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Take my

Take-Two Interactive

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shares, please!

That seemed to be the refrain from investors on Friday as the stock price of the video game software publisher plunged as much as 20% amid an analyst downgrade and continued fallout from a fiasco involving hidden sex scenes in its flagship game.

Banc of America analyst Gary Cooper helped spark the selloff Friday with his report on the company, in which he lowered his rating on the company's stock to sell from neutral and dropped his price target from $19 to just $12.

Cooper cited a number of reasons for his downgrade, among them: accounting and governance problems at the company, the potential for an investigation by the

Securities and Exchange Commission

and an accounting restatement, the rapid rate at which the company is burning cash, and his expectation that the company's earnings will be lower than expected because of a delay in releasing the next major version of its

Grand Theft Auto


"TTWO is not well-run, overly dependent on one product and will likely have to raise additional capital," said Cooper. Because of these factors, despite his downgrade, "our new price target ... may still prove aggressive," added Cooper, whose firm has done investment banking for Take-Two in the last year.

But it was more than just Cooper's note that seemed to distress investors. On Thursday, the Los Angeles City Attorney's office filed suit against the company, accusing it of unfair business practices related to the hidden sex scenes within

Grand Theft Auto: San Andreas

. The suit seeks to force Take-Two to give back some of the profit it has made on the game and to properly disclose the contents of its games in the future.


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acknowledged last summer that the explicit scenes were included in the original version of the game the company shipped it and that they could be accessed using a software program available on the Internet. After the discovery of the scenes, an industry rating board changed the rating on the title to "adults only," and Take-Two pulled it from store shelves. The Federal Trade Commission and the offices of at least two state attorneys general are investigating the company over the incident.

"Greed and deception are part of the

Grand Theft Auto: San Andreas

story -- and in that respect its publishers are not much different from the characters in their story," said Los Angeles City Attorney Rocky Delgadillo, in a statement. "Businesses have an obligation to truthfully disclose the content of their products -- whether in the food we eat or the entertainment we consume."

Following news of the downgrade and the suit, Take-Two's stock was reeling. In recent trading, the company's shares were off $2.48, or 15%, to $14.55. Earlier in the session, they traded as low as $13.64.

A company representative did not return a call seeking comment.

The latest turmoil ends a tough two weeks for Take-Two. Earlier this week, the company endured a broadside from its former audit chief. In her resignation letter, which the company released this week, Barbara A. Kaczynski

charged that there was an "unhealthy relationship" between the company's board of directors and its senior management "characterized by a lack of cooperation and respect." Kaczynski also expressed concern over the FTC investigation and various SEC inquiries concerning the company.

Kaczynski's resignation followed the company's

warning the previous week that it would delay filing its annual report because of problems it found while assessing its internal controls -- a set of checks and balances that companies are supposed to have in place to prevent corporate fraud. The Sarbanes-Oxley Act

required most larger companies and their auditors to start assessing and reporting the state of the companies' internal controls in the last year.

According to a regulatory filing, Take-Two found two "material weaknesses" in its controls, one relating to its accounting for accounts payable and one related to how it keeps track of software development costs that it has chosen to account for as a capital expenditure.

"As a result of the existence of these material weaknesses identified above,

Take-Two's management will conclude that as of October 31, 2005, the Registrant's internal control over financial reporting was not effective," the company said in the filing.

Kaczynski's resignation and the delay in filing the annual report both played into Cooper's decision to downgrade Take-Two's stock. One of the things that came out of her resignation was that the position of chairman of the company's board of directors had been vacant since last June, Cooper noted.

"We are unable to determine who is actively at the helm of the company," Cooper said. "We believe the board of directors is weak as evidenced by a lack of managerial changes despite 13 pre-announcements, earnings estimate revisions or outright earnings

misses in the past 10 quarters."

Additionally, the delay in the filing of the annual report, added to Kaczynski's statements about SEC inquiries and the timing of certain insider sales last year, adds to Cooper's suspicions that the SEC may launch a full-bore investigation into the company.

On the operations side, Cooper finds a lot to worry about concerning the

Grand Theft Auto

franchise, which is the core part of the company's business. The company plans to soon release a version of its

Grand Theft Auto: Liberty City Stories



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PlayStation 2, just six months or so after it released the original version for the PlayStation Portable handheld. By doing so, the company runs the risk of "degrading" the franchise, Cooper said.

"We continue to fear the 'Madonna syndrome' (i.e. over-saturation)," he said. "We believe that TTWO should slow down the releases of this property. But we understand that if it did its cash flow would be much lower."

Judging by the market's reaction, Cooper is not the only one concerned.