U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20982 / April 1, 2009
Accounting and Auditing Enforcement Release No. 2957 / April 1, 2009
Securities and Exchange Commission v. Take-Two Interactive Software, Inc., United States District Court for the Southern District of New York, Civil Action No. 1:09-CV-03113 (S.D.N.Y. April 1, 2009)
Take-Two Pays $3 Million Civil Penalty to Settle Fraud Charges in Stock Options Backdating Scheme
The Securities and Exchange Commission ("Commission") today announced the filing of a civil action against video and computer game publisher and distributor Take-Two Interactive Software, Inc. ("Take-Two"), alleging that during a seven year period, Take-Two defrauded investors by granting backdated, undisclosed "in the money" stock options to officers, directors, and key employees while failing to record required non-cash charges for option-related compensation expenses.
The Complaint alleges that on over 100 occasions from 1997 through September 2003, Take-Two looked back and picked grant dates for the Company's incentive stock options, resulting in grants of "in-the-money" options. According to the Complaint, Take-Two used several means to backdate options, including pre-priced option pools, backdating of employment agreements, and "pick-a-date" backdating, whereby a set exercise price for the grants was chosen, and then a past grant date was selected when Take-Two's stock price most closely corresponded to the set exercise price. On at least 26 occasions, the backdated grant dates coincided with dates of historically low annual and quarterly closing prices for Take-Two's common stock. These "fortuitous" grant dates, the complaint alleges, could not have been selected so consistently without the benefit of hindsight. According to the Complaint, Take-Two granted these options without complying with its own stock option plans and, generally, without the Board or a Committee thereof approving the grant dates or exercise prices. The Complaint alleges that Take-Two officers and employees prepared documents falsely indicating that the option grants had been made on earlier dates when Take-Two's stock price had closed lower.
The Complaint alleges that because of the undisclosed backdating scheme, Take Two filed with the Commission and disseminated to investors current, quarterly and annual reports, proxy statements and registration statements that contained materially false and misleading statements concerning the true grant dates and proper exercise prices of stock options. In doing so, Take-Two created the false and misleading impression that stock options were granted in accordance with the terms of the applicable stock option plans. According to the Complaint, Take-Two materially understated its compensation expenses and materially overstated its quarterly and annual pre-tax earnings and earnings per share in its financial statements. On February 28, 2007, Take-Two restated historical financial results for multiple years to record additional non-cash charges for option-related compensation expenses totaling $42.1 million net of tax.
Without admitting or denying the allegations of the Commission's Complaint, Take-Two consented to the entry of an order: (1) permanently enjoining it from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13 and 14a-9; and (2) requiring it to pay a $3 million civil penalty. The settlement is subject to the approval of the United States District Court for the Southern District of New York.
The Commission previously settled with former Chief Executive Officer and Chairman Ryan Brant for his alleged role as the architect of the fraudulent options backdating scheme. SEC v. Ryan Ashley Brant, Civil Action No. 1:07 CV 1075 (DLC) (S.D.N.Y. 2007) (filed February 14, 2007), Litigation Release No. 20003. In that action, Brant was permanently enjoined from violating and/or aiding and abetting violations of the antifraud, reporting, record-keeping, internal controls and securities ownership reporting provisions of the federal securities laws; permanently barred from serving as an officer or director of any public company; and ordered to pay disgorgement of $4,118,093, prejudgment interest of $1,143,000, and a civil penalty of $1 million. Brant also pled guilty to felony criminal charges of Falsifying Business Records in the First Degree and paid $1 million in lieu of fines and forfeiture to state and local New York authorities.
The Commission acknowledges the assistance of the New York County District Attorney's Office, which conducted a separate, parallel investigation.
The Commission's investigation is continuing.