SEC Settlement Buoys Take-Two Interactive

A long-running investigation by the Securities and Exchange Commission into Take-Two Interactive Software (TTWO) may be finally coming to a close.

Under an agreement announced today, the video-game software publisher will pay a $7.5 million penalty to the SEC to settle charges that it fraudulently inflated its reported revenue in 2000 and 2001 to meet Wall Street targets. Also as part of the settlement, the company's vice president of sales, its former CEO and two other former executives agreed to pay $6.4 million in combined penalties.

Neither the company nor the individual defendants admitted or denied the charges against them. The settlement agreement is subject to court approval.

"We have cooperated fully and are pleased to have resolved Take-Two's outstanding issues with the SEC," said Take-Two CEO Paul Eibeler in a statement. "The comprehensive company-wide changes we have instituted in recent years ... have made our company much stronger."

The settlement could be good news for Take-Two investors. Although the company is one of the top three independent game publishers in terms of sales and has the biggest game franchise in the business in its Grand Theft Auto series, its stock has traded at a significant discount to peers such as Activision (ATVI) and Electronic Arts (ERTS) in recent years. Analysts have attributed that discount, in part, to the ongoing SEC matter.

Following news of the settlement, Take-Two shares were up $1.29, or 4.9%, to $27.81 in recent trading.

The SEC began investigating Take-Two in 2001. The agency charged that near the end of its fiscal quarters in 2000 and 2001, the company shipped thousands of video games to customers who didn't have any obligation to pay for them. Take-Two recorded the shipments as sales, even though it later accepted returns on the items, the SEC alleged.

The company also recorded sales on products that couldn't be shipped yet because they were still being manufactured, improperly accounted for the acquisition of two other publishers in 2000 and failed from 2000 through the third quarter of fiscal 2003 to set aside enough money in reserves to account for declining retail prices for its games, according to the SEC.