Jeffrey and Lawrence Rosen have accused the Montreal-based company's top officials of selling shares before the public was notified about the death of an American child who had ingested the firm’s Magnetix toy.
They also said officials sold shares before announcing that all the magnetic toys were being recalled due to concerns about safety and product liability issues.
A second series of trades between September 13th and December 15th 2006 occurred after the insiders allegedly became aware of distribution failures, following the integration with Rose Art.
Wal-Mart and another large customer that accounted for about 36.5 per cent of net sales in 2005, threatened to reduce their future business unless the failures were corrected, said the claim.
The loss of business was publicly disclosed by Mega Brands on November 9th 2007 during the third-quarter results when the company said sales decreased 8.8 per cent to $184.1 million.
The suit follows an announcement by the company that a special committee of its board "concluded that no action should be taken by the company in response to allegations," which had been brought to its attention earlier.
The former principals of Rose Art Industries Inc., which was acquired by Mega Brands in 2005, have accused the Mega Brands officers of "having collectively sold 1,604,500 company shares in December 2005 and/or the fall of 2006 (in most cases after exercising company options)" with knowledge of confidential information that could affect the company stock price.
Lawrence Rosen said: "We are extremely disappointed with Mega Brands' decision not to take any action against the insiders and by the lack of particulars provided by the company in its recent press release as to why the company concluded that no action should be taken."
Mega Brands spokesman Harold Chizick said the allegations are 'old news' and have been thoroughly investigated by law firm Fasken Martineau Du Moulin hired by an independent committee of the board.
"They investigated for seven months and came to the conclusion that the company should not take action," he said in an interview.
Rosen lawyer Joel Rochon said his clients are disappointed with the board's decision but said they were refused access to the document upon which the decision was based.
Chizick said the Rosens declined to co-operate with the investigators. But Rochon said they were prepared to do so, but weren't provided in advance with questions being sought.
"There's a lot going on," he said. "People are upset because of the way things have unfolded. Part of this relates to the insider trading allegations."