U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20100 / May 2, 2007
Accounting and Auditing Enforcement
Release No. 2604 / May 2, 2007
Securities and Exchange Commission v. Capitol Distributing, LLC and Terry M. Phillips, Civil Action
No. 1:07-CV-00798 (RMC) (D.D.C. May 2, 2007)
In the Matter of Terry M. Phillips, Securities Exchange Act of 1934 Release
No. 34-55696 / May 2, 2007
Video Game Distributor Capitol Distributing, L.L.C. Settles Charges for Aiding and Abetting Accounting Fraud by Take-Two Interactive Software, Inc.; Terry Phillips, an Owner of Capitol, Agrees to Pay a $50,000 Civil Penalty as Capitol's Controlling Person and Consents to an Antifraud Cease-and-Desist Order
The Securities and Exchange Commission ("Commission") today announced that it filed a settled civil action in federal district court against video game distributor Capitol Distributing, L.L.C. ("Capitol") and one of its owners, Terry M. Phillips ("Phillips"). The Commission charged Capitol, a privately-owned, Virginia-based video game distributor, with aiding and abetting video game publisher Take-Two Interactive Software, Inc. ("Take-Two") in Take-Two's violations of the antifraud, reporting and recordkeeping provisions of the federal securities laws during fiscal years 2000 and 2001 through a fraudulent video game parking scheme. The Commission also charged Phillips with liability as a controlling person for Capitol's violations and instituted a settled administrative cease-and-desist order against Phillips, which found that Phillips was a cause of Capitol's violations.
In its complaint filed today, the Commission alleged that Capitol aided and abetted Take-Two's violations of the antifraud, financial reporting and recordkeeping provisions of the federal securities laws by knowingly providing substantial assistance to Take-Two's fraudulent scheme to inflate reported revenue during its fiscal years 2000 and 2001. Specifically, the complaint alleges that Take-Two shipped to Capitol hundreds of thousands of video games, typically at the end of reporting periods, and fraudulently recorded those shipments as sales when, in actuality, Capitol only temporarily parked the games for Take-Two and did not intend to sell them. The complaint alleges that in furtherance of the scheme Take-Two twice provided funds to Capitol or another Phillips-owned entity known as Phillips Land Company ("PLC"), for transmission to Take Two to create the false appearance that Capitol or PLC were paying for the games. According to the complaint, Capitol in two instances returned the games to Take-Two under invoices falsely describing them as "purchases" of "assorted product." The scheme enabled Take-Two to report approximately $15 million in phantom revenue from four separate parking transactions with Capitol.
Capitol, without admitting or denying the allegations in the complaint, consented to the entry of a final judgment permanently enjoining it from violating Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13 and 13b2-1.
The complaint alleges that Phillips, as Capitol's founder, 20 percent owner, and principal operator is a control person of Capitol within the meaning of Section 20(a) of the Exchange Act. Phillips, without admitting or denying the allegations in the complaint, consented to entry of a final judgment ordering him to pay a civil money penalty of $50,000 as a control person of Capitol for its aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b 20, 13a-1, 13a-13 and 13b2-1.
The settlements with Capitol and Phillips are subject to the approval of the United States District Court for the District of Columbia.
In a related administrative proceeding, Phillips consented, without admitting or denying the Commission's findings, to the entry of a Commission order to cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-1, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13. The Commission in its order found that Phillips and Take-Two began discussing Capitol's participation in the parking arrangement in July 2000. In October 2000, Take-Two discussed the first parking transaction with Phillips, asking Phillips if he had another company that Take Two could issue a purchase order to for the games in lieu of Capitol sending the games back as a return. Phillips mentioned PLC, then instructed a Capitol employee to work out the details with Take-Two.
On June 9, 2005, the Commission filed and simultaneously settled civil charges against Take-Two and former and current members of senior management in connection with the parking scheme. See SEC v. Take-Two Interactive Software, Inc., et al., Civil Action No. 05-CV-5443 (DLC) (S.D.N.Y. 2005) (filed June 9, 2005), Litigation Release No. 19260.
The Commission's investigation in this matter is continuing.
SEC Complaint in this matter, Administrative Proceeding