Take-Two Interactive Software, the publisher of popular game series Grand Theft Auto, found broad evidence of irregular stock options backdating, it said yesterday in a report detailing the investigation.
Independent investigators hired by Take-Two said the New York company failed in numerous instances to comply with the terms of its stock options plan, did not maintain adequate controls over the options granting process, and did not keep good records, the company reported in a filing to the SEC (Securities and Exchange Commission).
Even worse, a compensation committee set up by the company to oversee the granting of options allowed former Take-Two chairman and CEO Ryan Brant "to control and dominate the granting process". Brant founded Take-Two in 1993, and had resigned from all posts in the company by October 2006.
Between April 1997 and August 2003, Brant engaged in a pattern of backdating options, and backdated a "significant number of option grants", the filing says. The practice appears to have stopped around August 2003. Take-Two will have to restate historical financial statements to account for the stock options practice, it said.
Backdating stock options was made almost impossible to legally execute by the Sarbanes-Oxley US federal law on the principle that it is unfair to shareholders. Stock options give the holder a right to buy a set number of shares directly from the company at the price the company's shares trade on the stock market the day the option is handed out. Backdating involves companies pegging stock options to dates when the shares were lower than the day they are actually handed out, normally to boost the recipients' award.
Stock options were designed as a way for employees to share in the success of the company and give them an added incentive, not to make workers rich by simply writing a past date on to a stock option.
So far, stock options probes, carried out either by companies themselves or by the SEC, have affected more than 160 companies, including Apple, and led to the firing or resignation of top executives at some companies, including memory chip developer Rambus and security software vendor McAfee. Other companies have faced shareholder lawsuits over the issue.
For Take-Two, options backdating was just one of many internal financial problems. The company also faced an SEC lawsuit accusing it of shipping hundreds of thousands of video games to distributors who had no obligation to pay for the product, and fraudulently recording the shipments as sales. The suit was settled in mid-2005 for a penalty of $8.75m.
Take-Two said it began a voluntary investigation into its options practices in June, forming a committee that hired law firm Kasowitz, Benson, Torres & Friedman and BDO Seidman to conduct the probe.
The company said there is no evidence its current management team, including the CEO and chief financial officer, engaged in any misconduct.