“Grand Theft Auto” Game Maker to Pay $3M to Settle Illegal Stock Option Backdating Charges

Holding:

Take-Two Interactive Software, Inc. (“Take-Two”), the publisher and distributor of the “Grand Theft Auto” computer video game, has agreed to pay $3 million to settle accusations filed by the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) that it had engaged in illegal stock options backdating over a seven-year period. Without admitting or denying the SEC's allegations, the company also agreed to the issuance of an injunction against future violations of certain provisions of the federal securities laws. The settlement is subject to approval by the United States District Court for the Southern District of New York. If court approval is obtained, the settlement will conclude the SEC's investigation of this matter with respect to the company. As part of the settlement agreement with the New York County District Attorney, the company acknowledged that certain of its former directors and officers engaged in certain illegal behaviors related to the historical granting of stock options, and the district attorney agreed not to prosecute the company or its corporate subsidiaries for conduct related thereto. In addition, the company agreed to pay $300,000 to the District Attorney for reimbursement of costs related to the district attorney's investigation, to undergo a review of its corporate governance structure by external legal counsel, and to hire an administrator for its stock plan.

Detailed Summary:

According to the SEC, 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. See http://www.sec.gov/litigation/litreleases/2009/lr20982.htm.

Specifically, the SEC’s complaint alleged 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.  The SEC also asserted that 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 further stated 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 alleged that because of the undisclosed backdating scheme, Take Two filed with the SEC 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.

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). 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.

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