Adding to the recent troubles of video game maker Take-Two Entertainment, the City of Los Angeles has sued the company for hiding pornographic material in a game and is requesting that the company give up part of its profits from the game.
The news caused the company’s shares to drop almost 14 percent Friday, setting a new 52-week low as several prominent video game analysts downgraded the stock. Shares closed down $2.34 to $14.60, about half the June 13 high of $29.60.
The suit is just the latest problem for Take-Two, which sold 30 million copies of its wildly popular video game series Grand Theft Auto, but has recently lost sales, profits, and investor confidence from a debacle over hidden sexually explicit content.
Grand Theft AutoLast July gamers discovered they could unlock the blue material in Grand Theft Auto: San Andreas. At the time, the company insisted that hackers had created and inserted the material into the game.
Grand Theft Auto: San AndreasLater, investigations initiated by U.S. Senator Hillary Clinton and the Federal Trade Commission found that the company itself had created the smut.
The discovery prompted the Entertainment Software Ratings Board to change the rating of the game from Mature to Adults Only, effectively keeping the game out of most retail outlets (see GTA Gets ‘Adults Only’ Rating and Clinton Pans Video Game’s Sex).
Clinton Pans Video Game’s SexThe drawn-out, seven-month saga became the ugly poster child for explicit content in video games, and drew battle lines between concerned parents and politicians on one side, and the video game industry on the other.
Now, L.A. City Attorney Rocky Delgadillo’s suit, announced on Thursday, is asking that the company disgorge a portion of the profits from the game.
“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,” Mr. Delgadillo said. Businesses have an obligation to truthfully disclose the content of their products, whether in the food we eat or the entertainment we consume.”
Trouble for GTA Maker
Losing the legal game could mean lost profits for Take-Two, which already lost millions over the incident.
The company was forced to remove the Mature-rated game from retailer’s shelves and replace it with the “Adult Only” packaging. And most retailers won’t stock AO-rated games on shelves, so Take-Two lost even more sales.
Earlier in the week the company announced fiscal 2005 year earnings that slashed year profits almost in half, to $37.5 million from $65.4 million the prior year. But the company said it had delayed in filing its official 10-K form until after February 1 due to accounting issues.
Last July, the company settled with the U.S. Securities and Exchange Commission over a charge of fraudulent accounting practices.
The company also delayed the release of several key games last year, which increased investor alarm.
And now board member Barbara Kaczynski has resigned over management concerns.
A letter from her attorney on Tuesday said Ms. Kaczynski resigned because of concern over matters that came up during her tenure as a board member and chair of the company’s audit committee.
“These matters included Take-Two’s discovery of illicit images depicted in its Grand Theft Auto video game, the Federal Trade Commission’s investigation of Take-Two following that discovery, and various SEC inquiries directed at Take-Two and its employees,” the letter said.
Grand Theft AutoBank of America analyst Gary Cooper downgraded the stock on Friday after identifying key risks such as title delays, a possible SEC investigation, key employee departures, falling earnings, and over valuation.
analyst Gary Cooper downgraded the stock on Friday after identifying key risks such as title delays, a possible SEC investigation, key employee departures, falling earnings, and over valuation.