Wednesday, May 2, 2007
Securities and Exchange Commission ("Commission") today announced that it filed a settled civil action in federal district court against video game distributor Capitol Distributing, L.L.C. ("Capitol") and one of its owners, Terry M. Phillips ("Phillips"). The Commission charged Capitol, a privately-owned, Virginia-based video game distributor, with aiding and abetting video game publisher Take-Two Interactive Software, Inc. ("Take-Two") in Take-Two's violations of the antifraud, reporting and recordkeeping provisions of the federal securities laws during fiscal years 2000 and 2001 through a fraudulent video game parking scheme. The Commission also charged Phillips with liability as a controlling person for Capitol's violations and instituted a settled administrative cease-and-desist order against Phillips, which found that Phillips was a cause of Capitol's violations.
In its complaint filed today, the Commission alleged that Capitol aided and abetted Take-Two's violations of the antifraud, financial reporting and recordkeeping provisions of the federal securities laws by knowingly providing substantial assistance to Take-Two's fraudulent scheme to inflate reported revenue during its fiscal years 2000 and 2001. Specifically, the complaint alleges that Take-Two shipped to Capitol hundreds of thousands of video games, typically at the end of reporting periods, and fraudulently recorded those shipments as sales when, in actuality, Capitol only temporarily parked the games for Take-Two and did not intend to sell them. The complaint alleges that in furtherance of the scheme Take-Two twice provided funds to Capitol or another Phillips-owned entity known as Phillips Land Company ("PLC"), for transmission to Take Two to create the false appearance that Capitol or PLC were paying for the games. According to the complaint, Capitol in two instances returned the games to Take-Two under invoices falsely describing them as "purchases" of "assorted product." The scheme enabled Take-Two to report approximately $15 million in phantom revenue from four separate parking transactions with Capitol.