Oct. 10 (Bloomberg) -- Mattel Inc. directors and officers knowingly allowed the company to break federal laws by delaying the reporting of defective toys, a shareholder claimed in a lawsuit on behalf of the world's largest toymaker.

The Sterling Heights Police & Fire Retirement System, a pension fund in Michigan, accused directors of failing to ensure that Mattel promptly reported potentially hazardous defects to federal regulators, according to a complaint filed in Delaware Chancery Court today. The delay allowed directors to sell Mattel stock while the price was artificially inflated, the suit said.

``The company's illegal actions have not only placed children in harm's way, they have also exposed Mattel to lawsuits and potential fines and/or regulatory actions from federal authorities,'' the pension fund said in the suit.

Mattel, the maker of Barbie dolls and Hot Wheels cars, recalled 21 million toys since August because of lead paint or loose magnets that may be swallowed. About 65 percent of Mattel's toys are made in China, the world's biggest exporter of consumer products.

Mattel spokeswomen Lisa Marie Bongiovanni, Jules Andres and Jennifer Mennell didn't return phone calls seeking comment.

Reasonable Control, Supervision

The lawsuit claims that Chairman and Chief Executive Officer Robert Eckert and 11 directors failed to exercise reasonable control and supervision over company affairs. Directors stood by as the company ``intentionally'' ignored its reporting obligations by withholding information about potentially hazardous products from federal regulators for months, lawyers for the pension fund said in the suit.

``Mattel's corporate policy of flaunting its obligations under federal law has had a long history with the company,'' lawyers said in the suit.

Since 2001, regulators have fined Mattel twice for ``knowingly'' withholding information regarding problems that created a risk of serious injury or death, the complaint said.

Directors allowed these violations to take place to reap the benefit of increased sales of defective products, which inflated the value of Mattel's shares, the suit said. Between late January and mid-May, numerous directors dumped more than $33 million in company stock, ``indicating that they knew of impending issues,'' the complaint said.

Profit Return Sought

The pension fund is asking a judge to order the directors to return all profits made on their sales of Mattel stock between January and May. The suit also seeks unspecified damages and attorney fees.

About 80 percent of toys in the U.S. are produced in China. The toy recalls have prompted more testing and congressional hearings. Mattel has increased unannounced visits to suppliers and has more people working at vendor sites full-time, David Kosnoff, the senior director for product integrity at Mattel Brands & Licensing, said in an interview earlier this month.

Mattel, based in El Segundo, California, fell 3 cents to $22.72 at 3 p.m. in New York Stock Exchange composite trading. The shares have gained 11 percent in the past year.

The case is Sterling Heights Police & Fire Retirement System v. Robert A. Eckert et al, CA3285, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Sophia Pearson in Wilmington, Delaware Spearson3@bloomberg.net

Last Updated: October 10, 2007 15:05 EDT