U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19260 / June 9, 2005
Accounting and Auditing Enforcement
Release No. 2259 / June 9, 2005
SEC SUES TAKE-TWO INTERACTIVE SOFTWARE, INC. AND FOUR SENIOR EXECUTIVES FOR ACCOUNTING FRAUD
ALL PARTIES AGREE TO SETTLE AND PAY $8.75 MILLION IN PENALTIES AND OVER $5.1 MILLION IN DISGORGEMENT AND PREJUDGMENT INTEREST
SECURITIES AND EXCHANGE COMMISSION v. TAKE-TWO INTERACTIVE SOFTWARE, INC., RYAN BRANT, LARRY MULLER, JAMES DAVID, JR., AND ROBERT BLAU, Civil Action No. 1:05-CIV-5443 (DLC) (S.D.N.Y. 2005) (filed June 9, 2005)
IN THE MATTER OF ROBERT M. BLAU, Securities Act of 1933 Release No. 8581, Exchange Act of 1934 Release No. 51809 / June 9, 2005
The Securities and Exchange Commission today announced that it filed a civil action in federal district court against: Take-Two Interactive Software, Inc., a New York-based publisher and distributor of video and computer games; the company's former Chairman and Chief Executive Officer, Ryan Brant; its former Executive Vice President and Chief Operating Officer, Larry Muller; its former Chief Financial Officer, James David, Jr.; and its current Vice President of Sales, Robert Blau for fraudulent accounting practices designed to inflate its reported revenue during fiscal years 2000 and 2001. Those practices allowed Take-Two to consistently meet or exceed analysts' predictions regarding its earnings per share during all four quarters of fiscal year 2000 and to meet certain financial targets which triggered the payment of substantial bonuses to Brant, Muller and David. The Commission has also issued an order in a related administrative proceeding against Blau.
According to the Commission's complaint, Take-Two systematically recognized sales revenue from approximately 180 "parking" transactions in which the company, at or near the end of fiscal quarters or year end, shipped hundreds of thousands of video games to distributors who had no obligation to pay for the product, fraudulently recorded the shipments as if they were sales, and then accepted return of the games in subsequent reporting periods. In many cases, Take-Two created fraudulent invoices to disguise the returns as "purchases of assorted product." Take-Two also improperly recognized sales revenue for games that were still being manufactured and could not in fact be shipped, and in fiscal year 2000, improperly accounted for the acquisition of two video game publishers. In addition, from fiscal year 2000 through the third quarter of fiscal year 2003, Take-Two failed to establish proper reserves for reductions in the prices of its games at the retail level (referred to in the industry as "price protection" or "price concessions").
The SEC's complaint alleges:
Muller was the principal architect of the fraudulent parking transactions. At Muller's direction, Blau arranged and executed several of those transactions. For example, Muller instructed Blau to arrange a large parking transaction at the end of Take-Two's fiscal year 2000 with Capitol Distributing, a distributor formerly based in Virginia. On October 31, 2000, Take-Two's fiscal year-end, Blau arranged a shipment of 230,000 video games to Capitol with the understanding that the shipment would be returned. Take-Two improperly recorded $5.4 million in revenue from the shipment - which at that time was Take-Two's largest sale ever. Capitol subsequently returned the entire shipment. In an effort to hide the return from Take Two's auditors, Blau arranged, at Muller's direction, for the return to be made through an affiliate of Capitol and to disguise the return as a purchase of "assorted product" from that Capitol affiliate.
David knew about the fraudulent sales and parking transactions during 2000 and 2001 -- including the disguising of returns as purchases of new inventory, and the impact of those transactions on Take-Two's reported financials. Brant was similarly aware that Take Two was making certain shipments to Capitol and he knew that some games from those shipments were being returned. He also discussed with Muller and David treating some of those returns as purchases of new inventory. Consequently, Brant knew, or was reckless in not knowing, that Take-Two's reported financial results in 2000 and 2001 were materially inflated by the transactions with Capitol. Yet Brant and David signed Take-Two's Form 10-K for fiscal-year 2000 (filed on January 29, 2001) and David signed its Form 10-Q filed on April 30, 2001.
Take-Two's fraudulent accounting practices allowed it to improperly recognize approximately $60 million in revenue during 2000 and 2001, and report after-tax fiscal year 2000 earnings that were inflated by $20 million. Take-Two's quarterly revenue and/or earnings were materially overstated in nine of fifteen quarters from 2000 through the third quarter of 2003. On December 14, 2001, after press accounts appeared regarding concern that the Company would have to restate its earnings for fiscal year 2001, the price of Take-Two shares declined 31 percent on trading volume of 20.3 million shares, more than ten times the average trading volume for Take-Two shares during the previous three months.
In February 2002, Take-Two restated its financial statements for its fiscal year ended October 31, 2000 and the first three quarters of its fiscal year 2001 to correct for approximately 90 parking transactions during the period that the Company had used to inflate its revenues. The Company's February 2002 restatement also corrected for its improper accounting for the acquisition of two video game publishers in 2000. In February 2004, Take-Two again restated its financial statements. In its 2004 restatement, Take-Two corrected for its failure to set aside reserves for future price concessions during fiscal year 2000 through the end of the third quarter of fiscal year 2003. The Company's February 2004 restatement also corrected for the improper accounting treatment of approximately 88 additional sales transactions during 2000 and 2001 that had inflated its revenues.
Take-Two consented to pay a penalty of $7.5 million. Brant consented to pay a penalty of $500,000 and disgorgement and pre-judgment interest of $3,103,252; Muller consented to pay a penalty of $500,000 and disgorgement and pre-judgment interest of $1,215,720; David consented to pay a penalty of $200,000 and disgorgement and pre-judgment interest of $793,949; and Blau consented to pay a penalty of $50,000 and disgorgement and pre-judgment interest of $64,508. The settlements are without admitting or denying the allegations in the complaint, and are subject to court approval. The penalties may be distributed to harmed investors pursuant to the Sarbanes-Oxley Act of 2002.
In addition to the monetary relief described above:
- Take-Two consented to entry of a final judgment permanently enjoining it from future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1.
- Brant consented to entry of a final judgment permanently enjoining him from violating Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5 and 13b2-1, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13 and to an order barring him from serving as an officer or director of a public company for five years.
- Muller consented to entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2; and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13; and to entry of an order permanently barring him from serving as an officer or director of a public company.
- David consented to entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2; and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13; and to entry of an order barring him from serving as an officer or director of a public company for ten years. David also consented to a suspension from appearing or practicing before the Commission as an accountant for ten years pursuant to Rule 102(e) of the Commission's Rules of Practice, in a related settled administrative proceeding to be instituted once the injunction against David is entered.
- Blau consented to entry of a final judgment finding that he violated Section 13(b)(5) of the Exchange Act, and, in a related settled administrative proceeding, to entry of a Commission order to cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2; and from causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13.
SEC Complaint in this matter