Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, April 1, 2009

Take-Two Settles Backdating Charges with SEC

The SEC announced the filing of a civil action against video and computer game publisher and distributor Take-Two Interactive Software, Inc. ("Take-Two"), alleging that during a seven year period, 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.  The Complaint alleges 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.  

Without admitting or denying the allegations, Take-Two consented to the entry of a permanent injunction and agreed to pay a $3 million civil penalty. The settlement is subject to the approval of the United States District Court for the Southern District of New York.

The Complaint 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 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 Commission previously settled with former Chief Executive Officer and Chairman Ryan Brant for his alleged role as the architect of the fraudulent options backdating scheme.

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