The Securities and Exchange Commission charged video and computer game publisher and distributor Take-Two Interactive Software Wednesday for falsifying its reported income over a seven-year period.
According to the SEC, 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.
Specifically, 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.
Further, 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.
The company 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.
Take-Two's seven-year backdating scheme was egregious and pervasive, and caused the company to materially misrepresent its financial condition to investors, said SEC official Christopher Conte.
Our enforcement action today underscores our commitment to holding public companies accountable for false reporting and disclosures, and imposing penalties where appropriate.
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.
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