SEC Issues “Video Game Parking” Ticket

Distributor for Take-Two Interactive, best-known for the "Grand Theft Auto" series, allegedly helped the company to fraudulently record shipments as sales.

The Securities and Exchange Commission has settled civil charges against a video game distributor and its founder for helping Take-Two Interactive Software commit fraud and other violations.

The commission charged privately owned Capitol Distributing with helping Take-Two to violate federal securities laws during fiscal years 2000 and 2001 through a fraudulent “video game parking” scheme. The SEC also charged Capitol’s owner, Terry M. Phillips, with liability as a controlling person after finding that he was a cause of Capitol’s violations.

According to the commission, Take-Two — best-known for the ”Grand Theft Auto” series of video games — shipped hundreds of thousands of games to Capitol, typically at the end of reporting periods. Take-Two then fraudulently recorded those shipments as sales when, in actuality, Capitol only “parked” the games temporarily and did not intend to sell them.

The SEC complaint also charged that Take-Two twice provided funds to Capitol or another entity owned by Terry Phillips, known as Phillips Land Co. Allegedly, the funds were then sent on to Take-Two to create the false appearance that Capitol or Phillips Land Co. was paying for the games. The commission also alleged that in two instances, Capitol returned games to Take-Two under invoices falsely describing them as “purchases” of “assorted product.”

The scheme enabled Take-Two to report about $15 million in phantom revenue from four separate parking transactions with Capitol, according to the regulator.

In an email to CFO.com, Jim Ankner, Take-Two’s vice president of corporate communications and public affairs, wrote that Phillips “was never employed by Take-Two, and the SEC’s action has nothing to do with any current directors, officers, or employees. Take-Two settled with the SEC related to these matters in June 2005.”

Take-Two disclosed last month that the SEC had begun a formal investigation into its stock-option grants. That news was the latest blow for the embattled software company, which has restated its results on four different occasions in the past five years and settled accounting charges with the SEC.

Capitol, without admitting or denying the SEC allegations in the complaint, agreed not to violate the relevant securities laws.

Phillips, who also neither admitted nor denied the SEC allegations, agreed to pay a $50,000 civil penalty and consented to a cease-and-desist order.

The settlements are subject to court approval.

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