U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21163 / August 3, 2009
Accounting and Auditing Enforcement Release No. 3028 / August 3, 2009
Securities and Exchange Commission v. Kenneth Selterman and Patti Tay, United States District Court for the Southern District of New York, Civil Action No. 09-CV-6813 (S.D.N.Y. July 31, 2009)
SEC Charges Take-Two's Former General Counsel and Former Controller/Chief Accounting Officer With Stock Option Backdating
The Securities and Exchange Commission today announced the filing of a civil action against Kenneth Selterman and Patti Tay, the former General Counsel and former Controller/ Chief Accounting Officer, respectively, of video game maker Take-Two Interactive Software, Inc. (Take-Two) with stock option backdating. The SEC's complaint alleges that Tay and Selterman enriched themselves and others by knowingly or recklessly allowing Take-Two's former Chairman/CEO Ryan Brant to backdate Take-Two's stock option grants. The scheme involved granting backdated, undisclosed "in the money" stock options that coincided with dates of historically low annual and quarterly closing prices for Take-Two's common stock. The complaint alleges that Take-Two granted backdated stock options to senior officers, directors, and key employees without complying with its own stock option plans, and generally, without the Board or a committee thereof approving the grant dates and exercise prices. Take-Two also did not record or disclose the compensation expenses it incurred as a result of the "in-the-money" portions of the option grants. Tay's misconduct, according to the complaint, occurred from at least as early as 1998, while Selterman's misconduct occurred from at least as early as 2002.
The SEC's complaint, filed in federal court in the Southern District of New York, also alleges, among other things, that Tay and Selterman:
knew, or were reckless in not knowing, that exercise prices for stock options had been picked with hindsight;
created company records that falsely indicated that stock option grants had occurred on earlier dates when Take-Two's stock price had been at a low;
knew the accounting consequences of granting stock options at exercise prices less than fair market value on the date of the grant; and
knew or were reckless in not knowing that Take-Two's filings with the SEC were false and misleading because they materially understated Take-Two's compensation expenses and materially overstated its earnings (or understated its losses), and contained materially false and misleading statements pertaining to the true grant dates and exercise prices of options, creating the false and misleading impression that Take-Two granted options in accordance with the terms of its stock option plans.
Tay and Selterman have agreed to settle this matter, without admitting or denying the allegations of the SEC's complaint. Tay and Selterman consented to orders permanently enjoining them from violating the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5, the internal controls and books and records provisions of Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1; the misrepresentations to auditors provision of Exchange Act Rule 13b2-2; and the reporting provisions of Section 16(a) of the Exchange Act and Rule 16a-3; and from aiding and abetting Take-Two's violations of the Exchange Act's reporting, books and records, internal controls, and proxy solicitation provisions. Tay and Selterman agreed to permanent bars from serving as officers or directors of any issuer that has a class of securities registered with the SEC or that is required to file reports with the SEC. Tay and Selterman will each pay a civil penalty of $125,000. Selterman will also pay disgorgement of $363,185 plus prejudgment interest of $111,115, for a total of $474,300, representing the "in-the-money" benefit he obtained from exercising his backdated options.
In addition, as part of the settlements, and following the entry of the proposed final judgments, Tay and Selterman, without admitting or denying the Commission's findings, consented to the entry of administrative orders pursuant to Rule 102(e)(3) of the Commission's Rules of Practice permanently suspending them from appearing or practicing before the SEC as an accountant and an attorney, respectively.
The settlements are subject to the approval of the United States District Court for the Southern District of New York.
The SEC 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. The SEC also previously settled with Take-Two with respect to the alleged options backdating scheme. SEC v. Take-Two Interactive Software, Inc., Civil Action No. 1:09-CV-03113 (S.D.N.Y. 2009) (filed April 1, 2009), Litigation Release No. 20982.
The SEC acknowledges the assistance of the New York County District Attorney's Office, which conducted a separate, parallel investigation.