wife Ruth and a friend of his from his old job named Harold Matson to name it they simply combined the name Matson with the name Eliot to get Mattel ironically Harold Matson sold his share of the business early on so it quickly became a husband-and-wife team and we're not gonna believe this even still at these two lack direction Mattel actually started by making picture frames and if you're wondering how that somehow transitioned into making toys I'd be happy to tell you because it's a great part of the story one of Eliot's previous failures that furniture business suddenly became relevant when he had the idea of using some of the leftover materials from the picture frames to build some little tiny dollhouse furniture right there I think it shows us that if we ever fail at something or it doesn't work out like we planned try not to feel too bad about it because what we learned in trying can come back and be useful in ways that we can't even imagine at the time I would argue Mattel may have never gotten anywhere had it not been for that failed furniture business and it's not like these tiny chairs were their ticket to success either but it draw their attention to the industry this was the second half of the 1940s the baby boom had just started and there were millions of little kids running around plus considered since it all happened so quickly directly following the war the toy supply had yet to catch up to that demand when the demand is higher than the supply at one that could be a good opportunity once they learned what was happening I have to think that the toy market was turning to look a little more promising than the picture frame market caused them to shift their focus and by 1947 they had introduced their first successful toy as some of these names had it was called it the you could doodle basically a ukulele with a built-in music box the kids liked it it sold really well and it sort of put Mattel on the map establishing them as this toy company in 1955 another big break Disney premiered a new TV show on ABC called The Mickey Mouse Club and Mattel signed on as one of their first sponsors now this was a pretty big gamble they agreed to pay five hundred thousand dollars for a full year of sponsorship which was a ridiculous advertising expense for a company of this size had it not worked out it probably would have been the end of them and there were no guarantees that it would work out this was a new show and there was no precedent set for this type of deal it's actually thought to be the first one to show the power of advertising toys to children through the television which we say all the time today of course it worked out for Mattel they used the show to heavily promote their new toy called burp guns and even made toys as part of the integration such as these names the mouse guitar they followed up on all of it with what turned out to be quite possibly the best-selling toy ever the Barbie doll I'm not gonna talk about it too much here cuz he could easily take over the whole video but I do want to say that this was truly a family effort ruth noticed how her daughter loved playing with these two-dimensional dolls just cut out of paper she approached elliott with the idea of potentially designing something with the same idea but you know a third dimension they fittingly named it after their daughter who inspired it and released it in 1959 as an instant success an interesting note they introduced the Ken doll two years later named after their son all right we get the idea how they became a toy giant following an underserved market designing and producing these toys that engage and appeal to children making some risky marketing moves and getting those toys out there and doing it all repeatedly after the success of Barbie they became a public company in 1960 and continued growing through the rest of the decade just introducing countless classic toys such as Chatty Cathy the world's first talking doll in 1960 and Hot Wheels in 1968 they started acquiring a bunch of other companies over the next decade notably in 1971 they bought Ringling Brothers Barnum & Bailey Circus it's all been so fun and honest up until this point which is why this might catch you by surprise I think it did many others too in 1971 when Mattel was now the largest toy company out there they started lying on their financial statements if you follow the stock market or this channel you would know that that's a serious crime it's essentially scamming all of your investors by making your company appear better than it actually is here's what happened one of their production plans was ruined in a fire and around that same time there was a strike going on it that affected their material supply the combination of the two was devastating for the company and made it impossible for them to fill many of their orders people wanted their Barbie dolls and Hot Wheels but under these circumstances that they simply couldn't provide them here's where the fraud happens instead of just admitting that to the investors they lied to them and basically said that they did fill all of those orders reporting unfilled purchase orders as sales which is there's no excuse for that so in 1971 and 1972 the sales numbers they showed in their reports filed with the SEC were all just nonsense for example in 1971 alone the SEC charged that their sales were inflated by 14 million dollars for these reasons in there were other parts of the fraud too but this was the most significant now it appears that their CFO the chief financial officer this guy named Seymour Rosenberg was the main guy behind this fraud but Ruth handler was also responsible going all the way back to Elliott's previous business she was always involved in the sales in financial end of things I have no idea if she knew what was happening but I will say that she should have known so at the very least she was negligent or I'd hate to say it but maybe wilfully choosing to look the other way I don't know I don't want to accuse anyone of anything but she pled no contest along with the CFO and they were both sentenced to pay fifty seven thousand dollars in addition to 41 years in prison which was quickly suspended their actual punishment was far less it was 500 hours of community service per year for five years at this point any trust in anyone previously running the company was completely lost the courts forced their board of directors and specifically the Audit Committee to restructure and bring in more outsiders their creditors didn't trust anyone either they were pushing for Ruth and Elliot to resign which they did it would have been hard for them to continue otherwise and as if that wasn't enough there were then all of these class-action lawsuits coming from the investors remember how they were all tricked into investing in Mattel after the news of the fraud and the exaggerated earnings surfaced their stock price fell from an inflated fifty-two dollars and 25 cents all the way down to around $2 so I think it's safe to say a lot of investors unfairly lost a lot of money and now they were looking to recover it the result here was Elliot and Ruth giving them 2.5 million shares of their own stock which represented about half of everything they owned then in 1980 after all of this was settled in behind them the handlers voluntarily sold their remaining shares of the company which was about 12% of it worth around eighteen point five million dollars as far as the company itself the whole thing ended up being more of a speed bump than anything else the initial issues causing that actual drop in sales were fairly isolated in short-term as far as the cover-up as we saw it they went on pretty immediate damage control replacing the management and anyone else who may have been responsible quite possibly the most affected from any of this were Ruth and Elliot just to recap on that it almost landed Ruth in jail for the rest of her life luckily it was severely reduced but it still forced her to do a ton of community service it also forced her and her husband away from the company that they had started and spent 30 years building into the law just of its kind in addition to forcing them to just about hand over half of everything as part of that class-action lawsuit in the end they walked away from mattel with 18 million dollars in their pocket which of course is a ton of money but considering all the time and effort they spend - all the risks that they took I mean they invented and popularized the Barbie doll for heaven's sake I don't know 18 million just isn't all that much considering focusing on Ruth for a minute just look at her she seems like such a sweet old lady I may have been a little hard on her earlier the fact is she was involved in this major accounting fraud whether she know about it or not I'm not gonna let her off the hook by any means but there are relevant factors that we have to consider before passing judgment remember I pointed out how many acquisitions Mattel was making just before the scandal as some of them even unrelated and a little out there I mean they literally bought a circus the year before the fraud started Ruth has said that was a big mistake because the rapid growth and complexity of the business made it too hard to detect the fraud maybe that's a weak excuse maybe it's legitimate but even if it is legitimate she was supposed to be on top of things and recognized the complexity at that time also in 1970 just before the fraud started she was diagnosed with breast cancer and had a mastectomy when she left Mattel she even switched her focus into making prosthetic breasts to help people who have been in similar circumstances she has said that during that time the disease was very understandably distracting her from the business which I would say is a pretty legitimate reason for being unaware that this was happening but even so probably would have been better to play someone else in charge that she trusted it's a tricky one I'd like to believe that she was just negligent and had no idea what was happening but sadly there's no way to know one way or the other she did own a lot of the stock and did stand to gain from this fraud let me know in the comments what do you think either way there are major reasons to respect the handlers they put everything on the line up multiple times to create this toy giant that's provided so much enjoyment to children over the years and the she did after Mattel I guess to finish the story Ruth and Eliot and have both passed away Ruth in 2002 and Eliot in 2011 but I think we can all agree that they've left behind quite the legacy also back to Mattel there's a lot more to talk about specifically rises and falls in the 1980s they ran into trouble with the video game market in the 1990s they made a harmful 3.5 billion dollar acquisition and as recent as 2007 they had a massive toy recall for using lead paints if any of that sounds interesting let me know and I can make a follow up talking about all of it but until then let me know any thoughts you have about this scandal I'd like to hear what you have to say thank you for watching [Music]

Channel: Company Man

Views: 527,664

Rating: 4.9154677 out of 5

Keywords:

Id: uopMlI25Nfs

Length: 11min 55sec (715 seconds)

Published: Wed Jun 24 2020