Thursday, June 16, 2005

Take-Two Settles SEC Lawsuit

Take-Two is a big player in the entertainment software industry, and I've written in the past about how they desperately need additional growth drivers beyond the Grand Theft Auto franchise. What I haven't written about (that I can remember) is how tremendously shaky their accounting has been for the last four years.

Herb Greenberg of MarketWatch, who has a longstanding reputation as a basset hound when it comes to sniffing out questionable companies, is a longtime critic of Take-Two. His column today discussed the SEC lawsuit and some of the past issues surrounding the company. You can find the entire article here: http://tinyurl.com/7mk3g.

Here are some excerpts.
The SEC's allegations bear a startling resemblance to an admission in a company press release on February 13, 2002 announcing one of multiple restatements. According to that press release, an internal investigation found the company had "eliminated sales of products made to certain independent third-party distributors that were improperly recognized as revenue and returned to, or repurchased by the Company in subsequent periods..."

In other words, to help inflate its revenue, Take-Two sold product to itself.

Just what were the SEC allegations?
[Take-Two] "systematically recognized sales revenue from approximately 180 'parking' transactions in which the company, at or near the end of fiscal quarters or year end, shipped hundreds of thousands of video games to distributors who had no obligation to pay for the product, fraudulently recorded the shipments as if they were sales, and then accepted return of the games in subsequent reporting periods.

So the SEC alleged that they sold product to themselves. Again. Take-Two admitted no guilt in settling the lawsuit, but that's a common strategy--pay the fine but admit to nothing.

If you're not familiar with standard accounting practices and SEC law, it might not seem like such a big deal that a company is trying to inflate its revenue in this manner. Believe me, it's a big deal, and it is big-time fraud when something like this happens.

I've said it before, but Take-Two is a company on the edge, and they've lived on the edge for years, both in their accounting practices and their business strategies. When I say that they're betting the company on each Grand Theft Auto title, I mean it literally. If a GTA title ever blows up in their face, they're done.

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