UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
Civil Action No.: 1:06-cv-00803-SWK
IN RE TAKE-TWO INTERACTIVE
SECURITIES LITIGATION
CONSOLIDATED AMENDED
CLASS ACTION COMPLAINT FOR
VIOLATIONS OF FEDERAL
SECURITIES LAWS
c
LABATON SUCHAROW & RUDOFF LLP
Jonathan Plasse OP-7515)
Stacey B. Fishbein (SF-4777)
Ethan D. Wohl (EW-0806)
100 Park Avenue
New York, New York 10017
Tel: (212) 907-0700
Fax: (212) 818-0477
Lead Counselfor Lead Plaintrf
TABLE OF CONTENTS
P
1.
NATURE OF THE ACTION ..........................................................................................................1
II.
JURISDICTION AND VENUE ...................................................................................................... 8
III.
PARTIES ............................................................................................................................................... 8
IV.
SUBSTANTIVE ALLEGATIONS ................................................................................................13
A.
TAKE-TWO'S HISTORY OF ACCOUNTING AND REPORTING
IMPROPRIETIES ...............................................................................................................13
The Company's First Restatement of Financial Results ...................................13
B.
2.
The Company' s Second Restatement of Financial Results ...............................13
3.
The SEC Files its Complaint and the Company Agrees to a Consent
Decree .......................................................................................................................14
THE COMPANY ISSUED A SERIES OF FALSE AND MISLEADING
STATEMENTS ABOUT ITS BLOCKBUSTER GAME, GTA: SAN
ANDREAS ............................................................................................................................15
The GTA Series Has Historically Been the Company's Most
Important Product ..................................................................................................15
C.
2.
The Release of GTA: San Andreas ......................................................................16
3.
The "Hot Coffee" Modification ...........................................................................18
4.
Despite its Denials , Take-Two Was in Fact Responsible for Including
the Sexually Explicit Scenes in GTA: San Andreas ........................................... 20
5.
Take-Two Becomes the Subject of Numerous Governmental
Investigations and Proceedings ............................................................................. 27
6.
Barbara Kaczynski, Company Director and Head of its Audit
Committee, Resigns ................................................................................................29
7.
Summary of False and Misleading Statements Regarding GTA: San
Andreas .....................................................................................................................30
THE COMPANY ISSUED FALSE AND MISLEADING STATEMENTS
CONCERNING ITS BACKDATING OF OPTIONS ...............................................31
1.
Introduction ............................................................................................................. 31
D.
2.
Take-Two's Stock Option Plans ...........................................................................32
3.
Take-Two's Improper Pricing of Stock Option Grants ....................................33
4.
The Backdating Scheme Had a Material Effect on the Company's
Financial Statements ...............................................................................................39
5.
Take-Two's Scheme Caused the Company to Violate Generally
Accepted Accounting Principles and SEC Regulations ....................................41
TAKE-TWO'S FALSE AND MISLEADING PERIODIC FINANCIAL
STATEMENTS ISSUED DURING THE CLASS PERIOD .....................................44
1.
Fiscal Year 2004 ......................................................................................................44
2.
Fiscal Year 2005 ......................................................................................................48
3.
Fiscal Year 2006 ......................................................................................................53
V.
CLASS ACTION ALLEGATIONS .............................................................................................. 55
VI.
CONTROL ALLEGATIONS/GROUP PLEADING ..............................................................57
VII.
S CIENTER ......................................................................................................................................... 59
A.
The Video Games in the GTA Franchise Were Take-Two's Leading Product .......... 59
B.
Eibeler and Winters' SOX Certifications Support They Acted With Scienter............60
C.
Defendant Brant, on Behalf of Take-Two, Knew That GTA: San Andreas
Contained Pornographic Materials and that the Company Had Improperly
Backdated Stock Options ....................................................................................................62
D.
Defendants Houser and Donovan knew of the False and Misleading
Information Regarding GTA: San Andreas ......................................................................63
E.
Defendants Eibeler and Winters Had the Opportunity to Commit the Fraud...........63
F.
The Company Was Motivated to Lie to the Investing Public Regarding its
"M" Rating for GTA: San Andreas ...................................................................................64
G.
Defendants Eibeler and Winters Were Motivated by Greed to Commit the
Fraud....................................................................................................................................... 65
VIII.
LOSS CAUSATION .........................................................................................................................67
A.
Disclosure of the ESRB Re-Rating of GTA: San Andreas to "AO" ............................68
B.
Disclosure of the Los Angeles City Attorney's Investigation into GTA: San
Andreas ..................................................................................................................................68
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IX.
C.
Disclosure of the Manhattan District Attorney's Investigation .....................................69
D.
Disclosure of the Second SEC Investigation ...................................................................69
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON
THE MARKET DOCTRINE ....................................................................................................... 69
X.
NO SAFE HARBOR ........................................................................................................................70
XI.
CLAIMS FOR RELIEF ....................................................................................................................71
A.
FIRST CLAIM: Violation of Section 10(b) of the Exchange Act and Rule
10b-5 Promulgated Thereunder Against All Defendants ...............................................71
B.
SECOND CLAIM: Violation of Section 20(a) of the Exchange Act Against
Defendants Eibeler and Winters ........................................................................................75
C.
THIRD CLAIM: Violation of Section 20A of the Exchange Act Against
Defendant Winters ...............................................................................................................77
XII.
PRAYER FOR RELIEF ...................................................................................................................77
XIII.
JURY DEMAND ............................................................................................................................... 78
SCHEDULE A
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The New York City Employees' Retirement System, the New York City Police Pension
Fund, and the New York City Fire Department Pension Fund (collectively "NYC Funds" or "Lead
Plaintiff") individually and on behalf of all other persons and entities who purchased or otherwise
acquired common stock issued by Take-Two Interactive Software, Inc. ("Take-Two" or the
"Company") between October 25, 2004 and July 10, 2006, inclusive (the "Class Period"), by their
undersigned attorneys, for their Consolidated Amended Class Action Complaint ("Complaint"),
allege the following upon personal knowledge as to themselves and their own acts, and upon
information and belief as to all other matters.
Lead Plaintiff's information and belief are based upon, among other things, its investigation
made by its attorneys , which includes a review and analysis of Take-Two's press releases, conference
calls, analyst reports, media reports, news articles, filings with the United States Securities and
Exchange Commission (`SEC"), pleadings and other documents relating to various criminal, civil
and administrative investigations and proceedings involving the Company and certain of its
subsidiaries brought by, among others, the SEC, the Federal Trade Commission (`FTC"), the
District Attorney for the County of New York, and the City Attorney for Los Angeles, as well as
interviews with numerous confidential witnesses, including former employees of Take-Two.
Many of the facts supporting the allegations contained herein are known only to the
Defendants or are exclusively within their custody and/or control. Lead Plaintiff believes that
further substantial evidentiary support will exist for the allegations in this Complaint after a
reasonable opportunity for discovery.
1.
NATURE OF THE ACTION
1.
This is a class action brought by Lead Plaintiff on behalf of all persons and entities
who purchased or otherwise acquired common stock of Take-Two during the Class Period, and who
suffered damages thereby. Lead Plaintiff seeks to pursue remedies under the Securities Exchange
Act of 1934 (the "Exchange Act"). As described below, throughout the Class Period, Defendants
issued, or caused to be issued , a series of statements that they knew, or were reckless in not
knowing, were materially false and misleading, and failed to disclose material information necessary
to render such statements not false and misleading concerning, inter alia, the Company's: (a) most
profitable product, its blockbuster video game, Grand Theft Auto : San Andreas ("GTA: San
Andreas"); and (b) improper backdating of stock options granted to its directors and senior
management.
2.
Take-Two, develops, publishes, and distributes interactive entertainment software,
hardware, and accessories worldwide. The main source of the Take-Two's net sales is its publication
and distribution of interactive software games such as GTA: San Andreas for personal computers,
video game consoles, and handheld gaming units. Take-Two sells its software titles through direct
relationships with retail customers and third-party distributors such as Wal-Mart, Best-Buy and
Circuit City.
Take-Two: Cutting Edge Video Gamemaker and Restatement Recidivist
3.
Take-Two has, with violence-filled games like those in the GTA series , developed an
image as being on the cutting edge of the video game industry. Moreover, since going public in
1997, the Company has had a woeful history of financial, accounting and regulatory problems. Prior
to the commencement of the Class Period, the Company repeatedly engaged in improper accounting
practices including, inter alia, inflating earnings through fraudulent "parking" transactions and failing
to set aside adequate reserves for price concessions granted to customers. As a result, and to correct
these financial improprieties, in February 2002, the Company restated its financial results for fiscal
year 2000 and the first three quarters of its 2001 fiscal year (the "First Restatement"), and in
February 2004, again restated its financial results, this time, for fiscal years 1999 through 2002 and
the first three quarters of 2003 (the "Second Restatement").
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4.
These accounting improprieties also prompted the SEC to commence a formal
investigation into the Company and certain of its officers, as well as, issue "Wells Notices" to the
Company and certain of its officers.
5.
In June, 2005, the SEC filed a civil action against Take-Two relating to the fraudulent
accounting practices that resulted in the two restatements. Take-Two thereafter consented to the
entry of a judgment (the "Consent Decree"), which provided, inter alia, for: (i) payment by the
Company of a $7.5 million fine, and (ii) a permanent injunction against the Company from further
violations of the federal securities laws, including Section 10(b) ofthe Exchange Act.
6.
Unfortunately for the Company's investors, and notwithstanding the entry of the
Consent Decree, Take-Two has continued to issue misleading SEC filings and press releases in
violation of Section 10(b) of the Exchange Act, both with respect to its GTA: San Andreas video
game and its improper backdating of stock options.
Take-Two Issues False and Misleading Statements Concerning GTA: San Andres
7.
Sales of GTA: San Andreas, the fourth game in the GTA series, commenced on
October 25, 2004 and as the Defendants hoped, the game became an immediate and enormous
success. The game sold over 12 million units by January 31, 2005 at a retail sales price of
approximately $50 per unit, resulting in approximately $600 million in retail sales for that version of
the game in a little over three months.
8.
In order to "push the boundaries" even further in an effort to maximize the
Company's sales and maintain its "bad boy" image, the Company decided, prior to the game's
release, to include a variety of sexually explicit scenes in GTA: San Andreas. As defendant Sam
Houser ("Houser") noted in a July 14, 2004 email to defendant Terry Donovan ("Donovan"):
To this end, in addition to the violence and bad language, we want to
include sexual content, which I understand is questionable to certain
people, but pretty natural (more than violence) ....
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All of this material is perfectly reasonable for an adult (of course it
is!), so we need to push to continue to have our medium accepted
and respected as mainstream entertainment platform. [W]e have
always been about pushing the boundaries; we cannot stop here ....
9.
At the last minute, however, the Company realized that the variety of sexually
explicit scenes contained in GTA: San Andreas would prompt an "Adults Only"' (or "AO") rather
than a "Mature" (or "M") rating from the Entertainment Software Ratings Board (the "ESRB"), the
industry agency designated to review such games. Such a rating would be disastrous to the
Company because retailers, like Wal-Mart, which were a major source of sales, would not carry a
game with an "AO" rating.
10.
The Company then had two alternatives to obtain the necessary "M" rating from
the ESRB : either completely delete all the sexually explicit scenes from GTA: San Andreas, which
would seriously delay the launch date for the game, and could adversely affect the workings of the
game; or embed the sexually explicit scenes so that they would not, at least initially, be observed
during the ESRB review process.
11.
The Defendants decided to follow the quick way to the money and embedded the
pornographic scenes within the game. As defendant Houser noted in a June 14, 2005 e-mail to
defendant Donovan:
we locked it [the pornographic scenes] away because there was no
other way to get the game done on time- safely. The code is very
interwoven in [GTA] and everything reacts to everything else. The
impact of yanking something late is scary.
12.
The Company then applied for a "M" rating from the ESRB . Based on the
application, and unaware of the embedded sexually explicit scenes, the ESRB designated GTA: San
Andreas with a "M" rating, enabling the Company to market it through large retail stores. Within
six months, the game became one of the most popular video games ever published.
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13.
However, the embedded sexually explicit scenes were easily unlocked by a widely
distributed software modification over the internet called "Hot Coffee." Once installed, the
modification (or "mod"), as it is known in the industry, unlocked the preexisting code inside the
game's memory and allowed players to view and control the sexually graphic mini-games. The mod
was nicknamed "Hot Coffee" because when the game's central character known as CJ won over his
would-be girlfriend, she would invite him inside her house for "hot coffee."
14.
By midJune, 2005, public awareness of the sexually explicit scenes was growing.
However, the Company, having already racked up hundreds of millions of dollars of sales , did not
seem concerned . Indeed, defendant Houser, in a June 13, 2005 email seemed pleased:
they found it ... (d)oes this cause any problems? Hope not as it is
pretty cool.
15.
The ESRB was not so sanguine. On July 20, 2005, less than a week after it initiated
an investigation to determine whether GTA: San Andreas contained sexually explicit content, the
ESRB concluded its investigation and changed the rating of the game from "M" to "AO," based on
its determination that the game included prolonged scenes of graphic sexual content and nudity
hidden in its code.
16.
In response, retailers such as Best Buy, Circuit City and Wal-Mart immediately pulled
all existing copies of GTA: San Andreas from their shelves. Immediately thereafter , Take-Two
dramatically reduced its earnings projections for the fourth quarter of 2005 and recorded a net loss
for the third quarter of 2005 in anticipation of returns of tens of thousands of unsold copies of the
game from retailers.
17.
The Company's marketing of GTA: San Andreas then became the subject of a series
of governmental investigations, including those initiated by the FTC, Los Angeles County Attorney's
Office, and the Manhattan District Attorney's Office.
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18.
Despite the edict of the Consent Decree not to engage in further violations of
Section 10 (b) of the Exchange Act, the Defendants did just that, by participating in and pursuing the
common course of conduct and fraudulent scheme complained of herein and/or by issuing or
causing the issuance of a series of false and misleading statements concerning GTA: San Andreas,
including.
(a)
failing to disclose that GTA: San Andreas contained sexually explicit scenes;
(b)
failing to disclose that Take-Two intentionally included these pornographic
scenes in the game;
(c)
misrepresenting that Take-Two labeled and marketed its products in
accordance with ESRB principles and guidelines, and that it was complying with ESRB rating
systems, inasmuch as the inclusion of the pornographic scenes mandated that the game be rated by
the ESRB as "AO" rather than "M;"
(d)
failing to disclose in their numerous positive statements regarding GTA: San
Andreas that the inclusion of the pornographic scenes would significantly and negatively impact the
Company's revenues and earnings; and
(e)
failing to disclose the probability and extent of numerous governmental
investigations of Take-Two concerning GTA: San Andreas.
Take-Two Issues False and Misleading Statements
Concerning its Improper Practice of Backdating Stock Options
19.
In further violation of the Consent Decree, the SEC filings and press releases issued
during the Class Period were false and misleading in violation of Section 10(b) of the Exchange Act,
due to the Company's improper backdating of stock options granted to its top level management
and its failure to properly account for the backdated stock options.
20.
Lead Plaintiff's investigation has identified overwhelming evidence that Take-Two
routinely granted stock options to Company officers and directors on the precise dates at which its
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stock had reached its lowest price in weeks, if not months. Lead Plaintiff retained a professor of
finance who has authored several articles on the subject of options backdating and is a recognized
expert in the field to conduct an analysis of Take-Two's stock option grants. The professor's
analysis reveals that the timing of the Company's option grants could not have been the result of
random chance . Indeed, the mathematical probability of Take-Two's option grants occurring
without manipulation was less than one in 76, 000,000. Byway of contrast, the chances of
winning New York State 's "LOTTO" lottery are approximately one in 45,000,000.
21.
Because the Company failed to comply with the applicable Generally Accepted
Accounting Principles ("GAAP") governing the recording of compensation costs attributed to stock
option grants, its backdating scheme had a material effect on Take-Two's Class Period financial
statements . To the extent the Company failed to record, as a compensation cost, the difference
between the price of Take-Two stock on the date of the actual grant and the "backdated" exercise
price of the options, this deliberate omission resulted in a material understatement of the Company's
reported compensation expense and a material overstatement of its reported income during the
Class Period.
22.
On July 10, 2006, the Company announced it had received notice that the SEC was
conducting yet another investigation of Take-Two, this time focusing on the granting of stock
options from January 1997 to the present. This press release also belatedly announced that the
Company had initiated its own internal investigation into prior stock option grants.
23.
Then, on August 31, 2006, Take-Two announced that it was delaying filing with the
SEC its Form 10-Q for its third fiscal quarter of 2006 until it completed its own "investigation" of
its stock options program. It thus appears likely that the Company will again (for the third time in
six years) restate its financial results, this time, to properly reflect the stock option grants.
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II.
JURISDICTION AND VENUE
24.
The claims asserted herein arise under and pursuant to Sections 10(b), 20(a) and 20A
of the Exchange Act (15 U.S.C. § 78j (b), 78t(a) and 78t- 1) and Rule 10b-5 promulgated thereunder
by the SEC (17 C.F.R. § 240.10b-5). This Court has jurisdiction over the subject matter of this
action pursuant to 28 U.S.C. § 1331 and Section 27 of the Exchange Act (15 U.S.C. § 78aa).
25.
Venue is proper in this district pursuant to Section 27 of the Exchange Act and 28
U.S.C. § 1391(b). The Company' s corporate headquarters are located in New York, New York, and
many of the acts and practices complained of in this Complaint, including the preparation and
dissemination of materially false and misleading information, occurred in this district.
26.
In connection with the acts, transactions, conduct and other wrongs alleged in this
Complaint, Defendants, directly and indirectly, used the means and instrumentalities of interstate
commerce, including but not limited to the United States mails, interstate telephone
communications and the facilities of the national securities exchanges.
III.
PARTIES
27.
The NYC Funds are actuarial pension systems of the city of New York. The NYC
Funds purchased Take-Two common stock at artificially inflated prices during the Class Period and
have been damaged thereby. Attached to this Complaint as Schedule A is a listing of Lead Plaintiff's
purchases and sales of Take-Two's common stock during the Class Period.
28.
Defendant Take-Two has executive offices in New York, New York and is
organized under the laws of Delaware. Take-Two has over 72 million shares issued and outstanding,
which trade in an efficient market on the Nasdaq National Market ("NASDAQ"). Take-Two
publishes, develops, and distributes interactive entertainment software, hardware, and accessories. It
also manufactures and markets video games and video game accessories in Europe, North America
and the Asia Pacific region. Take-Two sells its software titles in retail outlets in North America and
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Europe through direct relationships with retail customers and third-party distributors. Rockstar
Games, Inc. ("Rockstar Games"), a wholly owned subsidiary of Take-Two, is the premium content
development division of game publisher Take-Two. Rockstar Games is affiliated with various
development studios, including Rockstar North Ltd. (` Rockstar North"). Rockstar North, another
wholly owned subsidiary of Take-Two, created all of the games in the GTA series , including Grand
Theft Auto, Grand Theft Auto 2, Grand Theft Auto III, Grand Theft Auto: Vice City, Grand Theft
Auto: San Andreas, and Grand Theft Auto: Liberty City Stories.
29.
(a)
Defendant Paul Eibeler ("Eibeler") is the Chief Executive Officer ("CEO")
of Take-Two and has been since January 2005. Defendant Eibeler served as President of the
Company from July 2000 to June 2003 and a director from December 2000 to February 2003.
Eibeler became President and a director once again in April 2004, and he continues to serve in those
capacities.
(b)
Because of his positions as well as his access to internal corporate
documents, conversations and connections with other corporate officers and employees, attendance
at management and Board meetings, and committees thereof, Eibeler knew or should have known
the adverse non-public information about the sexually explicit programming content of GTA: San
Andreas, the improper backdating of stock options granted to him and other Take-Two directors
and officers, the improper accounting for such options, and the false and misleading statements
made by or on behalf of the Company in connection therewith. Indeed, defendant Eibeler has
repeatedly certified in filings submitted to the SEC during the Class Period that he had designed
sufficient disclosure controls and procedures to " ... ensure that material information relating to
[Take-Two], including its consolidated subsidiaries, [Rockstar Games] is made known to [him] ...."
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(c)
During the Class Period, Eibeler participated in the issuance of false and
misleading statements , including press releases and SEC filings , regarding GTA: San Andreas and
the improper granting of stock options as described below.
30.
(d)
Eibeler received at least 995,000 options.
(a)
Defendant Karl H. Winters ("Winters") is, and at all times relevant hereto
was, Chief Financial Officer (`CFO") of Take-Two.
(b)
Because of his position as CFO, as well as his access to internal corporate
documents, conversations and connections with other corporate officers and employees, attendance
at management meetings and committees thereof, Winters knew or should have known the adverse
non-public information about the sexually explicit programming content of GTA: San Andreas, the
backdating of improper stock option grants to Take-Two directors and officers, the improper
accounting for such options, and the false and misleading statements made by or on behalf of the
Company in connection therewith. Indeed, defendant Winters has repeatedly certified in filings
submitted to the SEC during the Class Period that he had designed sufficient disclosure controls and
procedures to " ...ensure that material information relating to [Take-Two], including its
consolidated subsidiaries, [Rockstar Games] is made known to [him] ...."
(c)
During the Class Period, Winters participated in the issuance of false and
misleading statements, including the preparation of the false and/or misleading press releases and
SEC filings , regarding GTA: San Andreas and the improper granting of stock options as described
below.
(d)
Shortly prior to the time the ESRB changed the rating of GTA: San Andreas
from "M" to "AO," Winters sold 162,000 shares of Take-Two stock for proceeds of approximately
$5.9 million.
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31.
(a)
Defendant Ryan Brant (Brant"), served as Take-Two's Chairman and CEO
until he "resigned" in March, 2004. Brant's resignation was prompted by the SEC investigation, and
pursuant to the Consent Decree entered in June 2005, Brant agreed to pay a penalty of $500,000,
disgorge profits of $3,103, 252 and not serve as an officer or director of a public company for five
years, or violate Section 10(b) of the Exchange Act.
(b)
Since March, 2004, Brant has held the official position of "Vice-President of
Publishing" and has remained active in the management of the Company.
(c)
As described below: (i) Brant was active in the Company's development of
GTA: San Andreas and knew of the inclusion of pornographic scenes in that game; and (ii) Brant,
along with other members of the Company's senior management, supervised the policy of
improperly backdating stock options. Indeed, Brant was the primary beneficiary of this scheme,
receiving at least 779,560 options that were dated at the lowest stock price for the month during
which the options were granted to him.
(d)
Because of his position at Take-Two, his active participation in the
development of the improper granting stock options and the inclusion of pornographic materials in
GTA: San Andreas, as well as his access to internal corporate documents , conversations and
connections with other corporate officers and employees of both Take-Two and Rockstar Games,
and via reports and other information provided to him in connection therewith, Brant knew or
should have known about the adverse non-public information concerning the sexually explicit
programming content of GTA: San Andreas, the improper backdating of stock options, the
improper accounting for such options, and the false and misleading statements made by the
Company in connection therewith.
32.
Defendant Houser is, and at all times relevant hereto was, the President and co-
founder of Rockstar Games. Rockstar Games is the development arm of Take Two, and is
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responsible for all of the games in the GTA series, including GTA: San Andreas. As described in
detail below, Houser was aware of the Company's intentional inclusion of the sexually explicit
content in GTA: San Andreas because of his active participation in the development and creation of
the game. Further, because of his position at Rockstar Games, as well as, his access to internal
corporate documents, conversations and connections with other corporate officers and employees
of both Rockstar Games and Take-Two, and via reports and other information provided to him in
connection therewith, Houser knew or should have known about the adverse non-public
information concerning the sexually explicit programming content of GTA: San Andreas, and the
false and misleading statements made by the Company in connection therewith.
33.
Defendant Donovan is, and at all times relevant hereto was, the CEO of Rockstar
Games. In addition, Donovan is responsible for Rockstar Games' marketing, branding and public
relations campaigns. As described in detail below, because of Donavan's active participation in the
creation and development of GTA: San Andreas, he was aware of the Company's intentional
inclusion of the sexually explicit content in the game. Further, because of Donovan's position at
Rockstar Games, as well as his access to internal corporate documents, conversations and
connections with other corporate officers and employees of both Rockstar Games and Take-Two,
and via reports and other information provided to him in connection therewith, Donovan knew or
should have known about the adverse non-public information concerning the hidden sexuallyexplicit programming content of GTA: San Andreas, and the false and misleading statements made
by the Company in connection therewith.
34.
The defendants identified in 1129-33 are referred to herein as the "Individual
Defendants."
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IV.
SUBSTANTIVE ALLEGATIONS
A.
TAKE-TWO'S HISTORY OF ACCOUNTING AND
REPORTING IMPROPRIETIES
1.
35.
The Company' s First Restatement of Financial Results
Since 2000, Take-Two has been plagued by improper financial reporting, lengthy and
multiple SEC investigations, and revolving door management. Take-Two's public troubles began in
November 2001, prior to the commencement of the Class Period, when the SEC launched an
informal investigation into the Company's revenue recognition policies and practices. To head-off
the SEC investigation, Take-Two hired outside legal counsel and conducted an internal investigation
into the accounting matters at issue, which ultimately led to the First Restatement of the Company's
financial results.
36.
On February 12, 2002, Take-Two filed a Form 10-K with the SEC wherein it
disclosed the effects of the First Restatement on its financial results for fiscal year 2000 and the first
three quarters of fiscal year 2001. The First Restatement was based on the Company's improper
accounting for: (i) products that had not been shipped during the reported time period (the
"parking" transactions); (ii) product returns; and (iii) improper accounting treatment of acquisitions
of various companies. The Company was forced to restate its financial results to eliminate
improperly recognized net sales of $15 million for fiscal year 2000, and $10.5 million for the first
three quarters of 2001. The First Restatement also included a $19.2 million charge to correct
improper accounting by a subsidiary.
2.
37.
The Company' s Second Restatement of Financial Results
On December 18, 2003, Take-Two issued a press release disclosing that the SEC had
issued Wells Notices to Take-Two, and certain Company officers , including defendant Brant, the
Company's Chairman and CEO at the time. The Wells Notice revealed that the SEC intended to
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bring a civil action seeking an injunction and damages against the Company and stemmed from the
previously disclosed SEC investigation.
38.
On January 30, 2004, Take-Two filed with the SEC a Form NT 10-K announcing,
among other things, that the Company intended to amend its revenue recognition policies by
adopting a new methodology for recording reserves for price concessions . The Company also
announced that the revision in the Company's revenue recognition policies would result in the
Second Restatement of its previously issued financial results.
39.
In February 2004, Take-Two restated its financial results for fiscal years 1999
through 2002 and the first three quarters of 2003. The Second Restatement related to the
Company's continued fraudulent "parking" transactions, and its failure to set aside adequate reserves
for future price concessions granted to customers. These fraudulent accounting practices materially
overstated Take-Two's reported revenue and earnings for nine of the fifteen quarters between 2000
and the third quarter of 2003; the "parking" transactions inflated revenue by over $11 million, and
the failure to set aside adequate reserves overstated net income by more than $5.5 million.
3.
40.
The SEC Files its Complaint and the Company
Agrees to a Consent Decree
In June, 2005, the SEC filed a civil action against Take-Two, Brant and certain other
officers, alleging the Company's financial statements from 2000 through 2003 were false and
misleading because, inter alia, the Company systematically engaged in fraudulent "parking"
transactions, improperly recognized sales revenues for games that were still being manufactured,
improperly accounted for the acquisition of two video games publishers, and failed to establish
proper reserves for reduction in the prices of its games.
41.
At or about the same time, the Company consented to the entry of the Consent
Decree, which required that: (a) the Company pay a fine of $7.5 million; (b) the Company agree to
commit no further violations of, inter alia, Section 10(b) of the Exchange Act; and (c) defendant
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Brant pay a penalty, disgorge bonuses, and agree not to serve as an "officer or director" of a public
company (including Take-Two) for five years. Defendant Eibeler, on behalf of the Company,
signed the Consent Decree.
42.
In summary, shortly prior to the commencement of the Class Period, the Company
had restated its financial results twice, been the subject of an SEC investigation enforcement action
and complaint, and entered into a Consent Decree paying a substantial fine and agreeing not to
commit further violations of Section 10(b) of the Exchange Act.
B.
THE COMPANY ISSUED A SERIES OF FALSE AND MISLEADING
STATEMENTS ABOUT ITS BLOCKBUSTER GAME, GTA: SAN
ANDREAS
1.
43.
The GTA Series Has Historically Been
the Company's Most Important Product
Take-Two purveys raw, violent content in its video games. Indeed, according to an
industry analyst, "if the video game world were a high school, Take-Two would be the guy in the
leather jacket who blatantly smokes at his locker." Grand TbeftAuto Publisher Plays It Safe: Take-Two
Interactive Cancels Controversial Game After Previous Run Ins With Ratings Board, June 6, 2006, available at
http://www.Money.cnn.com/2006/06/06/commentary/game over/column gaming/index.htm .
44.
It's a company with an edge - and it has carefully cultivated that edge into substantial
profits with games like Manhunt, State of Emergency and, most prominently, the GTA franchise.
Game critic Bob Colayco stated the following about GTA generally:
The Grand Theft Auto series has been celebrated by video game
fans, demonized by politicians , and even studied by academia. More
so than any other game franchise, the franchise elicits strong
emotions from a wide range of people , even those not tied into the
game industry in some way ... The combination of popularity and
edgy content made Grand Theft Auto a lightning rod for the debate
on violence in video games.
The History of Grand TbeftAuto, December 15 , 2005, available at http://www.gamespot.com/
features
features/61 11834 /index.html.
-15-
45.
According to Dan Houser, creative VP at Rockstar Games, "[w]e try to take stuff
that hasn't been explored yet, and if others choose to follow, that's their business." Indeed,
Defendant Donovan has been more blunt, noting "we're not about cute games for kids....we don't
make games about Puff the f-ing Magic Dragon." Top 50 Game Geeks 26-50, 2005 WLNR 1119509
(July 16, 2005).
46.
The original GTA game was released in 1998 and has since become legendary in the
gaming world. Grand Theft Auto III ("GTA III"), released in 2001, marked the beginning of the
Company's entrance into the 3D gaming world viewed from a third-person perspective. As a result
of GTA III's advanced graphics and technology, it sold over ten million copies world wide.
2.
47.
The Release of GTA: San Andreas
On March 1, 2004, Take-Two issued a press release announcing GTA: San Andreas,
the next iteration in the globally successful GTA franchise. The Company and the Individual
Defendants knew that GTA: San Andreas would have to push the boundaries of acceptable societal
norms even harder and farther than any previous GTA video game in order to compete in the
saturated video game industry. As noted by defendant Houser, in a March 1, 2004 press release
issued by Take-Two:
In the past couple of years, we have put an enormous amount of
pressure on ourselves to ensure we do everything possible to exceed
people's expectations with Grand Theft Auto: San Andreas ... Even
though we still have eight months to go, we are starting to become
very proud of what we have achieved and we can't wait to get the
game into players' hands.
48.
GTA: San Andreas was released in the fall of 2004 with high market expectations
and large forecasted profits for the Company. As described below, given the unparalleled success of
the Company's previous GTA games, the Company attempted to boost its revenues by heavily
marketing the game and issuing financial guidance based upon its expected mammoth sales.
-16-
49.
Before its release , however, the Company had to submit GTA: San Andreas to the
ESRB to receive a rating label. The ESRB is a self-regulatory body established in 1994 to provide
consumers and retailers a rating based on an individual game's content. The ESRB independently
applies and enforces ratings, advertising guidelines, and online privacy principles adopted by the
computer and video game industry.
50.
Ratings provided by the ESRB have two parts: (i) rating symbols that suggest age
appropriateness of a game; and (ii) content descriptions that reveal the characteristics in a game that
influenced a particular rating or that may be of concern. The ESRB's standards influence video
game companies to control the content of their games in order to attain a rating that permits the
widest range of distribution coupled with the highest sales. Major retailers including Circuit City,
Wal-Mart and Best Buy, will not sell games with an "AO" rating.
51.
When Take-Two submitted GTA: San Andreas to the ESRB, the Company did not
reveal that it had included sexually explicit content in the game that could be accessed through
software available on the internet.
Since the ESRB was not provided with complete and accurate
information about GTA: San Andreas from Take-Two, the game initially received an "M" rating.
Under the ESRB 's Game Rating & Description Guide, an "M' 'rating indicates that the game is
suitable for persons ages 17 and older and that the game may contain violence, blood and gore,
sexual content or strong language.
52.
Had the Company provided truthful and accurate information to the ESRB, the
explicit sexual content of GTA: San Andreas would have earned the video game an "AO" rating. A
title rated "AO" has "content that should only be played by persons 18 years and older. Titles in this
category may include prolonged scenes of intense violence and/or graphic sexual content and
nudity." As noted above, major retailers such as Wal-Mart, Circuit City and Best Buy will not sell
games with an "AO" rating.
-17-
53.
On October 25, 2004, Take-Two began selling GTA: San Andreas. The video game,
with its "M" rating, making it available in most of the nation's largest retail chains, was an immediate
and huge success. Approximately 12 million copies of GTA: San Andreas were sold within three
months and by fiscal year end 2004, GTA: San Andreas accounted for 20.9% of Take-Two's
revenues. No other product accounted for more than 10% of Take-Two revenues for that year.
Similarly, for fiscal year 2005, GTA: San Andreas accounted for approximately 31% of Take-Two's
revenues. No other product accounted for more than 10% of Take-Two's revenues for that year.
3.
54.
The "Hot Coffee" Modification
However, it was not long before the sexually explicit programming content of GTA:
San Andreas became apparent to consumers. By June 2005, the "Hot Coffee" mod had percolated
throughout the gaming world. On June 9, 2005, Patrick Wildenborg, a software engineer from the
Netherlands, posted the following on Wikipedia, a well known and widely accessed source of
information for video game players:
With this mod you will be able to unlock the uncensored interactive
sex-games with your girlfriends in San Andreas. Rockstar build
[built?] all this stuff in the game, [but decided to disable it in their
final release for unknown reasons] And now this mod enables these
sex-games again, so now you can enjoy the full experience.
Hot Coffee Madfar GTA San Andreas, September 9, 2005, available at http: / /patrickw .gtagames.nl/
mods.html.
55.
The "Hot Coffee" mod became widely known among gamers and was easily
accessible by downloading and installing it on a user's personal computer.
56.
The news regarding the "Hot Coffee" mod prompted the ESRB to commence an
investigation of GTA: San Andreas. On July 8, 2005, GameSpot, a leading online source for the
gaming industry, published a news article entitled "ESRB Investigating San Andreas Sex
Minigames." When asked about the investigation, the Company responded that it was confident
-18-
that the rating of GTA: San Andreas would remain unchanged and falsely stated that the sexually
explicit content was the work of third parties and not Take Two. The GameSpot article stated in
relevant part:
Today, one of the most popular recent game industry rumors showed
signs of turning into a very real scandal.
Following a verbal lashing this week from California Assemblyman
Leland Yee (D-San Francisco), the Entertainment Software
Ratings Board (ESRB) today said it was launching an
investigation into Rockstar Games' best-seller Grand Theft
Auto: San Andreas to determine whether the game contained
sexually explicit minigames hidden in its code.
ESRB president Patricia Vance said her organization has "opened an
investigation into the circumstances surrounding the `Hot Coffee'
modification." "Hot Coffee" refers to the mod that, when installed
on a PC with San Andreas on it, unlocks several minigames that
prompt players to have the game's hero engage in X-rated acts.
The ESRB's investigation will examine whether the mod unlocks
preexisting code, as appears to be the case, or is actually a purely
third-party creation. Its ultimate purpose will be to determine if
Take-Two violated ESRB regulations requiring "full disclosure
ofpertinent content."
"The integrity of the ESRB rating system is founded on the trust of
consumers who increasingly depend on it to provide complete and
accurate information about what's in a game. If after a thorough and
objective investigation of all the relevant facts surrounding this
modification, we determine a violation of our rules has occurred, we
will take appropriate action," Vance said in a statement released this
morning ....
Rockstar alerted the press late in the day that it is aware of the
investigation by the ESRB. "We can confirm the ESRB is
conducting an investigation and that we will be complying fully
with their enquiries, "the statement read. "We thoroughly support
the work of the ESRB, and believe that it has an exemplary record of
rating games and promoting understanding of video game content.
We also feel confident that the investigation will uphold the
original rating ofthe game, as the work ofthe mod community
is beyond the scope ofeitherpublishers or the ESRB. "
This afternoon , when asked if the "Hot Coffee" code was included in
game discs manufactured by Rockstar or its agents , the company
-19-
commented more fully than it had previously. Specifically, a
spokesperson for Rockstar told GameSpot News it was not.
(Emphasis supplied).
57.
On July 15, 2005, GameSpat followed up its initial story with another article entitled
"Confirmed: Sex minigame in PS2 San Andreas." GameSpot confirmed the existence of the "Hot
Coffee" mod, but reported that a spokesperson for Take-Two had denied that the Company was
responsible for the sex scenes in GTA: San Andreas, but rather the scenes were entirely the work of
third-party hackers. The article stated in relevant part:
According to its creators, the Hot Coffee mod merely unlocks
hidden, preexisting code inside San Andreas. The game's publisher,
Rockstar Games, appeared to vehemently--but carefully--deny that
charge in a statement earlier this week "So far we have learned that
the `Hot Coffee' modification is the work ofa determined group
ofhackers who have gone to significant trouble to alter scenes
in the official version of the game," the company said. "In
violation of the software user agreement, hackers created the
`Hot Coffee' modification by disassembling and then
combining, recompiling and altering the game's source code."
However, Rockstar Games' argument has been undermined by
an increasing number ofreports that claimed the sex minigame is in the PlayStation 2 version ofSan Andreas. Since the
PS2 version comes on an unmoddable DVD, it cannot have any
content added to it, although cheat codes-created either by
the publisher or thirdparties-can unlockpreexisting code on
the disc. While devices such as GameShark and Action Replay Max
can tweak preexisting variables in system memory with cheats, they
cannot inject new models, animations , and/or code into a game.
(Emphasis supplied).
4.
58.
Despite its Denials , Take-Two Was in Fact Responsible
for Including the Sexually Explicit Scenes in GTA: San Andreas
The Company's claim that it was not responsible for the sex scenes in GTA: San
Andreas, which was widely reported in the press, created the false and misleading impression that
the sexually explicit scenes were not a part of the original programming but rather were added by
-20-
third party programmers who developed the "Hot Coffee" mod, and that such scenes were only
found in the third party programming.
59.
Lead Plaintiffs investigation has revealed that the Company, in an effort to "push
the boundaries" and maximize sales, always intended for the sexually explicit scenes to be included
in GTA: San Andreas , and developed the game to include those scenes. According to Confidential
Witness (`CW 1'), who was a head producer at Rockstar Games from 2000 - 2003 and worked on
the production end of the development of GTA: San Andreas, the girlfriend scenes that would
eventually become the embedded pornography , were initially intended to be in GTA: San Andreas.
Indeed, CW 1 recalls reviewing, in early to mid 2003, a work-up from Rockstar North detailing the
planned development of GTA: San Andreas , and advised that the work-up included all of the
sexually explicit scenes.
60.
The following e-mail colloquy between defendant Houser, and Jennifer Kolbe, a
Rockstar Games producer, dated July 14, 2004, also reflects the Company's intention to include the
sexually explicit scene. Notably, defendant Donovan, was copied on this exchange.
Sam Houser: How are we going to handle the approval of certain
bits of content. In [San Andreas] we are keen to include new
functionality and interaction in line with the `vibe' of the game. To
this end, in addition to the violence and bad language, we want to
include sexual content, which I understand is questionable to certain
people, but pretty natural (more than violence), when you think
about it and consider the fact that the game is intended for adults.
Here are some examples of content that will be displayed graphically
[LISTING OF 5 SEXUALLY EXPLICIT ACTS REDACTED]
All of these items are displayed through cut scenes and in-game. I
know this is a tricky area, but I want to find a way for this to work;
the concept of a glorified shop (Wal-Mart) telling us what we
can/can't put in our game is just unacceptable on so many levels.
[A]ll of this material is perfectly reasonable for an adult (of course it
is!), so we need to push to continue to have our medium accepted
and respected as mainstream entertainment platform. [WJe have
always been aboutpushing the boundaries; we cannot stop
-21-
here.... how do we proceed with this? We really don't want to cut
these areas.
Jennifer Kolbe : There are clearly two issues that I need to deal with:
The ESRB and how far we can push the content envelope before the
game turns from Mature to an AO, which would traditionally
eliminate us from about 80% of our distribution channels ... The
second issue is with retail and how to raise the level of content and
still stay within the boundaries, both vague and clear that have been
set by the more conservative retailers. The directive is clear - we
need to push the boundaries as hard as we can so that the
integrity ofthe game is not compromised but still maintain our
level ofdistribution so that sales are not affected.
Sam Houser: We need to move VERY fast. There is nothing
planned that an adult (M-rated) can't handle. Even if it is an AO
(which it shouldn't be), why should this reduce our distribution so
much? We have to have retail tell us what games to make? That's
nonsense... Freedom of speech? Isn't that how the country is
justifying the invasion of Iraq and other places? We must expose
such flagrant hypocrisy. .. Boundaries need to be stretched. This is
key. ...let me know. (Emphasis supplied).
61.
Nevertheless , when, shortly prior to GTA: San Andreas' launch date , senior
management of marketing reviewed the game for content, it was determined that the pornographic
scenes were too explicit and graphic to receive an "M" rating by the ESRB. To obtain the "M"
rating, the Company had a choice: either "wrap" or embed the pornographic scenes, a process by
which a programmer obstructs access to certain parts of the game, or completely eliminate them
from the game.
62.
However, completely eliminating the sexually explicit scenes from the game would
cause Take-Two huge problems by: (a) delaying the launch date of the game; and (b) possibly
interfering with the functioning of the game. According to experts in the gaming industry, if a scene
is deleted from a game, the deletion itself can have a wide ranging effect on all other components of
the game; for example, other codes that are essential to the game's play may be lost or destroyed. If
this happens, new codes would need to be created and old codes would need to be repaired.
-22-
Thereafter, the game would have to undergo substantial, additional bug testing and beta testing.
This process could take an extensive period of time and cost millions of dollars.
63.
Defendants Houser, Donovan and Brant shared these concerns. In response to
certain suggested edits by Donovan, defendant Houser stated in an e-mail dated August 16, 2004:
This is WAY, WAYmore than I expected. Not only is it insane to
edit comedy like this -- look at movies and everything else -- to do so
is going to be a lot of work and will screw with things. .Is this really
as far as we can push it? I just cannot believe that. Changing this
stuff will absolutely have a time impact. Let me know if this is
really the final position. (Emphasis supplied).
64.
Defendant Houser expressed similar frustrations in an email, dated August 17, 2004,
sent to Bryant, Donovan, and Kolbe:
Can we confirm that these are the content changes that need to be
made?
As I mentioned to Terry, I was pretty shocked by the list. The cuts
are everywhere. It doesn't fee/like we are pushing any
boundaries now. Why bother? I really, really do not want to
change this stuff. It feels SO wrong at the behest of psychotic,
moron, capitalist retailers . This is a GAME. It's COMIC. Airplane
(the movie) was more offensive. Please can we not forget the
edgy-ness thatgot us here. (Emphasis supplied).
65.
As a result, the decision was made to embed, not eliminate, the pornographic scenes.
Thus, the sexually explicit scenes were contained in GTA: San Andreas (rated "M") sold to tens of
millions of consumers.
66.
This was confirmed by CW 2, a former public relations manager, who worked at
Rockstar Games from September 2003 to June 2006. He acknowledged that the Company held a
meeting specifically regarding GTA: San Andreas just prior to its October 25 , 2004 release date.
CW 2 attended the meeting, which was held at Take-Two's corporate headquarters, along with
numerous other Take-Two and Rockstar Games marketing personnel.
-23-
67.
CW 2 advised that at the meeting, both the Director of Marketing of Rockstar
Games, Jennifer Gross, and defendant Donovan, informed the attendees that rather than remove
the code that contained the embedded content, it "was broken up ire the game." Indeed, it
was explained at the meeting that "you can't always take things out ofa game."
68.
The decision to "wrap" or embed the scenes was confirmed in a June 14, 2005 email
from defendant Houser to defendant Donovan:
we locked it away because there was no other way to get the game
done on time - safely. The code is very interwoven in [GTA] and
everything reacts to everything else. The impact of yanking
something late is too scary.
69.
Further, in an e-mail to defendant Houser regarding sex in GTA: San Andreas, dated
August 17, 2004, Leslie Benzies states:
we had a talk about and think it would be best to chop it or we don't
think we will get away with it and we'll probably end up doing loads
of versions to remove the stuff.
70.
Moreover, according to the written Statement of Lydia Parties, the Director of the
Bureau of Consumer Protection of the FTC, which was submitted to House Sub Committee on
Commerce, Trade and Consumer Protection, dated June 14, 2006, the ESRB determined that
"GTA: San Andreas had a minigame that had not been edited out ofgame play but was
embedded in wrapped form in the game 's computer code."
71.
It was just a short period of time until the public found out about the pornographic
scenes. And, contrary to the Company's public statement that the "Hot Coffee" mod was the
product of complex technical tampering, according to Wildenborg, the creator of the "Hot Coffee"
mod, it was easy to create the modification to unlock the hidden content:
all the contents of the Hot Coffee mod were already available on the
original disks. Therefore, the scriptcode, the models, the animations
and the dialogs by the original voice-actors were all created by
Rockstar. The only thing I had to do to enable the midigames
was toggling a single bit in the main.scm file .... the [n]ude
-24-
models that are used as a bonus in the Quick action version of the
mod, were also already present on the original disk.
(Emphasis supplied).
Welcome to My Madding Site, September 7, 2006, available at http://patrickw. gtagames.nl.
72.
Take-Two was aware of the impact of the "Hot Coffee" mod. When asked about
precisely what content people were accessing, Jennifer Kolbe responded in an e-mail to defendant
Donovan, among others, dated June 14, 2005: "it is the entire sex animation that was in the
game previously... the mod unlocked everything.... "
73.
Take-Two did not seem at all disturbed by the public' s growing awareness of the
"Hot Coffee" mod. In an e-mail to Leslie Benzies dated June 13, 2005, defendant Houser wrote:
"they found it .... [d]oes this cause any problems? Hope not as it is pretty cool."
74.
At a minim um, the Company acted with reckless disregard in its decision to embed
the sexually explicit content, rather than remove it from GTA: San Andreas, because it was clearly
foreseeable that the hidden content would thereafter be unlocked and revealed within the gaming
community. The existence of "mods" is ubiquitous within that industry and producers of games,
including Take-Two and Rockstar Games, have known of them and often leave the game scripts
open for modifications in order to permit user created content or in order to access hidden content.
Indeed, mod creation is often encouraged by companies because "mods" add to the counter-culture
images of certain games , enhancing their popularity and their profitability.
75.
On July 20, 2005, the Company issued a press release disclosing that the ESRB had
changed the rating of the GTA: San Andreas from "M" to "AO" due to the "Hot Coffee"
modification and acknowledged the negative financial impact of the "AO" rating. However, the
Company still falsely maintained that an "unauthorized thirdparty modification " caused the
addition of "Hot Coffee" scenes. The press release stated in relevant part:
Take-Two Interactive Software, Inc. announced today that the
Entertainment Software Rating Board (ESRB) has changed the rating
-25-
of Grand Theft Auto: San Andreas on all platforms from "Mature
17+" (M to "Adults Only 18 +" (AO) because of the so-called "hot
coffee mod," an unauthorized third party modification that alters the
retail version of the game. Take-Two cooperated fully with the
ESRB 's investigation.
Rockstar Games has ceased manufacturing ofthe current
version ofthe title and will begin working on a version ofthe
game with enhanced security to prevent the "hot coffee"
modifications. This version will retain the original ESRB M-rating
and is expected to be available during the Company' s fourth fiscal
quarter . Rockstar Games will be providing AO labels for retailers
who wish to continue to sell the current version of the title.
As a result of the re-rating of the game, Take-Two is lowering
guidance for the third fiscal quarter endingJuly 31, 2005 to $160
to $170 million in net sales and a net loss per share of $(0.40) to
$(0.45) to provide reserves for the value of the title's current North
American retail inventory. Accordingly, guidance for the fiscal
year ending October 31, 2005 is also being lowered to $1.26 to
$1.31 billion in net sales and $1.05 to $1.12 in diluted earnings per
share.
Take-Two and Rockstar Games have always worked to keep
mature-themed video game content out ofthe hands ofchildren
and we will continue to work closely with the ESRB and
community leaders to improve and better promote a reliable rating
system to help consumers make informed choices about which video
games are appropriate for each individual," said Paul Eibeler, TakeTwo's President and Chief Executive Officer. "The ESRB's
decision to re-rate a game based on an unauthorized thirdparty
modification presents a new challenge forparents, the
interactive entertainment industry and anyone who distributes
or consumes digital content. Rockstar Games is pleased that the
investigation is now settled and they look forward to returning their
focus to making innovative and groundbreaking video games for a
mature audience." (Emphasis supplied).
76.
Additionally, on July 20, 2005, The Street published an article entitled " Sex Scene
Shelves Take-Two's Grand Theft." The article reported that Take-Two had agreed to either re-label
all the copies of GTA: San Andreas for retailers, or exchange all unsold copies of the game for an
updated version that did not contain the embedded scenes. The article also indicated that Take-Two
-26-
continued to try to obscure the fact that it was responsible for the sexually explicit content was
embedded in the game. The article stated in relevant part:
Some analysts have charged that the "hot coffee" modification
simply allowed access to scenes that were already built into the game.
Take-Two spokesman Jim Ankner acknowledged that the
scenes were on the game discs, but said they were examples of
"unused and unflinished" content that is often found on game
discs when they ship. Game players could not view the scenes
without the hot coffee program, the installation of which constitutes
a violation of the end-user agreement, Ankner said. "In the future,
we will be more diligent to be sure that content like that is removed,"
he said.
Despite the public outcry, Ankner said the ESRB investigation was
the only one of which he is aware concerning the hot coffee
modification. (Emphasis supplied).
77.
In response to the re-rating of GTA: San Andreas by the ESRB, on the following
day, July 21, 2005, the Company's stock dropped $1.33 per share, or 4.9%, to $25.74 on a trading
volume that was five times its average daily trading volume.
5.
78.
Take-Two Becomes the Subject of Numerous
Governmental Investigations and Proceedings
FTC Investigation . On July 26, 2005, a mere six days after insisting that there were
no other investigations pending against it, the Company disclosed an investigation by the FTC. The
press release stated in relevant part:
Take-Two Interactive Software, Inc. announced today that it has
been notified that the staff of the Federal Trade Commission's (FTC)
Division of Advertising Practices is conducting an inquiry into
advertising claims made for Grand Theft Auto: San Andreas.
The Company intends to fully cooperate with the FTC inquiry, and
believes that it acted in accordance with all applicable laws and
regulations. The Company cooperated with a recently concluded
Entertainment Software Rating Board (ESRB) investigation into this
matter and has taken decisive and immediate corrective action.
-27-
79.
Australian Rating Board Revocation .
On July 29, 2005, the Company disclosed that
the Australian Rating Board had revoked its classification for GTA: San Andreas. The press release
stated in relevant part:
Take-Two Interactive Software, Inc. said today that Australia's Office
of Film and Literature Classification (OFLC), the Australian entity
responsible for rating films and video games, has revoked the
classification of Grand Theft Auto: San Andreas. As a result of this
decision, the game is now unclassified in Australia, and cannot be
sold, advertised or distributed in that country.
The Company stated that the OFLC decision had been expected and
the financial impact will not alter the Company's recently announced
guidance.
In announcing its decision, the OFLC stated that, "the content
unlocked by a third party `hot coffee' modification contained material
that could not be accommodated at the (prior) MA15+
classification."
80.
City of Los Angeles Lawsuit .
On January 27, 2006, Reuters published an article
entitled "Los Angeles Sues Over `Grand Theft Auto' Game." The article stated in relevant part:
The city of Los Angeles has sued Take-Two Interactive Software Inc.
for selling pornographic video games to children with its best-selling
game "Grand Theft Auto: San Andreas," which last year was found
to have hidden sex scenes.
Los Angeles City Attorney Rockard Delgadillo, in the suit filed on
Thursday, accused the game publisher of failing to disclose the
pornographic content to get the game onto shelves of major retailers
that do not carry games rated "Adults Only 18+."
Delgadillo said the company further deceived consumers by first
claiming that hackers had modified the original version of the games,
then announcing a week later that the sex scenes were written into
the original game code.
The lawsuit demands that Take-Two and Rockstar Games, the
subsidiary behind "Grand Theft Auto," one of the best-selling in
video game franchises history, stop marketing the games to children,
pay fines and return $10 million in profits.
-28-
81.
FTC Consent Order. On June 8, 2006, the Company announced that the FTC
concluded its inquiry regarding the advertising claims for GTA: San Andreas following the re-rating
of the title by the ESRB, and that Take-Two and Rockstar Games entered into an agreement with
the FTC containing a consent order under which the Company agreed to settle all outstanding
matters pending before the FTC. Among other things, the FTC consent order provided that the
Company could not misrepresent a video game's ratings or content descriptors , and that the
Company would implement a system to ensure that all game content is reviewed in connection with
submissions to ratings authorities.
82.
Attorneys General Request for Information . On June 9, 2006, the Company
announced that it had received requests for documents and information from the Attorneys General
of the states of North Carolina and Connecticut relating to GTA: San Andreas.
83.
New York Criminal Investigation .
On June 26, 2006, the Company announced that
the District Attorney of the County of New York had issued grand jury subpoenas requesting the
production of documents relating to the "Hot Coffee" mod, the termination of the Company's
auditor, and the compensation of former officers and directors.
6.
84.
Barbara Kaczynski , Company Director and
Head of its Audit Committee, Resigns
The "Hot Coffee" scandal also prompted one of the Company's directors to resign
from the Board. On January 25, 2006, the Company filed a Form 8-K with the SEC, stating that
Barbara Kaczynski, a Take-Two director and head of its audit committee, had resigned from her
position as a member of the Board. Included in the Company's Form 8-K was a letter written on
behalf of Kaczynski, by her attorney, which included the following statements:
As you know, we have just been retained to represent Barbara
Kaczynski. I write in response to your email of Friday, January 20,
2006, to Ms. Kaczynski, regarding her resignation from the board of
directors of Take-Two Interactive Software, Inc. ("Take-Two").
-29-
Your email seeks confirmation from Ms. Kaczynski that her
resignation from Take-Two's board was not due to a disagreement
with management of the type requiring disclosure under Item 5.02(a)
of SEC Form 8-K. Your email further asks Ms. Kaczynski to
approve draft language describing the circumstances surrounding her
resignation, which language the company intends to include in its
upcoming Form 8-K disclosure.
Ms. Kaczynski does not know whether her resignation is of a type
requiring disclosure under SEC rules and she does not feel able to
express a view with respect to the language the Company intends to
include in its Form 8-K disclosure about the resignation.
However, she is able to express to you directly the reasons why she
resigned. During Ms. Kaczynski's tenure as a board member
and chair ofthe audit committee, several matters requiring the
board's attention caused Ms. Kaczynski concern. These
matters included Take-Two's discovery ofilllcit images
depicted in its "Grand Theft Auto" video game, the Federal
Trade Commission's investigation of Take-Two following that
discovery, and various SEC inquiries directed at Take-Two and
its employees.
More recently, in connection with preparation of the 10-K and its late
filing, Ms. Kaczynski `s concerns have risen significantly because of
what she views as an increasingly unhealthy relationship between
senior management and the board of directors. In her experience,
management's interactions with the board were characterized by a
lack of cooperation and respect. Moreover, Ms. Kaczynski felt that
management failed to keep the board informed of important issues
facing the company or failed to do so in a timely fashion. In these
circumstances, Ms. Kaczynski decided to resign her position as a
member of the board. (Emphasis added).
7.
85.
Summary of False and Misleading Statements
Regarding GTA: San Andreas
As described in detail below, during the Class Period, the Company issued a series of
false and misleading statements regarding GTA: San Andreas, including: (a) failing to disclose that
the game contained sexually explicit scenes; (b) failing to disclose that the Company intentionally
included those pornographic scenes in the game; (c) misrepresenting that the Company labeled and
marketed its products in accordance with ESRB principles and guidelines and that it was complying
with ESRB rating systems, inasmuch as the inclusion of the pornographic material mandated that
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GTA: San Andreas be rated "AO" not "M;" (d) failing to disclose in its numerous positive
statements , regarding GTA: San Andreas that the inclusion of the pornographic scenes would
significantly and negatively impact the Company's revenues and earnings; and (e) failing to disclose
the probability and extent of numerous governmental investigations into the Company concerning
GTA: San Andreas.
C.
THE COMPANY ISSUED FALSE AND MISLEADING
STATEMENTS CONCERNING ITS BACKDATING OF OPTIONS
1.
86.
Introduction
Under certain circumstances, publicly traded companies may appropriately award
their officers and directors stock option grants. A stock option grant provides the recipient (the
"optionee") with the right to purchase shares (the "underlying shares") of a company at a specific
price - known as the "exercise price" or "strike price" - on or after a specified date. Stock options
are granted as part of employee and/or director compensation packages as a means to create
incentives to boost profitability and stock value. One of the advantages for investors in a company
utilizing this form of management compensation, as opposed to straight payments of cash, is that it
aligns the interests of management with the company's shareholders. The amount senior executives
and directors can reap from the options incentivizes them to perform well thereby increasing the
price of the company's shares of stock. Importantly, if the exercise price is manipulated so that it is
lower than it should be, the employee and/or director pays less and the company gets less when the
stock option is exercised.
87.
Option grants typically provide that the options become exercisable (`vested")
incrementally over a period of years. In the case of Take-Two, options granted by the Company
have typically vested over five years, with 1/5 of the total options granted vesting on each
anniversary of the grant date. The value of an option depends on the relationship between the
option's exercise price and the market price of the underlying shares. If the current market price of
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the underlying shares is above the option's exercise price, the option is described as "in the money."
Conversely, if the current market price of the shares is below the option's exercise price, the option
is described as "out of the money." If the current market price of the underlying shares is the same
as the option's exercise price, the option is described as "at the money." To achieve the goal of
aligning insiders' interests with those of shareholders, options are generally granted at the money.
Options are also generally granted at the money for accounting reasons as discussed below.
2.
88.
Take-Two's Stock Option Plans
Take-Two's 1997 Stock Option Plan (the "1997 Plan") filed with the SEC on
February 10, 1997 provided in relevant part that:
The Exercise Price at which each share of Common Stock may be
purchased pursuant to an Option shall be determined by the
Committee [consisting of two members of the Board of Directors],
except that (i) subject to Part G below [relating to 10% shareholders
of the Company], the Exercise Price at which each share of
Common Stock may be purchasedpursuant to an Incentive
Option shall be not less than 100% ofthe fair market value for
each such share on the Date of Grant ofsuch Incentive Option,
as determined by the Committee in good faith in accordance with
Section 422 of the [Internal Revenue] Code and applicable
regulations thereunder, and (ii) the Exercise Price at which each
share ofCommon Stock may be purchasedpursuant to a
Nonqualified Option shall be not less than 100% ofthe fair
market value for each such share on the Date of Grant ofsuch
Nonqualified Option, determined by the Committee as
aforesaid .... (Emphasis supplied).
89.
Similarly, the 2002 Stock Option Plan adopted by the Company (the "2002 Plan")
provided in relevant part that:
The purchase price ofthe Common Stock covered by each
option shall be determined by the Board ofDirectors or the
Committee [consisting ofat least two members ofthe Board of
Directors], as the case maybe, and shall not be less than 100%
of the Fair Market Value (as defined in Paragraph 15 hereof) of
a share of the Common Stock on the date on which the option
is granted (Emphasis supplied).
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90.
Take-Two's annual reports filed with the SEC throughout the Class Period
incorporated the 1997 and 2002 Plans by reference.
91.
Take-Two's annual reports filed with the SEC throughout the Class Period
repeatedly stated that the Company's financial statements accounted for its stock option grants in
accordance with Accounting Principles Board Opinion No. 25. For example, the Company's Form
10-K filed with the SEC for the fiscal year ended October 31, 2005 stated in relevant part:
The Company accounts for its employee stock option plans in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (`APB 25"). Under
APB 25, generally no compensation expense is recorded when the
terms of the award are fixed and the exercise price of the employee
stock option equals or exceeds the fair value of the underlying stock
on the date of grant.
92.
Take-Two's proxy statements issued during the Class Period also described the 1997
and 2002 Plans, and utilized these statements to induce the Company's shareholders to approve the
2002 Plan and amendments to both the 1997 and 2002 Plans. For example, the Company's 2005
proxy statement, which was filed with the SEC on May 16, 2005 provided:
The 2002 Stock Option Plan will be administered by the Board or a
Committee appointed by the Board. The Board or Committee will
determine , among other things, the persons to whom options will be
granted, the types of options granted, the number of shares subject to
options and the exercise price, provided that the exercise price of
all Incentive Stock Options ... and non-qualified stock options
granted must be at least equal to 100% ofthe fair market value
of the Common Stock on the date ofgrant .... (Emphasis
supplied).
93.
Each of the foregoing statements was rendered materially false and misleading by the
Company's improper practice of backdating option grants described below.
3.
94.
Take-Two's Improper Pricing of Stock Option Grants
As noted above , option grants to officers and directors are recognized as an
advantageous form of executive compensation because they align the interests of management with
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the company's shareholders. In the case of Take-Two, however, the use of options was corrupted
through secret manipulation to provide windfall income to the optionees that was unearned, never
disclosed to investors or the market, and provided no performance incentive.
95.
Between 1997 and 2005, Take-Two issued options to purchase more than 6,000,000
shares of the Company to senior managers and directors . The granting of many of those options particularly to key insiders such as defendants Brant and Eibeler constituted a fraud on Lead
Plaintiff and the Class.
96.
Specifically, the dates of stock option grants to insiders at Take-Two were routinely
manipulated to fall on days with the lowest stock prices, thereby inflating the value of the option
grants.
97.
The Company' s manipulation of stock option grants in this manner was inconsistent
with the public statements of Take-Two in numerous SEC filings that the exercise price of the
option would equal the fair market value of the stock at the time of the grant. Moreover, the
Company's treatment of stock options violated applicable GAAP provisions.
98.
Lead Plaintiff's expert - a professor of finance who has authored several articles on
the subject of options backdating and is a recognized expert in the field - has calculated that the
mathematical probability of Take-Two's option grants described below occurring without
manipulation was less than one in 76,000,000.
99.
Lead Plaintiff's expert reached this conclusion by analyzing the grants made by Take-
Two during the period 1997-2005 as follows. First, option grant dates were determined from public
filings and matched with historical prices for Take-Two's stock. Each option grant date was then
ranked within the month and fiscal quarter in which it fell, with rank 1 indicating the date with the
lowest share price in the period, rank 2 indicating the date with the second-lowest share price in the
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period and so on. By this method, Lead Plaintiffs expert determined rankings for each option grant
date as follows (dates with rank 1 or 2 are indicated):
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Table 1. Option Ranking Within Month
and Fiscal Quarter
Grant Date
Rankin
Month
Rankin
Quarter
2
1
2
2
3
2
13
22
7
21
1
12
14
1
1
6
4
10
9
1
2
7
11
17
5
1
8
1
1
1
1
9
1
4
12
21
36
12
17
2
1
4
3
7
23
46
46
34
33
10
14
14
1
1
9
4
28
30
1
6
16
6
55
5
2
8
1
1
1
36
46
1
25
28
62
36
8
10
April 17,1997
December 29,1997
August 31,1998
September 1, 1998
December 7,1998
May 14,1999
May 25,1999
June 7, 1999
July 30, 1999
August 24,1999
October 18, 1999
November 16,1999
April 10, 2000
April 14, 2000
May 31, 2000
July 21, 2000
August 1, 2000
October 30, 2000
November 17, 2000
November 28, 2000
December 20, 2000
February 16, 2001
February 20, 2001
May 1, 2001
May 3, 2001
October 1, 2001
February 15, 2002
February 22, 2002
June 21, 2002
August 6, 2002
November 13, 2002
November 18, 2002
May 1, 2003
September 30, 2003
April 14, 2004
July 27, 2004
Total # Days
# Rank 1 (of 36)
# Rank 1 or 2 (of 36)
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100.
Next, the probability of the number of grant dates of rank 1 and rank 2 was
calculated using a binomial distribution probability function, where the number of occurrences was
the number of grant dates of rank 1 (or ranks 1 and 2), the number of observations was the total
number of grant dates, and the probability was calculated by assuming twenty trading days per
month (resulting in a 5% probability for each day) and sixty trading days per quarter (resulting in a
1.67% probability for each day).
101.
The probability of less than one in 76,000,000 as noted above is the probability of 17
of 36 dates being ranked 1 or 2 in their respective calendar months. The specific probability of this
occurring is one in 76,136,911. The probabilities of the other results indicated above is comparably
remote: Probability of twelve of thirty-six dates being ranked 1 in the applicable month: one in
10,130,764; probability of eight of thirty-six dates being ranked 1 in the applicable fiscal quarter: one
in 8,420,967; probability of ten of thirty- six dates being ranked 1 or 2 in the applicable fiscal quarter:
one in 5,156,240
102.
The extraordinarily improbable distribution of option grants is further illustrated by
the following table, which indicates the individual beneficiaries of the grant date manipulation
including defendants Eibeler and Brant:
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Table 2. Rank of Option Grants Within Month of Grant, by Optionee
Optionee
1
Brant, Ryan
David, James, Jr.
729,560
3
4
5-6
50,000 100,000 250,000
115,000
140,000
Eibeler, Paul
Judd, Samuel
Lapin, Jeffrey
7-8
9-10
11-12
13-14
100,000
375,000
15,000
15-16
17-19
20-22
1,429,560
20,000
135,000
995,000
135,000
400,000
15,000 450,000
135,000
400,000
Ras, Barbara
Roedel, Richard
Rutcofsky, Barry
Seremet, Mark
350,000
20,000
15,000
10,000
15,000
55,000
5,000
217,500
25,000 20,000 135,000
25,000
20,000
72,000
50,000
370,000 385,000
150,000
25,000
25,000
130,000
100,000
200,000
1,719,560 725,000 115,000 300,000 425,000 715,000 465,000 759,500 265,000
103.
75,000 1,110,000
150,000
200,000
0 320,000 230,000 6,039,060
While the statistical analysis discussed above definitively demonstrates the intentional
nature of Take-Two's misconduct, the willful and knowing nature of these acts is further evidenced
by their continuation after the implementation of the Sarbanes-Oxley Act of 2002 (effective August
29, 2002) ("SOX") which required reporting of stock option grants on Form 4 within two business
days of the grant award.
104.
Of the nine option grants by the Company following SOX, three were rank 1 grants
under the methodology described above, i.e., were made on the date in their respective calendar
months with the lowest share price, and each of these was reported more than two business days
after the grant award, in violation of SOX.
105.
Defendants Brant and Eibeler, as well as other top officers, directors, and employees
of Take-Two, subsequently exercised their options, and thereby derived substantial monetary
benefits from the abnormally low exercise prices previously obtained through manipulation of their
stated grant dates . These and other Company directors and officers' option exercises are described
below:
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400,000
217,500
605,000
15,000
75,000
72,000
50,000
50,000
50,000
Sumner, Kelly
Williams, Anthony
Winters, Karl
Total
200,000
400,000
Leeds, Don
Lewis, Gary
Muller, Larry
Ptak, Thomas
Total
2
Table 3. Exercise of Ovtions (November 1998 to August 2003
INSIDER
Brant, Ryan
Eibeler, Paul
Emmel, Todd
Flug, Robert
Grace, Oliver, Jr.
Lewis, Gary
Lewis, Mark
Ras, Barbara
Sumner, Kelly
Tisch, Steven
Winters, Karl
TOTAL
Nov-98
100,000
Jan-99 May-01
Apr-02
Sep-02
37,667
Mar-03
Jun-03
100,000
Jul-03 Aug-03
45,027
5,000
13,568
33,746
60,000
40,243
25,000
100,000
40,243
25,000
33,746
37,667
5,000 160,000
13,568
45,027
Table 4. Exercise of Options (September 2003 to September 2005 and Cumulative Totals
INSIDER
Brant, Ryan
Eibeler, Paul
Emmel, Todd
Flug, Robert
Grace, Oliver, Jr.
Lewis, Gary
Lewis, Mark
Ras, Barbara
Sumner, Kelly
Tisch, Steven
Winters, Karl
TOTAL
4.
106.
Sep-03
20,000
Oct-03 Nov-03
5,000 125,000
Oct-04 Mar-05
15,150
10,000
45,150
Jun-05
Jul-05
12,324
6,000
10,000
20,000
25,000
50,000
97,324
26,000
7,070
5,000 125,000
5,000 112,000
5,000 119,070
Sep-05 TOTAL
432,694
5,000
22,220
6,324
38,216
33,746
30,000
60,000
40,243
25,000
25,000
7,500 184,500
13,824 896,619
The Backdating Scheme Had a Material Effect on the Company's
Financial Statements
The materiality and impact of the Company's manipulation on its financial results
was substantially magnified by the circumstances under which such results were reported. First,
investors viewed Take-Two as a growth company, and analyzed growth trends closely. As a result,
improper accounting that inflated year-over-year and quarter-over-quarter growth was material to
investors, even if it did not have a large impact on the absolute value of the misreported item.
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107.
Second, the market was highly sensitive to the Company's ability to meet analysts'
expectations, and any variance in revenue or earnings could have a major impact on share price if
such variance caused the Company's results to fall below analysts' targets.
108.
Third, misstatements that benefit senior management by increasing its compensation
are regarded as more material because they can undermine a company's credibility in the market and
present a conflict of interest.
109.
Generally Accepted Auditing Standards ("GAAS "), which govern audits of public
companies,' provide specific guidance on the evaluation of materiality in financial statements, and
on the evaluation of factors such as those noted above, which it refers to as "qualitative" materiality.
The relevant section of GAAS, AU § 9312.17, specifically calls for auditors to consider, among other
things:
f.
A misstatement that has the effect of increasing management's
compensation, for example , by satisfying the requirements for the
award of bonuses or other forms of incentive compensation.
j.
The significance of the misstatement or disclosures relative to
known user needs, for exampleThe significance of earnings and earnings per share to publiccompany investors and the significance of equity amounts to
private-company creditors.
•
The effect of misstatements of earnings when contrasted with
expectations.
In 2004, the Public Company Accounting Oversight Board ("PCAOB"), created under the Sarbanes-Oxley Act
1
of 2002, assumed responsibility for oversight of auditors of public companies, and adopted previously issued GAAS
pronouncements as interim standards of the PCAOB. References to "AU" sections and paragraphs (e.g., AU § 150.02)
herein are to the codification of GAAS.
-40-
5.
110.
Take-Two's Scheme Caused the Company to Violate Generally
Accepted Accounting Principles and SEC Regulations
Take-Two's options backdating scheme caused the Company to run afoul of GAAP
and SEC regulations both for its improper reporting of its financial condition generally, and its
failure to accurately report its executive compensation costs specifically.
111.
Public companies must prepare their financial statements in accordance with GAAP,
according to SEC regulations. By failing to comply with GAAP, Take-Two's financial statements
are presumptively in violation of those regulations.
112.
GAAP are the principles recognized by the accounting profession as the
conventions, rules, and procedures necessary to define accepted accounting practices at a particular
time. They are the official standards accepted by the SEC and promulgated in part by the American
Institute of Certified Public Accountants ("AICPA"), a private professional association.
113.
SEC Rule 4-01(a) of SEC Regulation S-X states that "[f]inancial statements filed with
the Commission which are not prepared in accordance with [GAAP] will be presumed to be
misleading or inaccurate, despite footnote or other disclosures, unless the Commission has
otherwise provided." 17 C.F.R. § 210.4-01(a)( 1). Regulation S-X requires that interim financial
statements must also comply with GAAP. 17 C.F.R. § 210 .10-01(a).
114.
As noted in AU § 110.02, a public company's management is responsible for
preparing financial statements in conformity with GAAP:
The financial statements are management's responsibility ...
Management is responsible for adopting sound accounting policies
and for establishing and maintaining internal controls that will,
among other things, initiate, record, process, and report transactions
(as well as events and conditions) consistent with management's
assertions embodied in the financial statements. The entity's
transactions and the related assets, liabilities and equity are within the
direct knowledge and control of management.... Thus, the fair
presentation of financial statements in conformity with generally
accepted accounting principles is an implicit and integral part of
management's responsibility.
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115.
As seen clearly in their decision to backdate stock option grants during the Class
Period, the Company's senior management wholly failed to adopt sound accounting policies and to
maintain internal controls designed to ensure that the Company's public filings were fairly presented.
116.
Under SEC regulations, the management of a public company has a duty "to make
full and prompt announcements of material facts regarding the company's financial condition."
Timely Disclosure of Material Corporate Developments, Exchange Act Release No. 34- 8995, 3 Fed.
Sec. L. Rep. (CCH) ¶ 23,120A, at 17,095, 17 C.F.R. § 241.8995, 1970 WL 10576 (Oct. 15, 1970).
The Company violated this regulation throughout the Class Period by deliberately and/or recklessly
misrepresenting the specific terms and the annual costs of the Company's employee and director
stock plans.
117.
In Securities Act Release No. 6349, 23 S.E.C. Docket 962 (Sept. 28, 1981), the SEC
stated that: "it is the responsibility of management to identify and address those key variables and
other qualitative and quantitative factors which are peculiar to and necessary for an understanding
and evaluation of the individual company."
118.
The Company violated this basic precept by concealing from the public a complete
understanding of material facts relating to Take-Two's employee compensation expenses, specifically
the costs the Company would have incurred had it properly accounted for stock options that the
Company improperly backdated.
119.
In Accounting Series Release 173 (July 2, 1975), the SEC reiterated the duty of
management to present a true representation of a company's operations: "[i]t is important that the
overall impression created by the financial statements be consistent with the business realities of the
company's financial position and operations."
120.
For the reasons stated above, the Company failed, throughout the Class Period, to
present a correct impression of Take-Two's business realities.
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121.
Further, at all times relevant to this Complaint, the accounting treatment for stock
options issued to officers and directors was governed by APB 25, Accounting for Stock Issued to
Employees.2
122.
Where options are issued at an exercise price equal to the market price of the
underlying shares (i.e. "at the money"), no compensation expense is recorded under APB 25.
123.
By contrast, APB 25 requires a company to record a compensation cost when an
option is granted with an exercise price below the market price of the underlying shares on the date
of grant (i.e. "in the money"). The compensation cost is equal to the total number of options
granted multiplied by the difference between the exercise price and market price of the stock on the
date of grant. This cost is recorded (amortized) in installments over the option 's vesting period.
124.
Thus, a failure to properly account for "in the money" option grants in accordance
with APB 25 will result in misstatements in a corporation 's financial statements . A company that
fails to record and amortize the value of "in the money" option grants understates compensation
expense and overstates net income on its income statement in each fiscal quarter and year during the
vesting period of an option.
125.
Accordingly, Take-Two's improper accounting resulted in misstatements in its
quarterly and annual financial statements during the Class Period for options issued after 1997 and
which vested during the course of the Class Period. As a result, the Company's reported operating
expenses were understated, and net income reported in quarterly and year end press releases and
SEC filings disseminated during the Class Period was overstated, and all SEC filings and press
releases reporting such results were materially false and misleading.
2 SFAS 123, issued in 2002, established an alternative measure for valuing options, but gave corporations the
choice of continuing to use APB 25, which Take-Two elected to do. A subsequent pronouncement, SFAS 123R, was
issued in 2005 and required companies to adopt the alternative measure commencing in 2006. The change in valuation
methodology preferred by SFAS 123 and required by SFAS 123R is not directly relevant to the wrongdoing alleged
herein.
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126.
On July 10, 2006, the Company disclosed it was subject to another SEC
investigation, this time focusing on its stock option grants. It also then announced that it was
conducting its own investigation into the stock option grants.
127.
On August 31, 2006, Take-Two disclosed that it would be delayed in the filing of its
Third Quarter Form 10-Q. This delay strongly suggests the likelihood that Take-Two will restate its
financial results, to properly reflect the impact of the improperly granted stock options.
128.
All told, Take Two's improper backdating of stock option grants and the improper
accounting for the options during the Class Period violated fundamental principles of GAAP, and
the disclosures by the Company contained in its proxy statements , SEC filings, and press releases
disseminated during the Class Period were false and misleading and failed to comply with the SEC
regulations identified above.
D.
TAKE-TWO'S FALSE AND MISLEADING PERIODIC FINANCIAL
STATEMENTS ISSUED DURING THE CLASS PERIOD
129.
Throughout the Class Period, the Company and defendants Eibeler and Winters
filed Annual Reports on Forms 10-K and Quarterly Reports on Forms 10-Q with the SEC, and
disseminated numerous earnings releases that contained materially false and misleading statements
regarding GTA: San Andreas and the Company' s improper backdating of stock options.
1.
130.
Fiscal Year 2004
The Class Period begins on October 25, 2004. On that day, the Company issued a
press release announcing that Grand Theft Auto: San Andreas had been "shipped to retail stores in
North America." In addition, the Company stated "Grand Theft Auto: San Andreas is the next
installment in the gaming franchise that has sold over 32 million units to date, including over 13
million units of Grand Theft Auto: Vice City and over 11 million units of Grand Theft Auto 3."
131.
On December 16, 2004, the Company issued a press release announcing its fourth
quarter and fiscal 2004 financial results. The press release stated in relevant part:
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Take-Two Interactive Software, Inc. today announced financial
results for its fourth quarter and fiscal year ended October 31, 2004.
Net sales for the fourth quarter ended October 31, 2004, which
included the launch ofthe blockbuster title Grand Theft Auto:
San Andreas for the PlayStation02 computer entertainment
system, were $438.0 million compared to $277.6 million for the
same period a year ago. Net income for the quarter was $62.6
million, which included a $7.5 million accrual to establish a reserve in
connection with the Company's SEC investigation as discussed
below. Fourth quarter 2004 net income of $62.6 million and diluted
net income per share of $1.36 compared to net income of $26.3
million and diluted net income per share of $0.58 the prior year.
Net sales for the fiscal year ended October 31, 2004 were $1.13
billion compared to $1.03 billion for fiscal 2003. Net income of
$65.4 million, including the $7.5 million accrual related to the
Company's SEC investigation, compared to $98.1 million in net
income last year, with diluted net income per share of $1.43
compared to $2.27 last year.
Rockstar's Grand Theft Auto: San Andreas, released in late
October for PlayStation 2, was a significant contributor to
fourth quarter and fiscalyear results. Created by the world-class
developers Rockstar North, Grand Theft Auto: San Andreas
was the top performingproduct in Take-Two's publishing
business this quarter and fiscalyear. According to
NPDFunworldSM, Grand Theft Auto: San Andreas was the top
selling PlayStation® 2 title in the United States in October and
November.
Management Comments
Paul Eibeler, President, added, "We are enter4nfiscal2009in a
strong, competitive position. With the tremendous success of
Grand Theft Auto: San Andreas, Rockstar Games has
magnified the power of the Grand Theft Auto brand, and they
will continue to build on the franchise with the launch of Xbox and
PC versions of Grand Theft Auto: San Andreas in June. Our
product portfolio going into 2005, which includes titles based on a
combination of proven franchises, new brands and licensed
properties, is the strongest in the Company's history. Combined with
the expansion of our management team and the strengthening of our
internal operations, we believe we are building the foundation for
-45-
long term, sustained growth in the interactive entertainment
industry." (Emphasis supplied).
132.
Take-Two's financial results for the fiscal year ended October 31, 2004, were
repeated in the Company' s annual report on Form 10-K (`2004 Form 10-K") filed with the SEC on
or about December 22, 2004. The 2004 Form 10-K was signed by, among others, defendant
Eibeler. The 2004 Form 10-K reported year-end operating expenses of approximately $275 million
and net income of $65.4 million.
133.
The 2004 Form 10-K further stated the following
We label and market ourproducts in accordance with
Entertainment Software Rating Board (ESRB) principles and
guidelines.
We believe that we comply with such rating systems and
properly display the ratings and content descriptions received
for our titles.
134.
The 2004 Form 10-K also stated that:
The Company accounts for its employee stock option plans in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (`APB 25").
135.
Additionally, the 2004 Form 10-K incorporated by reference the 1997 and 2002 Plans.
136.
The statements and financial metrics identified in the preceding 2004 press releases
and the 2004 Form 10-K were false and misleading and were known by Defendants to be false and
misleading at that time, or were recklessly disregarded as such, for the following reasons, among
others:
(a)
the Company did not grant options at market price but instead improperly
backdated grants of Take-Two stock options in violation of the Company's shareholder-approved
option plans;
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(b)
the Company improperly and opportunistically granted options to defendants
Eibeler, Brant, and other executives and directors on the precise dates at which Take-Two stock had
reached its lowest price in weeks without properly disclosing such practices;
(c)
the Company improperly accounted for compensation expenses in connection
with the improperly dated stock options in violation of GAAP and SEC regulations; and
(d)
the Company did not account for its employee stock plans in accordance with
APB 25.
137.
Additionally, to the extent the Company failed to record, as a compensation expense, the
difference between the price of Take-Two stock on the date of the actual grant and the "backdated"
exercise price of the options, this deliberate omission resulted in the material understatement of the
Company's reported compensation expense and a material overstatement of its reported income in the
2004 Form 10-K. Thus, the Company' s operating expenses and net income for fiscal year end 2004
were materially misstated.
138.
Further, as discussed herein, the 2004 press releases and 2004 Form 10-K were
materially false and misleading because they: (a) failed to disclose that GTA: San Andreas contained
sexually explicit scenes; (b) failed to disclose that the Company intentionally included those
pornographic scenes in the game; (c) misrepresented that the Company labeled and marketed its
products in accordance with ESRB principles and guidelines, and that it was complying with ESRB
rating systems , inasmuch as the inclusion of the pornographic material mandated that GTA: San
Andreas be rated "AO," not "M;" (d) failed to disclose that the inclusion of the pornographic scenes
would significantly and negatively impact the Company's revenues and earnings; and (e) failed to
disclose the probability and extent of governmental investigations into the Company concerning
GTA: San Andreas.
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2.
139.
Fiscal Year 2005
On March 3, 2005, the Company issued a press release announcing its financial
results for the first quarter ended January 31, 2005. The press release stated in part:
Net income for the quarter rose to $55.2 million, a 74% increase
from net income of $31.8 million during the same period last year.
Diluted earnings per share of $1.19 increased 70% from $0.70 per
diluted share in the prior year's first quarter.
Take-Two attributed the sharply higher first quarter results
primarily to continued strong consumer demand for its Grand
Theft Auto: San Andreas tide, as well as robust sales of the 2K
Sports line of products and improved performance of the Company's
Jack of All Games distribution business.
Rockstar Games
Rockstar's Grand Theft Auto: San Andreas, released in late
October for the PlayStation ®2 computer entertainment system,
was a significant contributor to the first quarter results. Created
by the world- class developers Rockstar North, Grand Theft Auto:
San Andreas was the top performing product in Take-Two's
publishing business in the quarter. According to NPDFunworldSM,
Grand Theft Auto: San Andreas was the top selling PlayStation® 2
title in the United States in each of the four months since its release.
The Company's life to date sales ofGrand Theft Auto: San
Andreas through the end ofthe first quarter have exceeded 12
million units.
Management Comments
Paul Eibeler, President and ChiefExecutive Officer, stated,
"Fiscal2005 is offto a great start. We are extremelypleased
with the continued success of Grand Theft Auto: San Andreas
and Rockstar's plans to extend the reach ofthis blockbuster
tide to multiple platforms and the Asian market later this year.
Additionally, we have made significant progress in diversifying our
business, building our product pipeline and adding to our sports
game development capabilities. We will continue to leverage our
internal resources and invest in new opportunities, including
extending our content to new hardware platforms. With our strong
performance in the first quarter and our rapidly expanding portfolio
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of proven franchises, new brands and licensed properties, Take-Two
is positioned for significant annual growth." (Emphasis supplied).
140.
Take-Two's financial results for the quarter ended January 31, 2005 were repeated in
the Company's quarterly report on Form 10-Q (`1 Q 2005 10-Q"), filed with the SEC on or about
March 10, 2005, and signed by defendants Eibeler and Winters. The 1Q 2005 10-Q reported
operating expenses of approximately $107 million and net income of $55.2 million. In addition, the
1Q 2005 10-Q stated the following
We believe that we comply with such rating systems and
properly display the ratings and content descriptions received
for our titles. (Emphasis added).
141.
The Company's 1 Q 2005 10-Q further stated:
In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the Company's financial position, results of
operations and cash flows.
142.
On May 16, 2005, the Company filed with the SEC a Definitive Proxy Statement on
a Form DEF14A (`2005 Proxy Statement"), which was signed by, among others, defendant Eibeler.
The 2005 Proxy Statement contained the following false and misleading language:
The 2002 Stock Option Plan provides that it will be administered by
the Board or a Committee appointed by the Board. The Board or
Committee will determine, among other things, the persons to whom
options will be granted, the types of options granted, the number of
shares subject to options and the exercise price, provided that the
exercise price of all incentive stock options (`Incentive Stock
Options") and nonqualified stock options granted must be at least
equal to 100% of the fair market value of the Common Stock on the
date of grant ...
143.
The 2005 Proxy Statement sought Take-Two shareholder approval to increase the
number of authorized shares under the 2002 Stock Option Plan.
144.
On June 2, 2005, the Company issued a press release announcing its financial results
for its second quarter and six months ended April 30, 2005. The financial results reflected the
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Company's three-for-two stock split completed in April 2005. The press release stated in relevant
part:
Net loss for the quarter was $8.2 million, compared to a net loss of
$14.6 million last year, with a net loss of $(0.12) per share compared
to a net loss per share of $(0.22) last year.
Take-Two attributed its increased second quarter sales to the
launch ofMidnight Club 3: DUB Edition for PlayStation®2 and
Xbox® and Major League Baseball 2K5 for PlayStation® 2 and
Xbox, as well as continued consumer demand for its Grand
Theft Auto: San Andreas title for PlayStationO 2.
Management Comments
Paul Eibeler, President and ChiefExecutive Officer, stated,
"We were pleased with the performance ofour second quarter
releases, as well as the continued success of Grand Theft Auto:
San Andreas. (Emphasis supplied).
145.
Take-Two financial results for the quarter ended April 30, 2005 were also reported in
the Company's quarterly report on Form 10-Q (the "2Q 2005 10-Q") filed with the SEC on or
about June 9, 2005 and signed by defendants Eibeler and Winters. The 2Q 2005 10-Q reported
second quarter operating expenses of approximately $83.8 million and a net loss of $8.2 million.
146.
The 2Q 2005 10-Q also stated the following.
We label and market ourproducts in accordance with
Entertainment Software Rating Board (ESRB) principles and
guidelines.
We believe that we comply with such rating systems and
properly display the ratings and content descriptions received
for our titles. (Emphasis supplied).
147.
The 2Q 2005 10-Q further stated:
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In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the Company's financial position, results of
operations and cash flows.
148.
On September 7, 2005, Take-Two issued a press release announcing its financial
results for its third quarter and nine months ended July 31, 2005. The press release stated in relevant
part:
Net sales in the third quarter increased 6% to $169.9 million,
compared to $160.9 million in the third quarter of fiscal 2004. Net
loss for the quarter was $28.8 million, compared to a net loss of $14.4
million last year, with a net loss of $(0.41) per share compared to a
net loss per share of $(0.21) last year.
Take-Two attributed its increased third quarter sales to the
launch of Grand Theft Auto: San Andreas for Xbox and PC and
Midnight Club 3: DUB Edition for the PSPTM, along with the release
of Charlie and the Chocolate Factory on multiple platforms and Sid
Meier's Pirates! for Xbox. (Emphasis supplied).
149.
On or about September 8, 2005, the Company filed with the SEC its quarterly report
on Form 10-Q ("3Q 2005 10-Q") for the period ending July 31, 2005. The 3Q 2005 10-Q was
signed by defendants Eibeler and Winters. It reported third quarter operating expenses of
approximately $90.4 million and a net loss of $28.8 million.
150.
The Company's 3Q 2005 10-Q further stated:
In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the Company's financial position, results of
operations and cash flows.
151.
On January 25, 2006, Take-Two announced its final results for its fourth quarter and
fiscal year ended October 31, 2005. The press release stated in relevant part:
Fourth quarter 2005 net income was $19.2 million with diluted net
income per share of $0.27 compared to net income of $62.6 million
and diluted net income per share of $0.91 for the same period last
year.
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Net revenues for the fiscal year ended October 31, 2005 increased
6% to $1.20 billion from $1.13 billion for the prior year. Net income
of $37.5 million for fiscal 2005 compared to net income of $65.4
million for the prior year with diluted earnings per share of $0.53
compared to $0.95 per diluted share last year.
152.
On or about January 31, 2006, the Company filed with the SEC its annual report on
Form 10-K for the fiscal year ending October 31, 2005 ("2005 Form 10-K"). The 2005 Form 10-K
was signed, by among others, defendants Eibeler and Winters. The 2005 Form 10-K reported
operating expenses of approximately $376 million and net income of $37.5 million.
153.
Additionally, the Company's 2005 Form 10-K provided the following:
The Company accounts for its employee stock option plans in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (`APB 25").
154.
The 2005 Form 10-K also incorporated by reference the 1997 and 2002 Plans.
155.
The statements and financial metrics identified in the preceding 2005 press releases,
2005 Forms 10-Q, and the 2005 Form 10-K were false and misleading and were known by
Defendants to be false and misleading at that time, or were recklessly disregarded as such, for the
following reasons, among others:
(a)
the Company did not grant options at market price but instead improperly
backdated grants of Take-Two stock options in violation of the Company's shareholder-approved
option plans;
(b)
the Company improperly and opportunistically granted options to the defendants
Eibeler and Brant and other executives and directors on the precise dates at which Take-Two stock had
reached its lowest price in weeks without properly disclosing such practices;
(c)
the Company improperly accounted for compensation expense in connection
with the improperly dated stock options in violation of GAAP and SEC regulations; and
-52-
(d)
the Company did not account for its employee stock plans in accordance with
APB 25.
156.
Additionally, to the extent the Company failed to record, as a compensation expense, the
difference between the price of Take-Two stock on the date of the actual grant and the "backdated"
exercise price of the options, this deliberate omission resulted in the material understatement of the
Company's reported compensation expense and a material overstatement of its reported income in the
2005 Forms 10-Q and 10-K. Thus, the Company' s operating expenses and net income as reported in
these SEC filings during its 2005 fiscal year were materially misstated.
157.
Further , as discussed herein, the statements in the 2005 press releases and 2005
Forms 10-Q and 10-K were false and misleading because they: (a) (with respect to the Company's
results for its first and second quarters), failed to disclose that the GTA: San Andreas contained
sexually explicit scenes; (b) failed to disclose that the Company intentionally included those
pornographic scenes in the game; (c) misrepresented that the Company labeled and marketed its
products in accordance with ESRB principles and guidelines and that it was complying with ESRB
rating systems, inasmuch as the inclusion of the pornographic material mandated that GTA: San
Andreas be rated "AO," not "M"; (d) failed to disclose that the inclusion of the pornographic scenes
would significantly and negatively impact the Company's revenues and earnings (with respect to the
Company's results for its first and second quarters); and (e) failed to disclose the probability and
extent of governmental investigations into the Company concerning GTA: San Andreas.
3.
158.
Fiscal Year 2006
On March 7, 2006, Take-Two announced its financial results for its first quarter
ended January 31, 2006. The press release stated in relevant part:
Net sales for the first quarter were $265.0 million compared to $502.5
million for the first quarter of fiscal 2005 which included holiday
sales of the blockbuster Grand Theft Auto: San Andreas for the
PlayStation®2 computer entertainment system. Net loss for the
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quarter was $29.1 million or $0.41 per share, compared to net income
of $55.2 million or $0.79 per diluted share in the prior year's first
quarter.
159.
On March 13, 2006, the Company filed with the SEC its Form 10-Q for the period
ending January 31, 2006 (the "1Q 2006 10-Q"). It was signed by defendants Eibeler and Winters.
The 1Q 2006 Form 10-Q reported operating expenses of approximately $104.4 million and net
losses of $29.1 million.
160.
Further, the Company's 1 Q 2006 10-Q stated:
In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary
for a fair statement of the Company's financial position, results of
operations and cash flows.
161.
On June 8, 2006, Take-Two issued a press release announcing its financial results for
its second quarter ended April 30, 2006. The press release stated in relevant part:
Net revenues for the second quarter were $265.1 million compared
to $222.1 million for the second quarter of fiscal 2005. Net loss for
the quarter was $50.4 million or $0.71 per share compared to a net
loss of $8.2 million or $0.12 per share in the prior year's second
quarter ....
162.
On June 9, 2006 the Company filed with the SEC its Form 10-Q for the period
ended January 31, 2006 (the "2Q 2006 10-Q"), which was signed by defendants Eibeler and Winters.
163.
The 2Q 2006 10-Q stated:
In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary
for a fair statement of the Company's financial position, results of
operations and cash flows.
164.
The statements and financial metrics identified in the 2006 press releases and the 1 Q
2006 10-Q and 2Q 2006 10-Q were false and misleading and were known by the Defendants to be
false and misleading at that time, or were recklessly disregarded as such, for the following reasons,
among others:
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(a)
the Company did not grant options at market price but instead improperly
backdated grants of Take-Two stock options in violation of the Company's shareholder-approved
option plans;
(b)
the Company improperly and opportunistically granted options to the Individual
Defendants and other executives and directors on the precise dates at which Take-Two stock had
reached its lowest price in weeks without properly disclosing such practices;
(c)
the Company improperly accounted for compensation expense in connection
with the improperly dated stock options in violation of GAAP, and SEC regulations; and
(d)
the Company did not account for its employee stock plans in accordance with
APB 25.
165.
Additionally, to the extent the Company failed to record , as a compensation expense, the
difference between the price of Take-Two stock on the date of the actual grant and the "backdated"
exercise price of the options, this resulted in the material understatement of the Company's reported
compensation expense and a material overstatement of its reported income in the 1Q and 2Q 2006
Forms 10-Q. Thus, the Company's operating expenses and net income for the first two quarters of
2006 were materially misstated.
166.
Further, as discussed herein, the 1 Q and 2Q 2006 Forms 10-Q were materially false
and misleading because they: (a) failed to disclose that the Company intentionally embedded the
pornographic scenes in GTA: San Andreas ; and (b) failed to disclose the probable likelihood and
financial effect of governmental investigations relating to GTA: San Andreas.
V.
CLASS ACTION ALLEGATIONS
167.
Lead Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of
the Federal Rules of Civil Procedure on behalf of a Class of all persons and entities who purchased
or otherwise acquired Take-Two publicly traded securities between October 25, 2004 to July 10,
-55-
2006 inclusive, and were damaged thereby.
Excluded from the Class are the Defendants herein,
members of the families of each of the Individual Defendants, any parent, subsidiary, affiliate,
partner, officer, executive or director of any Defendant, any entity in which any such excluded
person has a controlling interest, and the legal representatives, heirs, successors and assigns of any
such excluded person or entity.
168.
The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, shares of Take-Two were actively traded on the
NASDAQ. As ofJune 2, 2006, Take-Two had approximately 72 million shares of outstanding
common stock. While the exact number of Class members is unknown to Lead Plaintiff at this time
and can only be ascertained through appropriate discovery, Lead Plaintiff believes that there are
hundreds or thousands of members in the proposed Class. Record owners and other members of
the Class may be identified from records maintained by Take-Two or its transfer agent and may be
notified of the pendency of this action by mail, using the form of notice similar to that customarily
used in securities class actions.
169.
Lead Plaintiff and members of the Class purchased or otherwise acquired Take-Two
common stock during the Class Period at artificially inflated prices and have been similarly affected
by and sustained damages arising out of the wrongful course of conduct complained of herein.
170.
Lead Plaintiff is a representative party who will fairly and adequately protect the
interests of the members of the Class and retained counsel competent and experienced in class and
securities litigation. Lead Plaintiff does not have interests antagonistic to or in conflict with those of
the other Class members they seek to represent.
171.
A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all Class members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and burden
-56-
of individual litigation make it impossible for members of the Class to individually redress the
wrongs done to them. There will be no difficulty in the management of this action as a class action.
172.
Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a)
whether the federal securities laws were violated by the misrepresentations
and omissions of Defendants as alleged herein;
(b)
whether the documents , reports , filings, releases , and statements
disseminated to the Class by the Defendants during the Class Period misrepresented or omitted
material facts about the business performance and financial condition of Take-Two;
(c)
whether defendants Brant, Houser and Donovan participated in and pursued
the common course of conduct and fraudulent scheme complained of herein in connection with
claims asserted under the Exchange Act;
(d)
to what extent the members of the Class and have sustained damages and the
proper measure of damages;
(e)
whether the Defendants acted with scienter committing manipulative and
deceptive acts in furtherance of the scheme to defraud and/or in issuing and distributing materially
false and misleading statements with respect to the claims made herein; and
(f)
whether the market prices of Take-Two's common stock during the Class
Period were artificially inflated due to the material misrepresentations and/or omissions complained
of herein.
VI.
CONTROL ALLEGATIONS/GROUP PLEADING
173.
Defendants Eibeler and Winters controlled the content of Take-Two's press releases,
corporate reports , SEC filings, and communications with analysts. It is appropriate to treat these
-57-
defendants as a group for pleading purposes and to presume that the false, misleading and
incomplete information conveyed in the Company's public filings, press releases and other
publications issued while they were directors or officers of the Company, are the collective actions
of the narrowly defined group of Defendants identified above.
174.
Defendants Eibeler and Winters, by virtue of their high-level positions with the
Company, directly participated in the management of the Company, were directly involved in the
day-to-day operations of the Company at the highest levels, and were privy to confidential
proprietary information concerning the Company and its business , operations , financial statements,
and financial condition, as alleged herein.
175.
As officers and directors of a publicly-held company whose common stock was, and
is, registered with the SEC pursuant to the Exchange Act, and was and is, traded on the NASDAQ,
and governed by the provisions of the federal securities laws, defendants Eibeler and Winters each
had a duty to promptly disseminate accurate and truthful information with respect to the Company's
financial condition and performance, growth, operations, financial statements, business, markets,
management, and earnings, as well as, to correct any previously issued statements that had become
materially misleading or untrue, so that the market price of the Company's publicly-traded common
stock would be based upon truthful and accurate information. The misrepresentations and
omissions of these Defendants throughout the Class Period violated these specific requirements and
obligations.
176.
Defendants Eibeler and Winters, because of their positions of control and authority
as officers and/or directors of the Company, were able to and did authorize and control the content
of the various SEC filings, press releases and other public statements pertaining to the Company
during the Class Period. These Defendants were provided with copies of the documents alleged
herein to be false and misleading prior to or shortly after their issuance and/or had the ability
-58-
and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, during the
time they served as directors, or officers of the Company, each of these Defendants was responsible
for the accuracy of the public reports and releases detailed herein and was therefore primarily liable
for the representations contained therein.
VII.
SCIENTER
177.
As alleged herein , the Defendants acted with scienter in that they knew or acted with
reckless disregard with respect to the fact that the public documents and statements issued by or on
behalf of Take-Two contained materially false and misleading statements and/or omitted material
facts necessary to make the statements not false and misleading.
A.
The Video Games in the GTA Franchise Were Take-Two's Leading Product
179.
A strong inference of scienter arises from the fact that the GTA series was Take-
Two's leading game prior to and during the Class Period. For example, for the fiscal year ending
2002, GTA III for PlayStation 2 accounted for 29. 8% of Take-Two's net sales and GTA: Vice City
for the PlayStation 2 accounted for 7.5% of net sales. For the fiscal year ending 2003, GTA: Vice
City for PlayStation 2 accounted for 33. 6% of Take-Two's net sales. For fiscal year ended 2004,
GTA products, generally, accounted for approximately 34.3% of Take-Two's revenues, with Grand
Theft Auto: San Andreas for the PlayStation 2, GTA Double Pack for the Xbox, and GTA: Vice
City for the PlayStation 2 accounting for 20. 9%, 5.7% and 3.6% of revenue , respectively. Notably,
no other product accounted for more than 10% of Take-Two's revenues for that year. For fiscal
year ended 2005, GTA products accounted for approximately 38.1% of Take-Two's revenues, with
GTA: San Andreas for the PlayStation 2, Xbox and the personal computer accounting for 25.6%,
4.1% and 2.2% of revenue, respectively. Again, no other product accounted for more than 10% of
Take-Two's revenues for that year.
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178.
As a result, it is apparent that the GTA franchise, particularly GTA: San Andreas,
was critical to Take-Two's core business operations as it constituted, among other things, a
significant source of revenue for Take-Two. As signatories of the SEC filings that contained the
Company's financial statements , defendants Eibeler and Winters, as high-level officers of Take-Two,
had a duty to familiarize themselves with the facts and matters relevant to Take-Two's core business
operations, its leading products and sources of income, and the financial reporting of such products
and operations. Therefore, defendants Winters and Eibeler knew, or at a minim um, were reckless in
not knowing, about the material misstatements and omissions alleged above because they involved
matters that would have directly, substantially affected take-Two's earnings and/or revenue.
B.
Eibeler and Winters' SOX Certifications
Support They Acted With Scienter
179.
Throughout the Class Period, defendants Eibeler and Winters certified that they had
designed sufficient disclosure controls and procedures "to ensure that material information"
concerning Take-Two and Rockstar Games was made known to them. Winters, starting with TakeTwo's 2004 Form 10-K, and in every quarterly and annual report thereafter, and Eibeler, starting
with the 1 Q 2005 10-Q and in every quarterly and annual report thereafter, both certified the
following statement:
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls andprocedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is beingprepared,
(Emphasis supplied).
-60-
180.
The fact that GTA: San Andreas contained sexually explicit content intentionally
embedded by the Company was "material information ." Disclosures of the sexual content by the
Company to the ESRB and the investing public would have caused (and eventually did cause) TakeTwo to lose major sales revenue and earnings . Thus, by their own admission in the above
certifications, defendants Eibeler and Winters knew, or at a minimum, were reckless in not knowing,
that the Company intentionally included sexual content into GTA: San Andreas, and that such
scenes required an "AO" rating from the ESRB.
181.
Moreover, the SEC Consent Decree, signed by Eibeler on behalf of the Company,
enjoined the Company from further violations of the federal securities laws, including Section 10(b)
of the Exchange Act. As defendants Eibeler and Winters knew, the issuance of further false and
misleading statements in violation of the Exchange Act could therefore subject the Company to
draconian penalties and fines. These defendants therefore had strong reasons to ensure that,
consistent with their above-certified statements, they became aware of "all material information,"
including the Company's inclusion of pornographic material in GTA: San Andreas and the improper
backdating of options . Thus, the obligations imposed upon them by the Consent Decree, combined
with the certifications described above, provide evidence that these defendants either knew, or at a
minimum were reckless , in not knowing material information concerning both GTA: San Andreas,
as well as the improper backdating of stock options that was not publicly disclosed; and that the
dissemination of the press releases and SEC filings signed or approved by them were therefore false
and misleading.
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C.
Defendant Brant, on Behalf of Take-Two, Knew That GTA: San Andreas
Contained Pornographic Materials and that the Company Had Improperly
Backdated Stock Options
182.
Brant served as the Company's Chairman and CEO until March, 2004, when he
"resigned" from those positions, and assumed the corporate position of Vice-President of
Publishing. Brant continues today in that position.
183.
According to Take-Two's press release of March 16, 2004, as Vice President of
Publishing, Brant was to focus "on the continued development of the Company's portfolio of
proprietary brands ... including working closely with Sam Houser and Terry Donovan of Rockstar
Games" to extend the success of their "groundbreaking entertainment."
184.
However, the real reason for Brant's change of status became apparent soon after his
"resignation." Pursuant to the Consent Decree (entered in June 2005), and as a result of the
financial wrongdoing occurring under his direction of the Company, Brant was barred from serving
as an officer or director of a public company, including Take-Two, for five years.
185.
Notwithstanding the SEC Consent Decree, Brant in fact remained an active
member of the Company's management. Brant's continued active role in the Company's
management is reflected in his 2004 compensation. Although he "resigned" his positions as
Chairman and CEO in March of that year, he still received total 2004 compensation of over $4
million.
186.
Brant's continued active role in the Company's affairs included, among other things,
his participation in the development and creation of GTA: San Andreas. As a result, Brant knew
from the outset that the video game contained sexually explicit pornographic materials. Indeed, the
e-mails Brant received from defendants Houser and Donovan in August 2004, indicate his
awareness of the inclusion of the sexually explicit content: "REAL decisions on the content" had to
be made very soon (August 11, 2004 email from Houser to Brant and others); "edits" to the
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pornographic scenes that were then being considered were "BIG/complex changes" (August 17,
2004 email from Houser to Brant); and that it was "SO wrong at the behest of psychotic, mormon
capitalist retailers" to make such changes (August 17, 2004 e-mail from Houser to Brant and others).
187.
Brant also served as the Company's Chairman and CEO when he, along with other
senior members of management, developed the policy of improperly backdating stock options
described above. Indeed, as discussed in detail herein, Brant was the primary beneficiary of this
scheme, receiving an enormous number of backdated option grants.
188.
Thus, Brant in his capacity as a high level officer or employee of the Company,
became aware of (a) the information regarding the inclusion of pornographic materials in GTA:
San Andreas, as well as the improper backdating of options; and (b) that the public filings issued by
the Company during the Class Period contained false and misleading statements concerning these
matters.
D.
Defendants Houser and Donovan knew of the False
and Misleading Information Regarding GTA: San Andreas
189.
Based on their e-mails described above, there is no question that defendants Houser
and Donovan were aware of the Company's intentional inclusion of pornographic material in GTA:
San Andreas . In fact, as the e-mails make clear, they were, among others , responsible for the
inclusion of the sexually explicit content and the decision to embed the content.
Moreover, given
their positions at the Company, access to information and communications with senior Company
management, they either knew or were reckless in not knowing that the Company's public
disclosures concerning GTA: San Andreas were false and misleading in the manner described above.
E.
Defendants Eibeler and Winters Had
the Opportunity to Commit The Fraud
190.
Defendants Eibeler and Winters had the opportunity to commit and participate in
the fraud described above. As noted above, each of these defendants were top officers and directors
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of Take-Two, and thus controlled, authored and/or were responsible for the Company' s press
releases , corporate reports and SEC filings disseminated during the Class Period. Thus, they
controlled the public dissemination of and could falsify or omit, the material information about
Take-Two's financial results and operations that reached the public and affected the price of the
Company's stock.
F.
The Company Was Motivated to Lie to the Investing Public
Regarding its "M" Rating for GTA: San Andreas
191.
As noted above, the Company knew prior to its October 25, 2004 launch date that
GTA: San Andreas contained sexually explicit scenes. Rather then delete those scenes, the
Company chose to "wrap" or embed the scenes , making the game ultimately subject to an "AO"
rather than the "M" rating.
192.
The Company had a motive for failing to disclose the embedded pornography and
misrepresenting that it had complied with the ESRB rating process. As noted above, disclosure of
the game's adult content by the Company to the ESRB would have immediately prompted an "AO"
rating causing the Company to lose substantial sales revenue and earnings derived from its major
distribution channels , including stores such as Wal-Mart, Best Buy and Circuit City, which as
discussed above, would only sell games with a "M" rating or lower.
193.
In that regard, the Company has repeatedly acknowledged that a "substantial
portion" of its sales are made to a limited number of customers. For example, in the Company's
September 2005 10-Q, Take-Two reported:
Sales to our five largest customers accounted for approximately
41.0% and 35.6% of our revenues, respectively, for the nine months
ended July 31, 2005 and 2004. Sales to our five largest customers
amounted to approximately 38.9% of our revenues for the year
ended October 31, 2004. For the year ended October3l, 2004,
sales ofourproducts to Wal-Mart accounted for 10.4% ofour
revenues. Our sales are made primarily pursuant to purchase orders
without long-term agreements or other commitments and our
customers may terminate their relationship with us at any time. The
-64-
loss ofour relationships with principal customers or a decline in
sales to principal customers could harm our operating results.
(Emphasis supplied).
194.
The Company's motivation to maintain the pornographic component in GTA: San
Andreas was exacerbated by the reality of the immense pressure to meet product launch dates of
GTA: San Andreas, which was projected to account for a very large percentage of the Company's
total sales for the fiscal year ended October 31, 2005.
G.
Defendants Eibeler and Winters Were
Motivated by Greed to Commit the Fraud
195.
Defendant Winters used the artificially inflated price of the Company's stock to
unload over $5 million dollars worth of stock before the inevitable news of the ESRB's changed
rating of GTA: San Andreas became public in July 2005, which caused the Company's stock price to
drop. Specifically, sales by defendant Winters shortly before the ESRB changed its rating include:
Name
Date
# of Shares
Price Per Share ($)
Proceeds ($)
Karl H. Winters
06/14/05
03/11/05
50,000
112,000
162,000
28.77
40.62
1,438,500.02
4,459,439.88
$5,897,939.90
TOTAL
197.
Defendant Winters' sales represented 85% of his holdings during the Class Period.
Because these sales represented a significant portion of defendant Winters' holdings and preceded
the announcements of adverse public information , they are suspicious in timing and in character.
198.
Similarly, five Company directors sold approximately 368,094 shares of Company
stock for over $11 million, again, right before the Company's stock dropped with the disclosing of
the ESRB re-rating in July 2005. Specifically, sales by Company directors shortly before the ESRB
rating change include:
-65-
Name
Date
# of Shares
Price Per Share ($)
Proceeds ($)
Oliver R. Grace r.
Director
06/23/05
06/22/05
06/21/05
06/20/05
06/17/05
5,797
4,303
24,900
80,500
184,500
300,000
27.91
27.91
27.88
28.13
28.18
161,794.27
120,096.73
694,211.98
2,264,464.93
5,199,210.06
$8,439,777.97
Gary Lewis
Director
TOTAL
07/13/05
06/20/05
20,000
10,000
30 ,000
27.75
28.19
555,000.00
281,900.01
$836,900.01
Steven A. Tisch
Director
06/16/05
06/15/05
06/15/05
06/15/05
2,000
9,000
8,000
8,000
27,000
28.59
28.42
28.5
28.47
57,180.00
255,780.00
228,000.00
227,759.99
$768,720.99
Todd Emmel
Director
TOTAL
03/21/05
03/18/05
1,645
5,425
7,070
41
41
67,445.00
222,425.00
$289,870.00
Robert Fl
Director
07/12/05
06/17/05
04/05/05
27.73
28.2
39.25
TOTAL
6,000
12,324
10,000
28,324
166,380.00
347,536.81
392,500.00
$906,416.81
GRAND
TOTALS
368,094
TOTAL
TOTAL
196.
$11,241,684.96
These sales indicate that Winters and a number of the Company' s directors knew
that the Company's stock price was artificially inflated during the Class Period as a result of the
material adverse information known to them but not to the investing public, and that rather than
hold their shares in anticipation of future success of the Company resulting in increases in the stock
price, they sold off their holdings in order to profit from the artificially inflated price before the
adverse information became public.
-66-
197.
With respect to the Company' s false and misleading statements regarding the
workings of, operations and manipulations of Take-Two's stock options plans, there is ample
evidence indicating that the defendants Eibeler, Winters and Brant knew or were reckless in not
knowing that these statements were false when made, including such established facts (and/or the
inferences derived therefrom):
(a)
Defendants Brant and Eibeler were, at various times, aware of the precise
terms under which the Company's stock options were granted because, as Company directors, they
were charged with the responsibility of administering the stock option plans;
(b)
Defendants Eibeler and Winters, as directors and officers of the Company,
were responsible for the dissemination of the false and misleading information during the Class
Period regarding executive compensation contained in Take-Two's proxy statements and other
periodic SEC filings;
(c)
Moreover, by virtue of their own receipt of improperly backdated stock
options, defendants Brant and Eibeler knew that: (a) Take-Two was improperly granting backdated
options to themselves and other directors and officers of the Company; and (b) that the Company's
representations in SEC filings that it had fully complied with APB 25 and its own stock options
plans were false; and
(d)
Defendants Brant and Eibeler had strong personal motives to manipulate the
exercise price of the Company's stock options, as that manipulation inured not only to their direct
financial benefit, but also to those of their peers and employees. As discussed herein, these
defendants received, in the aggregate, options for hundreds of thousands of stock.
VIII .
LOSS CAUSATION
198.
As detailed herein, throughout the Class Period, the Defendants engaged in a
scheme and course of conduct to deceive the market and that resulted in artificially inflated prices
-67-
for Take-Two common stock. As a result, Lead Plaintiff and the Class purchased Take-Two
common stock at artificially inflated prices and were damaged thereby. The Company achieved this
facade of success and the continued steady growth expected by the market in part by, inter alia,
misrepresenting the amount of reported expenses and income in its financial statements, as well as,
issuing misleading statements concerning the sexually explicit content embedded in GTA: San
Andreas. When the Company's prior misrepresentations and fraudulent conduct were revealed
through a series of partial corrective disclosures, the price of Take-Two common stock fell
significantly on several occasions (as detailed herein), as portions of the artificial inflation were
removed from the Company's stock price. As a result of their purchases of Take-Two common
stock during the Class Period, Lead Plaintiff and other members of the Class suffered economic
loss.
A.
Disclosure of the ESRB Re-Rating of GTA: San Andreas to "AO"
199.
On July 20, 2005, the Company announced that the ESRB had concluded its
investigation and had changed the rating of the GTA: San Andreas from "M" to "AO " due to the
inclusion of sexually explicit scenes in the game.
200.
The following day, on July 21, 2006, the Company's stock dropped $1.33 per share,
or 4.9%, to $25.74 on a trading volume that was five times its average daily trading volume. The
disclosure that the ESRB changed its rating was a substantial cause of this price drop.
B.
Disclosure of the Los Angeles City Attorney' s Investigation
into GTA: San Andreas
201.
On January 27, 2006, the Los Angeles City Attorney's office announced that it filed a
lawsuit against Take-Two and Rockstar Games, alleging violations of California law for failing to
disclose that the Company had included pornographic scenes in GTA: San Andreas, which should
have resulted in the game initially receiving an "AO" rating from the ESRB rather than an "M"
rating.
-68-
202.
Immediately following this revelation , Take-Two's stock price declined from $17.03
per share to $14.69 per share for a one day decline of 13.7% on more than 20 million shares traded
approximately ten times the average daily trading volume during the preceding 12 months.
C.
Disclosure of the Manhattan District Attorney's Investigation
203.
On June 26, 2006, the Company announced that the Manhattan District Attorney
had recently issued multiple grand jury subpoenas requesting the production of documents relating
to, among other things, the "Hot Coffee" modification, the termination of PricewaterhouseCooper,
the Company's auditor, compensation of former officers and directors, presentation of earnings
results and the activities of the Company's Board and committee thereof since October 2001.
Immediately following this disclosure, the Company's stock dropped $2.02 per share, or 15%, on a
trading volume that was 12 times its average daily trading volume.
D.
Disclosure of the Second SEC Investigation
204.
On July 10, 2006, Take-Two announced that it had received notice from the SEC
that it was conducting yet another investigation of the Company, this time into Take-Two's stock
option grants from January 1997 to the present. The press release also announced that the
Company had initiated an internal investigation into prior stock option grants. Immediately
following these disclosure, the Company's stock dropped approximately 7.5% from the prior day's
closing price of $10.10 per share to $9.34 per share, in effect, reducing the Company's market
capitalization by over $ 55. 1 million.
IX.
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD ON THE MARKET DOCTRINE
205.
At all relevant times, the market for Take-Two's common stock was an efficient market
for the following reasons , among others:
(a)
Take-Two's common stock met the requirements for listing, and was listed
and actively traded on the NASDAQ, a highly efficient and automated market;
-69-
(b)
As a regulated issuer, Take-Two filed periodic public reports with the SEC
and the NASDAQ;
(c)
Take-Two regularly communicated with public investors via established
market communication mechanisms, including through regular disseminations of press releases on
the national circuits of major newswire services and through other wide-ranging public disclosures,
such as communications with the financial press and other similar reporting services; and
(d)
Take-Two was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales forces and certain customers
of their respective brokerage firms. Each of these reports was publicly available and entered the
public marketplace.
206.
As a result of the foregoing, the market for Take-Two's common stock promptly
digested current information regarding Take-Two from all publicly available sources and reflected such
information in Take-Two's stock price. Under these circumstances, all purchasers of Take-Two's
common stock during the Class Period suffered similar injury through their purchase of Take-Two's
common stock at artificially inflated prices and a presumption of reliance thus applies.
X.
NO SAFE HARBOR
207.
The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint. The
specific statements pleaded herein were not "forward-looking statements" when made. To the
extent there were any forward-looking statements, there were no meaningful cautionary statements
identifying important factors that could cause actual results to differ materially from those in the
purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor
does apply to any forward-looking statements pleaded herein, Defendants are liable for those false
forward-looking statements because at the time each of those forward-looking statements was made,
-70-
the particular speaker knew that the particular forward-looking statement was false, and/or the
forward-looking statement was authorized and/or approved by an executive officer of Take-Two
who knew that those statements were false when made.
XI.
CLAIMS FOR RELIEF
A.
FIRST CLAIM: Violation of Section 10(b) of the Exchange Act and
Rule 10b-5 Promulgated Thereunder Against All Defendants
208.
Lead Plaintiff repeats and reallages each and every allegation contained above as if
fully set forth herein.
209.
During the Class Period, Defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing
public, including Lead Plaintiff and other Class members, as alleged herein; (ii) artificially inflate and
maintain the market price of Take-Two common stock; and (iii) cause Lead Plaintiff and other
members of the Class to purchase Take-Two common stock at artificially inflated prices.
210.
In furtherance of this unlawful scheme, plan and course of conduct, the Defendants,
jointly and individually, took the actions set forth herein. The Defendants: (a) employed devices,
schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to
state material facts necessary to make the statements not misleading; and/or (c) engaged in acts,
practices, and a course of business which operated as a fraud and deceit upon the purchasers of the
Company's common stock in an effort to maintain artificially high market prices for Take-Two's
common stock in violation of Section 10(b) of the Exchange Act and Rule 10b-5. All Defendants
are sued either as primary participants in the wrongful and illegal conduct charged herein or as
controlling persons as alleged below.
211.
Defendants, individually and in concert, directly and indirectly, by the use, means or
instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
-71-
continuous course of conduct to conceal adverse material information about the business,
operations and financial results of Take-Two as specified herein.
212.
Defendants employed devices, schemes and artifices to defraud, while in possession
of material adverse non-public information, and engaged in acts, practices, and a course of conduct
as alleged herein in an effort to assure investors of Take-Two's value and performance and
continued substantial growth, which included the making of, or the participation in the making of,
untrue statements of material facts and omitting to state material facts necessary in order to make
the statements made about Take-Two and its business operations in the light of the circumstances
under which they were made, not misleading, as set forth more particularly herein, and engaged in
transactions, practices and a course of business which operated as a fraud and deceit upon the
purchasers of Take-Two common stock during the Class Period.
213.
As alleged in greater detail above, defendants Eibeler and Winters primary, and
controlling person liability, arises from the following facts: (i) they were high-level executives
and/or directors at the Company during the Class Period; (ii) both of these defendants, by virtue of
their responsibilities and activities as a senior officer and/or director of the Company, were privy to
and participated in the creation, development and reporting of the Company's financial statements
and reports; (iii) both of these defendants enjoyed significant personal contact and familiarity with
other defendants and was advised of and had access to other members of the Company's
management team, internal reports and other data and information about the Company's finances,
operations, and sales at all relevant times; and (iv) both of these defendants prepared and reviewed
the Company's SEC filings and press releases disseminated to the investing public, and were aware
of their contents, and they knew or recklessly disregarded that information contained therein was
materially false and misleading.
-72-
214.
Further, as alleged in greater detail above, defendants Houser, Brant and Donovan
engaged in market manipulation in violation of Rule 1Ob-5(a) and (c), promulgated under Section
10(b) of the Exchange Act. During the Class Period, defendants Houser, Brant and Donovan,
individually and via a fraudulent scheme with others, directly and indirectly, participated in a course
of business that operated as a fraud or deceit on purchasers of Take-Two securities and concealed
material adverse information regarding GTA: San Andreas and/or the improper backdating of stock
options.
215.
Specifically, defendants Houser, Donovan, and Brant, who were high-level senior
executives at Rockstar Games and/or Take-Two during the Class Period, were privy to and actively
participated in the creation and development of GTA: San Andreas , and knew that it contained
embedded sexually explicit scenes, and each of these defendants conspired with others at the
Company to create the false impression that GTA: San Andreas did not contain sexually explicit
content and thus could continue to be sold with an ESRB "M" rating, allowing the game to be
marketed to the Company's major retail store customers such as Wal-Mart, Best-Buy and Circuit
City. This fraudulent scheme served no purpose other than to improperly obtain an "M" rating by
the ESRB; improperly buttress the impression that Take-Two's sales and earnings during the Class
Period would remain at high levels as a direct result of the Company's continuing ability to sell its
most profitable game to its most important customers, and thereby artificially inflated the market
price of the Company's securities.
216.
Further, as discussed herein, defendant Brant, as the Company's former Chairman
and CEO, developed the policy of improperly backdating stock options and was the primary
beneficiary of the scheme, receiving a tremendous number of backdated options. As such, Brant
knew that the dates of stock option grants to insiders at Take-Two were routinely manipulated to
fall on days with the lowest stock prices and that this inflated the value of the option grants.
-73-
217.
As a result of the foregoing, during the Class Period, defendants Houser, Brant and
Donovan carried out a plan, scheme and course of conduct which was intended to and, during the
Class Period, did deceive the investing public, including Lead Plaintiff and other Class members, by
failing to disclose that GTA: San Andreas contained embedded pornography and misrepresenting
that it had complied with the ESRB rating process, and by failing to disclose the Company's
improper backdating of stock options granted to its top level management. Based upon the nondisclosure of these matters and otherwise, by misrepresenting the Company's business prospects and
the true nature of its operating condition and financial results, Lead Plaintiff and other members of
the Class to purchase Take-Two shares at artificially inflated prices that they would not have paid
had they known of the unlawful conduct alleged herein.
218.
Defendants Houser, Brant and Donovan: (i) employed devices, schemes, and
artifices to defraud; and (ii) engaged in acts, practices, and a course of business which operated as a
fraud and deceit upon the purchasers of the Take-Two securities, including Lead Plaintiff and other
members of the Class, which inflated the pricing of Take-Two securities in violation of Section 10(b)
of the Exchange Act and Rule 10b- 5(a) and (c).
219.
All Defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and/or to disclose such facts, even though such facts were available to them. The material
misrepresentations and/or omissions described above were done knowingly or recklessly and for the
purpose and effect of concealing Take-Two's operating condition and financial results from the
investing public and supporting the artificially inflated price of its common stock. As demonstrated
by the persistent overstatements and misstatements of the Company's business, operations and
earnings throughout the Class Period, as described above, Defendants , if they did not have actual
knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such
-74-
knowledge by deliberately refraining from taking those steps necessary to discover whether those
statements were false or misleading.
220.
As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Take-Two's common
stock was artificially inflated during the Class Period. In ignorance of the fact that market prices of
Take-Two's publicly-traded common stock were artificially inflated, and relying directly or indirectly
on the false and misleading statements described herein, or upon the integrity of the market in
which the common stock trades, Lead Plaintiff and the other members of the Class acquired TakeTwo common stock during the Class Period at artificially high prices and were damaged thereby.
221.
At the time of said misrepresentations and omissions , Lead Plaintiff and other
members of the Class were ignorant of their falsity, and believed them to be true. Had Lead
Plaintiff and the other members of the Class and the marketplace known the truth regarding TakeTwo's financial results, which was not disclosed by Defendants, Lead Plaintiff and other members
of the Class would not have purchased or otherwise acquired their Take-Two common stock, or, if
they had acquired such common stock during the Class Period, they would not have done so at the
artificially inflated prices which they paid.
222.
By virtue of the foregoing, Defendants have violated Section 10(b) of the Exchange
Act, and Rule 10b- 5 promulgated thereunder.
223.
As a direct and proximate result of the wrongful conduct alleged herein, Lead
Plaintiff and the other members of the Class suffered damages in connection with their respective
purchases and sales of the Company's common stock during the Class Period.
B.
SECOND CLAIM: Violation of Section 20(a) of the Exchange Act Against
Defendants Eibeler and Winters
224.
Lead Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
-75-
225.
The claim is asserted against defendants Eibeler and Winters.
226.
Both of these defendants served as a director or officer of the Company, and acted
as controlling persons of the Company within the meaning of Section 20(a) of the Exchange Act as
alleged herein. By virtue of their high-level positions, substantial participation in and/or awareness
of the Company' s operations and/or intimate knowledge of the false financial statements filed by
the Company with the SEC and disseminated to the investing public, each of these defendants had
the power to influence and control and did influence and control, directly or indirectly, the decisionmaking of the Company, including the content and dissemination of the various statements which
Lead Plaintiff contend are false and misleading. These defendants were provided with or had
unlimited access to copies of the Company's reports, press releases, public filings and other
statements alleged by Lead Plaintiff to be misleading prior to these statements were issued and had
the ability to prevent the issuance of the statements or cause the statements to be corrected.
227.
Moreover, these defendants had direct and supervisory involvement in the day-to-
day operations of the Company and, therefore, are presumed to have had the power to control or
influence the particular transactions giving rise to the securities violations as alleged herein, and
exercised the same.
228.
As set forth above, both of the defendants violated Section 10(b) and Rule 10b-5 by
their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling
persons, these Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and
proximate result of Defendants' wrongful conduct, Lead Plaintiff and other members of the Class
suffered damages in connection with their purchases of the Company's common stock during the
Class Period.
-76-
C.
THIRD CLAIM: Violation of Section 20A of the
Exchange Act Against Defendant Winters
229.
Lead Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
230.
The claim is brought pursuant to Section 20A of the Exchange Act against defendant
Winters on behalf of Lead Plaintiff and all other members of the Class who purchased Take-Two
stock contemporaneously with defendant Winters' sale of stock during the Class Period.
As discussed above, defendant Winters sold a substantial number of shares of Take-Two common
stock during the Class Period, representing significant portions of his holdings, while in possession
of material, adverse non-public information. This conduct violated Section 10(b) and 20A of the
Exchange Act.
231.
As set forth in the attached schedule, Lead Plaintiff purchased 23,400 shares of
Take-Two common stock on June 15, 2005.
232.
Defendant Winters, while in possession of material, adverse, non-public information,
sold Winters sold 50,000 shares of Take-Two common stock on June 14, 2005.
233.
Numerous other Class members also purchased Take-Two common stock
contemporaneously with Defendant Winters' sale of stock during the Class Period based upon
material, adverse, non-public information.
234.
As a result, under Section 20A of the Exchange Act, defendant Winters is liable to
Lead Plaintiff and the Class for all profits gained and losses avoided by them as a result of these
contemporaneous transactions.
XII.
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiff prays for the relief and judgment, as follows:
77 -
A.
Determining that this action is a proper class action and certifying Lead Plaintiff as
class representatives under Rule 23 of the Federal Rules of Civil Procedure and Lead Plaintiffs;
counsel as counsel to the Class;
B.
With respect to each Count awarding compensatory damages in favor of Lead
Plaintiff and the other Class members against all Defendants, jointly and severally, for all damages
sustained as a result of Defendants' wrongdoing, in an amount to be proven at trial, including
interest thereon;
C.
Awarding Lead Plaintiff and the Class their reasonable costs and expenses incurred
in this action, including counsel fees and expert fees; and
D.
Such other and further relief as the Court may deem just and proper.
XIII . JURY DEMAND
Lead Plaintiff hereby demands a trial by jury.
Dated: September 11, 2006
LABATOIN SUCHAROW & RUDOFF LLP
By:
Janaan Plasse UP-7515)
Stacey B. Fishbein (SF-4777)
Ethan D. Wohl (EW-0806)
100 Park Avenue
New York, New York 10017
Tel: (212) 907-0700
Fax: (212) 818-0477
Lead Counselfor Lead Plaintiff
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MICHAEL A. CARDOZO
CORPORATION COUNSEL
OF THE CITY OF NEW YORK
Bruce E. Stanton
Assistant Corporation Counsel
New York City Law Department
100 Church Street
New York, New York 10007-2601
Tel: (212) 788-0989
Fax: (212) 788-8900
Attorneysfor the NYC Funds
- 79 -
Schedule A
SCHEDULE A
Lead Plaintiff’s Common Stock
Transactions Between October 25, 2004 and July 10, 2006
Trade
Date
----------------Purchases ---------------Share
Number
Total
Price
of Shares
Cost
Trade
Date
----------------Sales---------------Share
Number
Total
Price
of Shares
Proceeds
NYC Employees Retirement System
1/14/2005
1/18/2005
2/2/2005
2/8/2005
3/4/2005
4/15/2005
4/15/2005
4/15/2005
5/19/2005
6/13/2005
6/15/2005
6/24/2005
7/25/2005
9/8/2005
$
$
$
$
$
$
$
$
$
$
$
$
$
$
22.7756
22.3804
24.3999
25.2842
25.8895
25.3844
25.3844
25.5400
27.1001
29.4000
28.9985
26.2600
25.4300
22.6700
6,900
7,050
3,900
21,000
40,050
36,173
5,927
4,500
21,800
9,100
9,100
24,200
100
200
$ 157,151.64
$ 157,781.82
$ 95,159.74
$ 530,968.20
$ 1 ,036,875.81
$ 918,229.90
$ 150,453.34
$ 114,930.00
$ 590,782.18
$ 267,540.00
$ 263,886.35
$ 635,492.00
2,543.00
$
$
4,534.00
12/31/2004
1/3/2005
1/3/2005
2/17/2005
2/22/2005
3/3/2005
3/21/2005
3/22/2005
3/24/2005
6/27/2005
8/4/2005
8/4/2005
10/13/2005
10/14/2005
11/21/2005
6/30/2006
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
23.2443
23.4479
23.4548
24.6487
24.5603
25.1028
25.9747
26.4999
26.6691
25.5247
24.4455
24.4455
18.9591
18.5884
18.6900
10.8200
2,850
3,750
3,450
2,700
1,350
3,300
4,410
10,140
3,300
5,800
27,077
8,423
35,500
70,850
200
100
$ 66,246.13
$ 87,929.44
$ 80,919.23
$ 66,551.55
$ 33,156.35
$ 82,839.37
$ 114,548.32
$ 268,708.59
$ 88,008.10
$ 148,043.43
$ 661,910.15
$ 205,904.24
$ 673,048.24
$1,316,989.61
$ 3,738.00
1,082.00
$
25,500
48,450
50,900
5,500
26,500
3,450
7,450
11,100
500
100
100
10,100
$ 644,747.10
$ 1,254,347.89
$ 1,292,065.96
$ 140,470.00
$ 718,152.65
$ 101,430.00
$ 219,030.00
$ 321,883.35
$ 13,130.00
2,267.00
$
1,896.00
$
$ 158,671.00
2/22/2005
7/25/2005
8/4/2005
8/4/2005
8/30/2005
10/13/2005
10/14/2005
6/30/2006
$
$
$
$
$
$
$
$
24.2000
25.4300
24.4455
24.4455
23.8790
18.9591
18.5884
10.8200
150
100
28,250
16,450
4,200
43,800
86,150
9,700
$ 3,630.00
$ 2,543.00
$ 690,584.69
$ 402,128.08
$ 100,291.80
$ 830,408.81
$1,601,392.45
$ 104,954.00
193,424.13
376,692.71
378,227.56
40,864.00
208,670.77
38,220.00
55,860.00
92,795.20
55,146.00
3/31/2005
6/24/2005
6/27/2005
8/4/2005
8/4/2005
10/13/2005
10/14/2005
$
$
$
$
$
$
$
26.2991
26.2843
25.5247
24.4455
24.4455
18.9591
18.5884
750
300
2,900
1,450
10,850
12,300
24,550
$
$
$
$
$
$
$
NYC Police Pension Fund
2/8/2005
3/4/2005
4/15/2005
4/15/2005
5/19/2005
6/13/2005
6/13/2005
6/15/2005
6/24/2005
9/8/2005
12/8/2005
2/17/2006
$
$
$
$
$
$
$
$
$
$
$
$
25.2842
25. 8895
25.3844
25.5400
27.1001
29.4000
29.4000
28.9985
26.2600
22.6700
18.9600
15.7100
NYC Fire Department Pension Fund
2/8/2005
3/4/2005
4/15/2005
4/15/2005
5/19/2005
6/13/2005
6/13/2005
6/15/2005
6/24/2005
$
$
$
$
$
$
$
$
$
25.2842
25.8895
25.3844
25.5400
27.1001
29.4000
29.4000
28.9985
26.2600
7,650
14,550
14,900
1,600
7,700
1,300
1,900
3,200
2,100
$
$
$
$
$
$
$
$
$
19,724.35
7,885.29
74,021.71
35,445.94
265,233.41
233,196.99
456,345.73