Washington, D.C., April 1, 2009 (LAWFUEL) – The Securities and Exchange Commission today charged video and computer game publisher and distributor Take-Two Interactive Software, Inc. for falsifying its reported income over a seven-year period. Take-Two agreed to pay a $3 million penalty to settle the SEC’s charges that the company 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 SEC previously charged Take Two’s former Chief Executive Officer and Chairman Ryan Brant for his alleged role as the architect of the fraudulent options backdating scheme.
“Take-Two’s seven-year backdating scheme was egregious and pervasive, and caused the company to materially misrepresent its financial condition to investors,” said Christopher Conte, an Associate Director in the SEC’s Division of Enforcement. “Our enforcement action today underscores our commitment to holding public companies accountable for false reporting and disclosures, and imposing penalties where appropriate.”
The SEC’s complaint alleges that from 1997 to 2003, Take-Two granted backdated options to officers, directors, and key employees without complying with its own stock option plans, and generally without the Board or a Committee of the Board approving the grant dates or exercise prices. Take-Two used several means to backdate the options, including looking back and picking grant dates for the company’s incentive stock options that coincided with dates of historically low annual and quarterly closing prices for Take-Two’s common stock, resulting in grants of “in-the-money” options. Documents at the company falsely indicated that the option grants had been made on earlier dates when Take-Two’s stock price had closed lower.
The SEC’s complaint further 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 SEC’s 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 Feb. 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 SEC’s allegations, Take-Two has agreed to pay a $3 million penalty and consent to the entry of an order permanently enjoining it from violating the antifraud, reporting, record-keeping and internal controls provisions of the federal securities laws. The settlement is subject to the approval of the U.S. District Court for the Southern District of New York. The Commission acknowledges the cooperation provided by Take-Two during the course of the investigation. Take-Two currently operates under new management and a new board of directors.
Separately, the New York County District Attorney’s Office today announced that it has reached a settlement agreement with Take-Two requiring that, among other things, Take-Two pay $300,000 to state and local New York authorities and continue to undertake remedial measures.
In the SEC’s prior case against Brant, he agreed to settle the Commission’s charges by paying more than $6.3 million and consenting to a permanent bar from serving as an officer or director of any public company. Separately, he 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 SEC’s investigation is continuing.