rival toymaker bought the family-owned company. Now the legacy of that toy is
haunting Mega Brands, the Canadian firm that purchased Rose Art.
Mega Brands officials allege in a lawsuit that Jeffrey and Lawrence Rosen
— the brothers who sold them Rose Art, then led that division after the
merger — didn’t fix the problems with the dangerous toy in part because they
didn’t want to jeopardize personal multimillion-dollar payouts tied to profit
targets.
Kenny Sweet Jr., a suburban Seattle toddler, died, and at least 27 other
children suffered serious intestinal injuries after swallowing tiny magnets
that fell out of Magnetix toys.
In a statement, the Rosen family denied Mega Brands’ allegations, saying
that “prior to its acquisition by Mega Brands” the family “acted in a thorough
and responsible manner with regard to the manufacture, safety, quality control
and sale of its Magnetix toy products.”
Four months before Kenny’s death in November 2005, Mega Brands bought Rose
Art from the Rosen family for $315 million in cash and stock, plus the
assumption of $35 million in debt.
Mega Brands, formerly known as Mega Bloks, promised the Rosen family more
than $51 million in additional “earnout” payments if certain financial targets
were met. The Rose Art division needed to sell a lot of Magnetix toys and
other products in 2005 to trigger the windfall.
The Rosens said they told Mega Brands before the merger that customers had
complained that magnets were falling out, and the family said it disclosed an
attorney’s claim that a child was injured. In a May 2005 letter, that attorney
said 10-year-old Timothy Kroell received life-threatening intestinal injuries
after swallowing Magnetix pieces. The Rosens in a court filing pointed to that
letter and their disclosure of customer complaints as evidence that Mega
Brands knew of these issues before the merger yet “never made any suggestions
for changes in the way the business operated.”
In a written response to questions, Mega Brands said it was not aware of
the extent of the problems with Magnetix until after Kenny’s death. As Mega
Brands executives negotiated the purchase of Rose Art, “the Rosens indicated
that there had been some complaints about magnets falling out but they had
looked into this and remedied the problem,” Mega Brands asserted.
Mega Brands said it tried to contact Timothy Kroell’s attorney but received
no response. The attorney told the Tribune that he didn’t respond because he
discovered the toy that hurt Timothy was a Magnetix knockoff.
More Top Picks Depression After A Heart Attack Why So Many Survivors Struggle
Mega Brands officials say the company added glue and increased factory
inspections shortly after it learned of Kenny’s death and later redesigned the
toy.
The U.S. Consumer Product Safety Commission announced a limited recall of
Magnetix on March 31, 2006. Not long after that, relations between the Rosens
and Mega Brands fell apart.
That May, the Rosens sued Mega Brands, alleging that the Canadian company
owed them more than $50 million in earnout and other payments. The brothers
alleged that Mega Brands executives discriminated against them because they
are American, not Canadian.
Mega Brands chief executive Marc Bertrand fired Lawrence Rosen via an
e-mail shortly after the suit was filed. Bertrand cited the lawsuit and “the
magnitude of the Magnetix-related problems,” among other things.
“It is also abundantly clear that you have been distracted by your earnout
claim and we are concerned that you may have not been acting or thinking in
the best interests of the company,” Bertrand’s e-mail said.
Mega Brands stock dropped 5 percent on the Toronto Stock Exchange on news of the shake-up.
The financial fallout continues. Last year, Mega Brands took $36.3 million
in pretax charges related to the changes it made to Magnetix toys, the costs
of product-liability suits and the litigation between the company and the
Rosens.
But the turmoil did not tarnish Magnetix’s luster with consumers. Sales of
Magnetix jumped to a record high last year.
Then last month, the safety commission expanded its recall of Magnetix
building sets, alerting the public that another 4 million boxes are considered hazardous.