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In re Take-Two Interactive Software

April 21, 2009

IN RE TAKE-TWO INTERACTIVE SOFTWARE, INC. DERIVATIVE LITIGATION


The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge

This Document Relates To: ALL ACTIONS.

OPINION AND ORDER

In this consolidated securities action, Plaintiffs Richard Lasky and Raeda Karadsheh (collectively, "Plaintiffs"), derivatively on behalf of Take-Two Interactive Software, Inc. ("Take-Two"), a Delaware corporation, assert claims under Section 14(a), Section 10(b), and Section 20(a) of the Securities Exchange Act of 1934, and related state common law claims, against individuals who were directors and officers of Take-Two at various times, based on defendants' alleged involvement in backdating stock options without proper disclosure and trading on inside knowledge of the scheme. Named as defendants are the following 23 individuals: Robert Flug ("Flug"), Paul Eibeler ("Eibeler"), Oliver R. Grace, Jr. ("Grace"), Todd Emmel ("Emmel"), Mark S. Lewis ("M. Lewis"), Steven Tisch ("Tisch"), Michael J. Malone ("Malone"), Grover C. Brown ("Brown"), John F. Levy ("Levy"), Ryan A. Brant ("Brant"), Barry S. Rutcofsky ("Rutcofsky"), Barbara Kaczynski ("Kaczynski"), Mark E. Seremet ("Seremet"), Larry Muller ("Muller"), Thomas Ptak ("Ptak"), Kelly G. Sumner ("Sumner"), James H. David, Jr. ("David"), Barbara A. Ras ("Ras"), Richard W. Roedel ("Roedel"), Jeffrey C. Lapin ("Lapin"), Anthony Williams ("Williams"), Gary Lewis ("G. Lewis") and Karl Winters ("Winters") (collectively, "Defendants"). The Court has jurisdiction of Plaintiffs' federal claims pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78a. The Court has supplemental jurisdiction of Plaintiffs' common law claims pursuant to 28 U.S.C. § 1367.

The Special Litigation Committee (the "SLC"), a committee formed by TakeTwo's board of directors to investigate allegations of stock options backdating practices and a nominal defendant in this action moves, after having completed its investigation, to dismiss Plaintiffs' claims as against all named Defendants except Brant, David, Muller and Sumner, and to assign the remaining claims to Take-Two. Plaintiffs oppose the SLC's motion and, alleging spoliation of evidence by the SLC, also move to strike the motion to dismiss and to exclude the SLC's reports from the Court's consideration.

The Court has considered thoroughly the parties' submissions, including the deposition transcripts and published reports. For the reasons that follow, Plaintiffs' motion is denied in its entirety, and the SLC's motion is granted.

BACKGROUND

The following general background facts are undisputed for purposes of the instant motion practice. After the two actions filed separately by Plaintiffs were consolidated into the present action, Plaintiffs filed a Verified Consolidated Shareholders Derivative Complaint (the "complaint"). Broadly speaking, the complaint arises from the "backdating" of stock options granted to Take-Two directors and employees between approximately 1997 and 2006. Stock options give the recipient the right to buy shares of a corporation's common stock at a set price, called the "strike" price, on a future date after the option vests. The strike price of a stock option is typically set as the price of the stock on the day the option is issued. A stock option is "backdated," however, when the strike price is set as the price of the stock on a day before the option is issued, usually (as is alleged in this case) when that price is lower than the price on the date of issuance, thereby making the option more valuable.

The complaint alleges that Take-Two regularly represented in proxy statements that the strike price of stock options issued throughout the relevant time period equaled the price of the stock on the date of issuance when, in reality, these stock options were regularly backdated. Financial statements publicly filed by Take-Two were also allegedly misleading, as they failed to account for the backdating even though certain accounting rules required them to do so. The complaint also alleges that 15 Defendants -- Brant, David, Eibeler, Emmel, Flug, Grace, G. Lewis, M. Lewis, Muller, Ras, Rutcofsky, Seremet, Sumner, Tisch and Winters -- sold some of their own stock while in possession of inside information concerning the backdating scheme. When the backdating practice came to light, Take-Two was forced to restate all of its financial information for the period from 1997 to 2006.

On March 8, 2006, Take-Two's board of directors created the SLC to investigate certain claims asserted in other derivative litigation involving Take-Two, St. Clair Shores General Employees Retirement System v. Eibeler, No. 06 Civ. 0688 (SWK). On June 23, 2006, after allegations involving the stock option backdating surfaced in the media, the board authorized the SLC to investigate the backdating allegations as well. Plaintiffs' initial complaints were filed shortly thereafter.

The SLC initially consisted of Malone, Levy and Brown. Brown was appointed chairman of the SLC. On July 7, 2006, the SLC hired the law firm of Kasowitz, Benson, Torres & Friedman LLP ("Kasowitz") and the accounting firm BDO Seidman LLP ("BDO") in connection with the investigation. On January 17, 2007, Kasowitz issued a report to the board containing its factual findings and recommendations. The report (hereinafter, the "Kasowitz Report"), inter alia, implicated Brant, Sumner, David, Muller and Patti Tay ("Tay") (who is not named as a Defendant in this action) as having participated in the backdating scheme and/or having willfully made questionable representations to Take-Two's auditors during the relevant time. (See Decl. of Grover C. Brown dated Sept. 5, 2007, Ex. B-J.)

On January 30, 2007, the board adopted a resolution formally authorizing the SLC to investigate and evaluate specifically Plaintiffs' filed complaints, to determine whether or not continued prosecution of the litigation was in the best interests of Take-Two and its shareholders, and to decide a course of action for Take-Two. (See Brown Decl. Ex. B-E.) The SLC hired the law firm of Wolf, Block, Schorr and Solis-Cohen LLP ("Wolf Block") to help it write the final report. (See Brown Decl. A. at 16.) On February 14, 2007, the SLC issued a Supplemental Report (hereinafter, the "SLC Supplemental Report"), wherein the SLC made specific recommendations to the board as to how much in proceeds obtained by backdated stock option recipients Take-Two ought to attempt to recover. (See id. Ex. B-M.)

Malone did not seek re-election to the board and, as a result, his term as a board member ended on March 29, 2007, and he was no longer a member of the SLC. Strauss Zelnick ("Zelnick"), who is not a named defendant in this action, was elected to the board on that day and, on or about May 21, 2007, Zelnick was appointed to the SLC. (See Brown Decl. Ex. B-D.) On June 29, 2007, the Court stayed the action until September 4, 2007, to allow the SLC to finish its report. (See Docket Entry No. 60.)

On September 5, 2007, the SLC issued its final report (hereinafter, the "SLC Final Report"), which, inter alia, detailed the investigatory processes followed by the SLC and its advisors, and recommended that Plaintiffs' claims against all Defendants except Brant, David, Muller and Sumner be dismissed, and that the remaining claims be assigned to Take-Two for prosecution or other disposition. (See Brown Decl. Ex. A.) The SLC filed the motion to dismiss on September 7, 2007.

DISCUSSION

Governing Standards

The parties agree that Delaware law governs the SLC's motion to dismiss, see Locals 302 & 612 of the Int'l Union of Operating Eng'rs v. Blanchard, No. 03 Civ. 5954 (LAP), 2005 U.S. Dist. LEXIS 17679, *15 (S.D.N.Y. Aug. 25, 2005), and that the seminal case of Zapata Corp. v. Maldonado, 430 ...


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