Wilamowsky v. Take-Two Interactive Software, Inc.

• Decision Date: 30 September 2011
• Docket Number: No. 10 Civ. 7471 (RJS).,10 Civ. 7471 (RJS).
• Citation: 818 F.Supp.2d 744
• Parties: Eli WILAMOWSKY, Plaintiff, v. TAKE–TWO INTERACTIVE SOFTWARE, INC., Ryan Brant, Todd Emmel, Robert Flug, and Oliver Grace, Defendants.
• Court: U.S. District Court — Southern District of New York

818 F.Supp.2d 744

Eli WILAMOWSKY, Plaintiff,

v.TAKE–TWO INTERACTIVE SOFTWARE, INC., Ryan Brant, Todd Emmel, Robert Flug, and Oliver Grace, Defendants.

No. 10 Civ. 7471 (RJS).

United States District Court, S.D. New York.

Sept. 30, 2011.

Sandy A. Liebhard, Uri S. Ottensoser, and Joseph R. Seidman of Bernstein Liebhard, LLP, New York, NY, for Plaintiff.

Ada F. Johnson, John B. Missing, and John V. Ponyicsanyi of Debevoise & Plimpton LLP (DC), N.W., Washington, DC, and Colby A. Smith of Debevoise & Plimpton, LLP (NYC), New York, NY, for Defendant Take–Two.

Gary S. Klein and Brian A. Daley of Sandak Hennessey & Greco, LLP, Stamford, CT, for Defendant Ryan Brant.Andrew C. Hruska and Louisa B. Childs of King & Spalding LLP, New York, NY, for Defendant Todd Emmel.Stephen Ehrenberg of Sullivan and Cromwell, LLP, New York, NY, for Defendant Robert Flug.Charles A. Stillman, Michael J. Grudberg, and Nathaniel I. Kolodny of Stillman, Friedman & Shechtman, P.C., New York, NY, for Defendant Oliver Grace.

opinion and order

RICHARD J. SULLIVAN, District Judge.

On October 18, 2010, the Court approved the settlement of a securities fraud class action against Take–Two Interactive Software, Inc. (“Take–Two” or the “Company”), its subsidiary, and several individual defendants arising from Take–Two's inclusion of sexually explicit content in a video game and the backdating of stock options granted to its directors and senior management. Plaintiff Eli Wilamowsky is a short seller of Take–Two stock who opted out of that settlement and brought this individual action because the plan of allocation excluded short sellers like him from recovery, (Compl. ¶ 1.) Now before the Court are Defendants' motions to dismiss pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u–4(b). For the reasons that follow, the motions are granted.

I. Background ¹

A. Parties

Plaintiff Eli Wilamowsky short sold 924,500 shares of Take–Two stock between May 25, 2004 and April 21, 2005. (Compl. ¶¶ 132, 160–161; id., Ex. E (Chart of Plaintiff's sales and purchases).) As a short seller, Plaintiff essentially bet that Take–Two stock was overvalued and slated to decrease in price, leading him to borrow and sell Take–Two stock under an obligation to later purchase (or “cover”) and deliver the stock back to its owner. ( Id. ¶ 3) Plaintiff alleges that before and after he made short sales, a series of Defendants' misrepresentations about the Company's stock options plans “continually, and increasingly, inflated Take–Two's stock price.” ( Id. ¶ 5.) Because these misstatements allegedly caused Plaintiff to cover his short positions at artificially higher prices than those at which he sold, Plaintiff allegedly suffered financial harm. ( Id.)

Defendant Take–Two is a public company organized under the laws of Delaware that develops and distributes popular video games, hardware, and accessories. ( Id. ¶¶ 27, 30.) The Company's corporate headquarters are located in New York and its stock is traded on the NASDAQ National Market. ( Id.) The Complaint also names four Individual Defendants: Take–Two's founder and former CEO Ryan Brant (“Brant”), and former directors Todd Emmel, Robert Flug, and Oliver Grace (the “Directors”), who were all beneficiaries of Take–Two's alleged options backdating scheme. ( Id. ¶¶ 31–35.)

B. The Options Backdating Scheme

Although the settled shareholder securities class action involved claims related to both Take–Two's options backdating scheme and the inclusion of sexually explicit content in one of Take–Two's Grand Theft Auto video games, this individual case focuses solely on the options backdating scheme. Specifically, the Complaint alleges that between 1997 and 2005, Take–Two operated two stock option plans to compensate its directors and officers, including the Individual Defendants. ( Id. ¶¶ 51–53, 59.) According to the Complaint, Take–Two routinely manipulated the dates of its stock option grants to make them fall on days with the lowest stock prices, thereby inflating the value of the grants. ( Id. ¶¶ 59–60.) The Company thus effectively granted options with an exercise price below the market price of the underlying shares on the date of grant, referred to as “in-the-money” grants. ( Id. ¶ 99.) Significantly, Take–Two failed to account for these in-the-money grants as compensation expenses pursuant to Accounting Principles Board Opinion No. 25 (“APB 25”), and violated Generally Accepted Accounting Principles (“GAAP”). ( Id. ¶¶ 97–100.) As a result, Take–Two understated compensation expenses and overstated net income in its press releases and SEC filings. ( Id. ¶¶ 131, 139.) The scheme resulted in an overstatement of Take–Two's earnings by 20% in fiscal year 2002, 11% in fiscal year 2003, and 5–6% in fiscal years 2004 and 2005. ( Id. ¶ 89.)

According to the Complaint, the “truth about Take–Two's option backdating was finally revealed on July 10, 2006,” when Take–Two announced that the SEC was investigating its option grants and that it had initiated its own internal investigation. ( Id. ¶ 140.) On this news, Take–Two's stock dropped approximately 7.5% from the prior day's closing price of $10.10 per share to $9.34 per share. ( Id.) Subsequently, in December 2006 and January 2007, Take–Two completed an internal investigation that revealed (1) a pattern and practice of backdating options (particularly by Brant), and (2) failure to comply with the terms of its stock option plans, as well as failures to maintain adequate control and compliance procedures and accurate documentation of option grants. ( Id. ¶¶ 72–74.) On February 14, 2007, Brant pled guilty to a felony charge of falsifying business records in New York State Supreme Court, New York County, and entered into a civil settlement with the SEC. ( Id. ¶ 17.) On February 23, 2007, Take–Two announced that options granted to several directors, including Emmel, Flug, and Grace, were “improperly dated” and that each of the directors had entered into an agreement to repay the compensation that they had unlawfully obtained. ( Id. ¶ 18.)

C. Plaintiff's “Individual Action Period”

Plaintiff's self-styled “Individual Action Period” extends from March 4, 2004 through July 16, 2006 ( id. ¶ 3), beginning with the first of nine alleged Take–Two misstatements ( id. ¶ 109) and ending six days after the truth was revealed to the market on July 10, 2006 ( id. ¶ 140).² However, Plaintiff's trading was confined to a much smaller 11–month period between May 25, 2004 and April 21, 2005. ( Id. ¶¶ 160–161; id., Ex. E.) Specifically, beginning in May 2004 and mostly ending in January 2005,³ Plaintiff sold Take–Two stock “short” at prices averaging $23.38 per share.⁴ ( Id. ¶ 160.) Plaintiff subsequently covered his short positions by purchasing 924,500 shares in March and April of 2005 at an average price of $28.74 per share. ( Id. ¶¶ 132, 161.) Plaintiff seeks to recover the difference between these average prices ( id. ¶ 164), alleging that Take–Two's “consistent misstatements continually, and increasingly, inflated Take–Two's stock price during the Individual Action Period” ( id. ¶ 5).

The first two of these misstatements, a March 4, 2004 press release announcing Take–Two's financial results for the first fiscal quarter of 2004, and a March 16, 2004 SEC Form 10–Q filing, occurred prior to Plaintiff's first sales of Take–Two stock. The press release reported that the Company's quarterly net income was $31.8 million. ( Id. ¶ 109.) The 10–Q stated in relevant part:

In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the Company's financial position, results of operations and cash flows.... The Company accounts for its employee stock option plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

( Id. ¶ 112–13.)

The remaining seven misstatements similarly involve pairs of (1) press releases reporting financial results in advance of SEC filings and (2) the SEC filings themselves, reiterating the results and restating the accuracy of Take–Two's financial statements and its compliance with APB 25. ( See id. ¶¶ 115–38 (June 8, 2004 Press Release, June 14, 2004 10–Q, September 9, 2004 Press Release, September 14, 2004 10–Q, December 22, 2004 10–K, March 3, 2005 Press Release and March 10, 2005 10–Q).) ⁵ Five of these alleged misstatements occurred during Plaintiffs selling period between May 25, 2004 and January 24, 2005, when Plaintiff was betting that the market overvalued Take–Two stock. This selling period was followed by a holding period between January 25, 2005 and March 2, 2005, during which Plaintiff did not sell or purchase any Take–Two stock and Take–Two did not issue any alleged misstatements. ( id., Ex. E.) The price of Take–Two shares, however, rose approximately 13% during the holding period. ( Id., Ex. D.) Plaintiff began to cover his earlier sales on March 3, 2005, and concluded his covering purchases by April 21, 2005. In the early part of this purchasing period, Take–Two issued its two final alleged misstatements: a March 3, 2005 Press Release announcing its first quarter financial results, and a March 10, 2005 SEC 10–Q filing detailing those results.

D. Procedural History

As noted above, prior to opting out of the class settlement, Plaintiff was a putative member of a consolidated class action captioned In re Take–Two Interactive Securities Litigation, No. 06 Civ. 803 (S.D.N.Y). The first of the cases comprising that consolidated action was filed on February 2, 2006 and assigned to the Honorable Shirley Wohl Kram, United States District Judge. On April 16, 2006, lead plaintiffs filed the Consolidated Second Amended Class Action Complaint (“SAC”). By Memorandum and Order dated April 16, 2008, Judge Kram denied in part and...