49 Y 1 MILBERG WEISS BERSHAD P HYNES & LERACH LLP t! 2 WILLIAM S. LERACH (68581) J' TRICIA L. McCORMICK (199239) ^^ 3 3 600 West Broadway, Suite 1800 San Diego, CA 92101 t ' ' r O OUpT 4 Telephone: 619/231-1058 619/231-7423 (fax) 5 - and - JEFF S. WESTERMAN (94559) 6 355 South Grand Avenue Suite 4170 7 Los Angeles, CA 90071 Te1ephone,: 213/617-9007 8 213/617-9185 (fax)
9 SPECTOR, ROSEMAN & KODROFF, P.C. JAMES A. CAPUTO (120485) 10 600 West Broadway, Suite 1600 San Diego, CA 92101 11 Telephone: 619/338-4514 619/231-7423 (fax) 12 - and - ROBERT M. ROSEMAN 13 JEFFREY L. KODROFF 1818 Market Street, Suite 2500 14 Philadelphia, PA 19103 Telephone: 215/496-0300 15 215/496-6611 (fax)
16 Co-Lead Counsel for Plaintiffs
17 [Additional counsel appear on signature page.]
18 UNITED STATES DISTRICT COURT 19 CENTRAL DISTRICT OF CALIFORNIA 20 WESTERN DIVISION 21 I
22 In re THQ, INC. SECURITIES Master File No. LITIGATION CV-00-01783 -AHM(Ex) 23 CLASS ACTION 24 This Document Relates To: CONSOLIDATED CLASS ACTION 25 ALL ACTIONS. COMPLAINT
26 DEMAND FOR JURY TRIAL
27
28 1 NATURE OF THE CASE
2 1. This is a securities class action on behalf of all
3 purchasers of the publicly traded securities of THQ Inc. ("THQ" or
4 the "Company") between 10/26/99 and 2/10/00 (the "Class Period"),
5 against THQ and certain of its officers and directors for
6 violations of the Securities Exchange Act of 1934 (the "1934 Act").
7 2. THQ develops, publishes and distributes interactive
8 entertainment software worldwide for a variety of hardware
9 platforms including PC CD-ROM and those manufactured by Sega,
10 Nintendo and Sony. During the Class Period, THQ falsely
11 represented the state of its business, financial results, and
12 prospects causing its stock price to be inflated to as high as $38-
13 1/4. The Individual Defendants named herein took advantage of this
14 inflation and sold 522,912 of their THQ stock for $14.7 million.
15 Later, THQ selectively disclosed to certain analysts that its first
16 half 2000 results would be much lower than previously represented.
17 THQ's stock then dropped to as low as $17-3/8 per share.
18 3. In late 10/99, THQ announced its results for the third
19 quarter ended 9/30/99, including better-than-expected revenues and
20 earnings. During 11/99, THQ announced several new video game
21 releases, announced that its World Wrestling Federation ("WWF")
22 game for Nintendo 64 was a number one seller, and THQ's CEO was
23 quoted in a newspaper article . discussing THQ's growing,
24 diversification. These statements caused THQ's stock to increase
25 dramatically to as high as $38-1/4 per share.'
26
27
28 1 All share and per share amounts are adjusted: to'r-eflect 3 fe_r - 2 stock split on 12/1/99.
- 1 - 1 4. Then on 2/10/00, an article from TheStreet.com revealed
2 that THQ had selectively disclosed that its first half results
3 would be worse that previously represented, that many of its titles
4 did not sell well in the previous quarter, and that THQ's 3rdQ 1999
5 results were artificially inflated from aggressive accounting.
6 S. On these disclosures, THQ's stock price declined to as
7 low as $17-3/8 per share.
8 6. As a result of the defendants' false statements, THQ's
9 stock price traded at inflated levels during the Class Period,
10 increasing to as high as $38-1/4 in 11/99. The individual
11 defendants took advantage of this inflated ,stock price, selling
12 522,912 shares of THQ stock for proceeds exceeding $14.7 million:
13 Defendant Shares Sold Proceeds 14 Burstein 30,750 $ 845,910 15 Farrell 157,500 $ 4,525,870 16 Gysi 30,000 $ 907,464 17 Haller 75,501 $ 2,038,023 18 Jagid 23,700 $ 715,192
19 Lapin 90,000 $ 2,459,880 20 Locke 81,711 $ 2,301,362 21 Whims 33,750 $ 943,650 22 Totals 522,912 $14,737,351 23
24 JURISDICTION AND VENUE
25 7. Jurisdiction is conferred by §27 of the 1934 Act. The
26 claims asserted herein arise under §§10(b) and 20(a) of the 1934
27 Act and Rule 10b-5.
28
- 2 - 1 8. Venue is proper in this District pursuant to §27 of the
2 1934 Act. Many of the false and misleading statements were made 'in
3 or issued from this District.
4 9. The Company's principal executive offices are in
5 Calabasas, California, where the day-to-day operations of the
6 Company are directed and managed.
7 THE PARTIES
8 10. Plaintiffs Thomas E. Weiner and John H. Cottrell each
9 purchased THQ common stock during the Class Period, as more fully
10 described in their certifications previously filed with the Court,'
11 and have suffered damages as a result of defendants' wrongful acts
12 alleged herein.
13 11. Defendant THQ develops, publishes and distributes'
14 interactive entertainment software worldwide for a variety of
15 hardware platforms including PC CD-ROM and those manufactured by
16 Sega, Nintendo and Sony. THQ's common stock trades in an efficient
17 market on the NASDAQ National Market System.
18 12. (a) Defendant Brian J. Farrell ("Farrell") was at all
19 relevant times President, Chief Executive Officer and a director of
20 THQ. During the Class Period, and as part of the fraudulent
21 scheme, Farrell sold 157,500 shares of THQ stock based on inside
22 information, pocketing over $4.5 million in proceeds.
23 (b) Defendant Fred A. Gysi ("Gysi") was at all relevant
24 times, Vice President-Finance and Administrator, Chief Financial
25 Officer, Secretary and Treasurer of THQ. During the Class Period,
26 and as part of the fraudulent scheme, Gysi sold 30,000 shares of
27 THQ stock based on inside information, __poO'ket^i g X907,464- -ice
28 proceeds.
- 3 - 1 (c) Defendant Alison P. Locke ("Locke") was, at alll
2 relevant times, Senior Vice President-Sales and Marketing of THQ.
3 During the Class Period, and as part of the fraudulent scheme,
4 Locke sold 81,711 shares of THQ stock based on inside information,
5 pocketing over $2.3 million in proceeds.
6 (d) Defendant L. Michael Haller ("Haller") was, at all
7 relevant times, Senior Vice President and a director of THQ.
8 During the Class Period, and as part of the fraudulent scheme,
9 Haller sold 75, 501 shares of THQ stock based on inside information,
10 pocketing over $2 million in proceeds.
11 (e) Defendant Lawrence Burstein ("Burstein") was, at all
12 relevant times, a director of THQ. During the Class Period, and'
13 as part of the fraudulent scheme, Burstein sold 30,750 shares of
14 THQ stock based on inside information, pocketing- $845,910 in
15 proceeds.
16 (f) Defendant Bruce Jagid ("Jagid") was, at all relevant'
17 times, a director of THQ. During the Class Period, and as part of
18 the fraudulent scheme, Jagid sold 23,700 shares of THQ stock based
19 on inside information, pocketing $715,192 in proceeds.
20 (g) Defendant Jeffrey C. Lapin ("Lapin") was, at all
21 relevant times, Vice Chairman of the Board of THQ. During the
22 Class Period, and as part of the fraudulent scheme, Lapin sold
23 90,000 shares of THQ stock based on inside information, pocketing
24 over $2.4 million in proceeds.
25 (h) Defendant James L. Whims ("Whims") was, at all
26 relevant times, a director of THQ. During the Class Period, and
27 as part of the fraudulent scheme, Whims sald._'33, L shares of - TI Q
28 stock based on inside infr)rmation, pocketing $943,6-50- in proceeds .-
- 4 - 1 On 12/8/99, THQ filed a Registration Statement for certain
2 shareholders to sell shares, including 42,228 by Whims.
3 13. The individuals named as defendants in ¶12(a)-(h) are
4 referred to herein as the "Individual Defendants." The Individual
5 Defendants, because of their positions with the Company, possessed
6 the power and authority to control the contents of THQ's quarterly
7 reports, press releases and presentations to securities analysts,
8 money and portfolio managers and institutional investors, i.e., the
9 market. Each defendant was provided with copies of the Company's
10 reports and press releases alleged herein to be misleading prior to
11 or shortly after their issuance and had the ability and opportunity
12 to prevent their issuance or cause them to be corrected. Because;
13 of their positions and access to material non-public information
14 available to them but not to the public, each of these defendants
15 knew that the adverse facts specified herein had not been disclosed
16 to and were being concealed from the public and that the positive',
17 representations which were being made were then materially false
18 and misleading. Despite their duty not to sell THQ stock under
19 such circumstances, each Individual Defendant nonetheless did so.
20 The Individual Defendants are liable for the false statements
21 pleaded herein at $$18, 23, 25-26, 28-29 and 36, as those
22 statements were each "group-published" information, the result of
23 the collective action of the Individual Defendants.
24 SCIENTER, FRAUDULENT SCHEME AND COURSE OF BUSINESS
25 14. In addition to the above described involvement, each
26 Individual Defendant had knowledge of THQ's problems growing its
27 revenues and was motivated to conceal such prQbl.ems. ^-
28
- 5 - 1 15. Each defendant is liable for (i) making false statements,
2 or (ii) failing to disclose adverse facts known to him/her aboVt
3 THQ while selling THQ stock, or (iii) participating in a fraudulent
4 scheme which permitted defendants to sell 522,912 shares of THQ
5 stock at artificially inflated prices for $14.7 million in insider-
6 trading proceeds. Defendants' fraudulent scheme and course of
7 business that operated as a fraud or deceit on purchasers of THQ
8 stock was a success, as it (i) deceived the investing public
9 regarding THQ's prospects and business; (ii) artificially inflated
10 the prices of THQ's publicly traded securities; (iii) caused
11 plaintiff and other members of the Class to.purchase THQ publicly
12 traded securities at inflated prices; (iv) permitted THQ to issue
13 fewer shares to acquire Genetic Anomalies than otherwise would have
14 been required if THQ's stock price had not been inflated; and (v)
15 permitted defendants to sell off 522,912 shares of their THQ stock,
16 pocketing $14.7 million in insider-trading proceeds.
17 BACKGROUND TO THE CLASS PERIOD
18 16. THQ develops, publishes and distributes interactive
19 entertainment software for the various hardware platforms that
20 collectively dominate the home video game market. THQ publishes
21 titles- for Sony's PlayStation, Nintendo 64, Nintendo Game Boy
22 Color, and personal computers ("PCs") in most interactive software
23 genres, including action, adventure, driving, fighting, puzzle,
24 role playing, simulation, sports and strategy.
25 17. THQ was founded in 1989 as a licensee and manufacturer of
26 toy and video games. By the mid-1990's the Company was in extreme
27 trouble as the video game industry migrated €. em Q.-bi- to 16-b-i.t
28systems. Revenues dropped from $50 million in 190yan$3 m
- 6 - 1 in 1994. THQ recovered in 1996-1998 and by late 1998, its stock was
2 trading above $20. By early 1999, THQ was again having problems as
3 its contract with World Championship Wrestling ("WCW") was set to
4 expire in the summer of 1999 as THQ lost the contract to Electronic
5 Arts. WCW had previously accounted for two-thirds of THQ's
6 revenues, and THQ's stock price dropped to as low as $11 per share
7 in 3/99 from $20 in 1/99. In order to cause its stock price to
8 increase as of the beginning of the Class Period,. defendants knew
9 it was essential the Company report favorable results. so that it
10 would be viewed favorably compared to its larger competitor,.
11 Electronic Arts.
12 FALSE AND MISLEADING STATEMENTS
13 18. On 10/26/99, THQ issued a press release announcing its
14 3rdQ 1999 results:
15 THQ Third Quarter Net Earnings More Than Double to a
16 Record $[0.25] Per Diluted Share on a 69% Increase in
17 Revenue to a Record $44.3 Million
18
19 Brian Farrell, president and chief executive officer
20 of THQ , said that third quarter results reflected strong
21 performance both domestically and internationally. He
22 said that growth in the domestic market was driven by the
23 release of "Championship Motocross(TM) featuring Ricky
24 Carmichael" for PlayStation(TM), "Road Rash(TM) 6411 for
25 Nintendo(R) 64 and "Destruction Derby(TM) 64" for
26 Nintendo 64. THQ 's "Rugrats" franchise continued to
27 demonstrate strong global consumer._appea-l -ecro s all
28 platforms, accounting for 28% of sales in the--carter.
- 7 - 1 Farrell added that foreign revenue also grew
2 significantly, representing 48% of total third quarter
3 revenue as compared to 10% in the third quarter of 1998
4 and 26% in the second quarter of 1999. He said that this
5 performance reflected the release of "Star Wars Episode
6 One: The Phantom Menace" for PlayStation in Germany,
7 "Castrol Honda Super Bike" for PlayStation, and "Michael
8 Owen's World League Soccer" for Nintendo 64. Farrell
9 noted that "Championship Motocross featuring Ricky
10 Carmichael", "Road Rash 64" and "Destruction Derby 64"
11 are all scheduled for release in foreign markets in the
12 fourth quarter.
13 "These results confirm that THQ 's strategy to build
14 a diversified portfolio of products with high consumer
15 appeal across all platforms is working to build value for
16 shareholders. We are especially pleased that revenue
17 increased 69% compared to last year even though we had no
18 sales of wrestling products for the first time since
19 1996.
20 19. These results were better than expected with consensus
21 estimates of $0.21 in EPS.
22 20. Subsequent to issuing its 3rdQ 1999 results, - THQ
23 management (Farrell/Gysi) spoke to analysts and THQ shareholders
24 regarding the Company's results and prospects, representing that:
25 • The better-than-expected earnings were the result of a
26 better mix of revenues toward higher margin PC sales. 27 via, AP^. 28
- 8 - 1 • The strong 3rdQ results were particularly important due
2 to the lack of sales of WCW-related product and highlighted
3 THQ's improving diversification.
4 • The Company would have a strong 4thQ 1999 due to revenues
5 to be recognized on a joint venture with JAKKS Pacific based
6 on WWF-related sales.
7 • THQ's receivables increase was due to 900 of sales
8 occurring in September.
9 • THQ had numerous new releases on tap for the 4thQ that
10 would lead to sales and earnings growth in the 4thQ 1999 and
11 beyond.
12 • THQ was on track to report EPS of $1.93-$1.97 in 2000.
13 21. On 10/26/99, U.S. Bancorp Piper Jaffray issued a report
14 on THQ written by Anthony Gikas based on Gikas' conversations with
15 THQ management. The report rated THQ a Strong Buy, forecast 2000
16 EPS of $1.93 and stated:
17 Key Points:
18 -- September 1999 Quarter: THQ, Inc. reported third
19 quarter revenue of $44.3 million, in-line with our
20 estimate of $44.7 million, and earnings per share of
21 $0[.25], ahead of our earnings per share estimate of
22 $0[.21]. The Street earnings per share consensus was
23 $0[.20]. THQ experienced a strong third quarter as a
24 result of strong performance both domestically and
25 internationally.
26 -- No Wrestling In September Quarter, No Problem: THQ's
27 quarter over quarter revenue growth.- V&Y 6`S°o Q3 and
28 earnings per share growth of over 100% -.wiiout one
- 9 - 1 dollar of wrestling revenue! In the third quarter of
2 1999, THQ's nonwrestling revenues tripled in comparison
3 to the year ago quarter.
4 -- Investment Conclusion: THQ announced its 19th
5 consecutive quarter of positive earnings comparisons.
6 The Company has been successful in building and
7 diversifying its product release schedule that shifts its
8 focus to higher margin products, such as PlayStation and
9 PC software. We continue to believe THQ Inc. is one of
10 the best-managed businesses in the entertainment software
11 industry with an impeccable track record and our
12 confidence remains high. We are increasing our price
13 target from $[31] to $[35], representing an 18 P/E
14 multiple on our revised calendar 2000 EPS estimate of
15 $[1.93]. Reiterate Strong Buy.
16 22. On 10/27/99 Gerard Klauer Mattison & Co. issued a report"
17 on THQ by E. Williams, based on Williams' conversations with THQ
18 management. The report forecast the following 2000 EPS for THQ:
19 Ql $ .53 Q2 $ .23 20 Q3 $ .33 Q4 .87 21 2000 $1.96
22 The report also stated:
23 • Balance sheet appears solid. THQ ended the quarter
24 with $26.8 million in cash ($[1.331 per share).
25 Inventories were $5.2 million, up from $2.9 million a
26 year ago, on an increase in cost of goods sold of 64%.
27 Accounts receivable rose 246% versus year- gcr_levels to
28 $35.5 million, The 69% revenue growth, coupled'-with 90 r
- 10 - 11 of the quarter's sales occurring in the month of
2 September (versus 34% a year ago), were the main reason
3 for this increase.
4 • Momentum expected to continue through 1999 and into
5 2000. We project continued strong growth in sales and
6 earnings for the fourth quarter and FY00. The company's
7 fourth quarter should be led by Rugrats (PSX and GBC),
8 WWF (N64 and GBC), MTV Sports: Snowboarding (PSX), among
9 other games.
10 • We are raising our FY99 estimates. We are raising our
11 1999 EPS estimate to $[1.65] from $[1.57], including
12 PCP&L, a 34% increase in EPS from $[1.23] in 1998. We ;I
13 are maintaining our FY00 EPS estimate of $[1.97],
14 reflecting approximately 20% EPS growth. The company's
15 release schedule appears very solid, and we believe there
16 is upside potential to our current estimates.
17 INVESTMENT CONCLUSION
18 We reiterate our BUY rating. THQ has been one of
19 the most consistent growers within the interactive space
20 during the last four years, posting 19 successive
21 quarters of positive earnings comparisons; some of these
22 quarters were well ahead of expectations. Management has
23 done this through timely licensing agreements,
24 significant revenue growth and strong (and still
25 improving) operating margins. The company is in a solid
26 financial position, with over $[1.33] per share in cash
27 and no debt. The company has begun a . rapi'd` Internat ional
28 1
- 11 - 1 expansion, with an ever-increasing portion of its sales
2 attributable to these markets.
3 * *
4 We expect THQ's sales and earnings momentum to
5 continue through 2000. The company has built a solid
6 release schedule and should transition relatively
7 smoothly from its WCW wrestling titles to its WWF
8 wrestling titles. We are raising our 4Q99 EPS estimate
9 to $[.681 versus $[.591 and our prior estimate of $ [ . 66] .
10 This increase is due to a slightly lower tax rate than
11 had been expected (35% versus our prior 38% estimate).
12 We are maintaining our FY00 EPS estimate of $ [1.97] . Due
13 to the announcement of THQ's recognition of 100% of the
14 revenue from the THQ/Jakks joint venture, we now expect
15 revenue of $379 million in 2000.
16 23. On 11/15/99, THQ filed its Form 10-Q with the SEC for the'
17 quarter ended 9/30/99, containing the results previously reported
18 on 10/29/99. The Form 10-Q was signed by Farrell and Gysi and
19 represented that:
20 In our opinion, such unaudited financial statements
21 include all adjustments (consisting only of normal
22 recurring adjustments) necessary to present fairly the
23 information set forth herein. The results for the three
24 months and nine months ended September 30, 1999 are not
25 necessarily indicative of the results to be expected for
26 the full year or for any other interim period.
27 24. On or about 11/15/99, Farrell was intervi-ved--by Jason Z-.
28 Cohen of the Knight-Ridder Tribune Business Neros^e rdi g tie-
- 12 - 1 impact of Pokemon on THQ's 4thQ results. On 11/16/99, Knight-
2 Ridder Tribune Business News published an article based on the
3 interview which stated in part:
4 The yellow menace doesn't scare Brian Farrell, chief
5 executive of THQ Inc. In fact, he kind of likes the cute
6 little monsters. 7 * * *
8 In the video game industry, the popularity of a game
9 in a certain format many times increases demand for all
10 titles designed for that format, Farrell said.
11 "It drives hardware sales. The whole Pokemon
12 phenomenon has driven sales of the 'GameBoy Color'
13 (gaming system) very, very fast," said Farrell, pointing
14 out that his Calabasas-based company offers "GameBoy
15 Color" products such as "Toy Story 2", that target the
16 same audience as Pokemon. "We actually root for Pokemon.
17 We like it when there's a hot product driving the sales
18 of the hardware."
19 * * *
20 The next step for game console manufacturers is to
21 incorporate the stand-alone boxes into the home theater
22 system. Manufacturers want to add digital video disc
23 capability and the ability to connect to the computer,
24 Svensson said.
25 The result is a growing acceptance of video games as
26 household entertainment, he said.
27 THQ hopes to translate that acceptance--into- sales
28 growth.
It - 13 - .art
1 The company weathered a challenge during the third
2 quarter without any wrestling titles, and with no new
3 offerings from its other top seller, Rugrats. THQ
4 escaped unscathed, reporting record earnings.
5 "The third quarter was a real test for THQ . It was
6 the first quarter where there weren't any wrestling
7 products at all," Farrell said. "We had a huge bar and
8 we cleared it. We're very pleased with the way we've
9 diversified."
10 * *
11 THQ said it intends to make a foray into producing
12 titles for Sega's new Dreamcast machine, a move Svensson
13 predicts will pay off.
14 *
15 Farrell said THQ already has announced two titles
16 for Dreamcast and plans to debut as many as six products
17 for the new format in the next year.
18 25. On 11/22/99, THQ issued a press release announcing a
19 PlayStation video game introduction - Rugrats:
20 THQ Inc. (Nasdaq/NM:THQI) and Nickelodeon today
21 announced that family-friendly PlayStation(R) videogame
22 "Rugrats: Search for Reptar(TM)," has been recognized by
23 Sony Computer Entertainment America.(SCEA) as a "Greatest
24 Hits" product.
25
26 "We are thrilled to have 'Rugrats: Search for
27 Reptar' inducted into Sony's 'Great-eat :Hits!'program, " Am- APO- 28 ' said Alison Locke,, senior vice president of _saes, THQ .
l _ c - 14 - 1 "The game was a breakout PlayStation hit for the then
2 uncultivated young kid's demographic and has consistently
3 topped the charts."
4 26. On 11/30/99, THQ issued a release announcing that "WWF
5 Wrestlemania 2000" for Ninetendo 64 was the number one seller. The
6 release stated:
7 THQ/JAKKS JAKKS Pacific LLC, a joint venture
8 consisting of THQ Inc. (Nasdaq:THQI) and JAKKS Pacific-
9 Inc. (Nasdaq:JAKK) today announced record sales-for 1IWWF
10 WrestleMania(R) 2000" for the Nintendo(R) 64 game
11 console.
12 The game launched Thursday, Nov. 18 with a national
13 television launch event on UPN's "WWF SmackDown!" and has
14 ranked as the top-selling console game among major
15 software retailers for the past two weeks, even topping
16 the charts over the busy post-Thanksgiving holiday
17 weekend.
18
19 "We are thrilled with the initial response to 'WWF
20 WrestleMania 2000'," said Brian Farrell, president and
21 chief executive officer of THQ. "Even at this early
22 date, signs indicate that 'WWF WrestleMania 2000' is
23 going to be one of the biggest hits of the holiday
24 season."
25 27. As a result of these announcements, by late 11/99 THQ's
26 stock was trading at above $38 per share. THQ's stock dropped in
27 12/99 in conjunction with a drop in Electroni'c- Arts' -stock priee
28 due to concern that Electronic Arts would repo- lower-than--
- 15 - 1 expected sales of Nintendo 64 software as Nintendo 64 was reaching
2 the end of its cycle. 0
3 28. On 12/20/99, THQ announced the acquisition of internet
4 entertainment studio Genetic Anomalies in a press release whichi
5 stated:
6 THQ Inc. today announced that it has acquired privately
7 held Genetic Anomalies, Inc., a leading Internet
8 entertainment studio, in. an all-stock transaction valued
9 at approximately $8 million.
10 The acquisition includes rights to all of Genetic
11 Anomalies' products including "Chron ;x"(TM), its in-
12 development sports product, and its WWF online strategy
13 game also in development. In addition, THQ has acquired
14 Genetic Anomalies' suite of online technology including
15 multiplayer game servers and infrastructures, as well as
16 its patent-pending virtual property technology,
17 Collectible Bits(TM).
18 THQ issued in the transaction 220, 000 new shares and
19 assumed existing Genetic Anomalies stock options to
20 acquire approximately 44,000 THQ shares. The acquisition
21 will be accounted for as a pooling of interests.
22 29. On 1/7/00, THQ announced its product line-up for 2000 in
23 a press release which stated: -
24 THQ Inc. (Nasdaq:THQI) today announced its 2000
25 product line - the strongest release schedule in company
26 history.
27 On the heels of the company's best:hcil e .y selling - =
28 season, THQ has assembled the biggest --games in
- 16 - 1 interactive game development and some of the biggest
2 brands in entertainment to usher in the new millennium.
3 The 2000 release schedule, which can be found at
4 www.thq.com/ReleaseSchedule, crosses every viable
5 platform including PlayStation 2, Dreamcast, PlayStation,
6 Nintendo 64, PC, Mac and Game Boy Color, as well as a
7 slate of online games.
8 "Reports from retail indicate that 1999 marks the
9 biggest holiday selling season ever for THQ," said Brian
10 Farrell, president and CEO, THQ. "We topped the charts
11 with WWF WrestleMania 2000 for N64, Disney/Pixar's Toy
12 Story 2 for Game Boy Color, our Rugrats releases, and
13 launched our first MTV Sports release, MTV Sports:
14 Snowboarding. We anticipate record sales and earnings
15 for the fourth quarter of 1999, and we continue to
16 believe that we will exceed final analyst expectations
17 for the quarter. We are excited to unveil our 2000.line-
18 up, which includes our first online product, our first
19 Dreamcast release, as well as launch support of the
20 highly anticipated PlayStation 2."
21 30. THQ's practice was to manage the investment markets'
22 expectations of the Company by reviewing, commenting on and
23 supporting analyst expectations.
24 31. On 1/27/99, in an interview with Herb Greenberg of
25 TheStreet.com, defendant Gysi differentiated THQ from its
26 competitors, who were then experiencing an industry-wide slowdown,
27 by stating:
28
- 17 - 1 "We are very focused on trying to run this like a
2 business.... We're very financially oriented. We watch
3 our numbers very carefully. We don't get caught up in
4 [industry specifics] ; we view it as if we sell perishable
5 items, not video games. So, one thing we do carefully is
6 manage our inventories. So when push comes to shove, we
7 would rather be conservative."
8 Defendant Gysi also specifically stated that the Company did not
9 have any concerns about its inventories.
10 32. TheStreet.com later reported on 2/10/00 that sometime on
11 2/8/00, defendants met or contacted certain analysts to inform only
12 them that THQ's 1stQ and 2ndQ of 2000 were going to be materially
13 lower than the prior year. In fact, defendants informed the
14 analysts that the 1stQ and 2ndQ earnings for 2000 would be $0.25
15 (versus $0.55 in 1999) and $0.05 (versus $0.21 in 1999) Upon
16 receiving this non-public material information, the analysts' sales
17 staff put out calls to their top clients.
18 33. On Tuesday, 2/8/00, without any public disclosure by
19 defendants, THQ stock fell $2.2182 to $21.3438, almost a loo drop,
20 on 1.6 million shares traded. THQ's average daily trading is
21 650,000.
22 34. Then on 2/9/00, without any public disclosure by
23 defendants, THQ stock fell another $2.4735 to $18.875, an 11% drop,
24 on almost 4.2 million shares traded.
25 35. Then on 2/10/00, without any public disclosure by
26 defendants, THQ stock fell an additional $0.625 to $18.25, on 3.4
27 million shares traded. - - =
28 i _ - II - 18 - 1 36. In fact, as of 2/11/00 THQ's website under Investor
2 Information still states:
3 • 19 consecutive quarters of positive earnings
4 comparisons.
5
6 • Accelerating growth through expansion of
7 international presence via the acquisition of Rushware in
8 December 1998 and the opening of an office in France in
9 -November 1999.
10 37. Then on 2/10/00, TheStreet.com reported the following
11 about THQ:
12 How THQ Selectively Disclosed Bad News
13
14 Now hear this: Late Tuesday the company apparently
15 met (either together or individually) with analysts to
16 lower the boom: While the fourth quarter will be fine,
17 the bulls say the first and second quarters are likely to
18 be a tad lighter than expected: 25 cents per share this
19 year vs. the 55 cents the company earned in the first
20 quarter last year, and 5 cents vs. 21 cents in the
21 second. (Seems sales aren't as robust as expected and
22 expenses are higher than expected.)
23 38. On 2/10/00, THQ stock dropped to as low as $17-3/8 on
24 huge volume of 3.4 million shares, a 54% decline from the Class
25 Period high of $38-1/4.
26 39. In fact, THQ's results for the 3rdQ of 1999 were
27 materially false and misleading and in. viol*atic of- enerally
28 Accepted Accounting Principles ("GAAP").
- 19 - 1 40. GAAP are those principles recognized by the accounting
2 profession as the conventions, rules and procedures necessary to
3 define accepted accounting practice at a particular time. SEC
4 Regulation S-X (17 C.F.R. §210.4-01(a) (1) ) states that financial
5 statements filed with the SEC which are not prepared in compliance
6 with GAAP are presumed to be misleading and inaccurate, despite
7 footnote or other disclosure. Regulation S-X requires that interim
8 financial statements must also comply with GAAP, with the exception
9 that interim financial statements need not include disclosure which
10 would be duplicative -of disclosures accompanying annual financial'
11 statements. 17 C.F.R. §210.10-01(a).
12 41. THQ was concealing a slowdown in demand by shipping`
13 excess amount of product to its distributors and retailers. These
14 customers were willing to accept excess amounts of product due to
15 THQ's liberal return policies (returns allowed when demand drops)
16 which essentially made THQ's sales to distributors and retailers'
17 contingent on resale. Pursuant to GAAP, as set forth in FASB
18 Statement of Financial Accounting Statement No. 48, such sales
19 should not have been recognized as revenue. Nonetheless, THQ
20 recognized the sales as revenue in the 3rdQ 1999 and simultaneously
21 reduced its reserve for returns. Note the following:
22 • THQ's receivables rose significantly faster than revenue
23 during the September quarter. As measured in days sales
24 outstanding (DSO), receivables amounted to 73 days at 9/99 -
25 up 37 days both sequentially and year-over-year.
26 • THQ's earnings boost during the 3rdQ 1999 as a result of
27 a reduction in its allowance for. doubtfu±- accounts : - The
28 Company's allowance fell by $1.1 million from the June quarter-
- 20 - 1 despite a $14 million increase in receivables. Consequently,
2 the allowance fell to 36.2% of gross receivables at 3rdQ 19,99
3 from 51.3% in the 2ndQ 1999 and 54.0% in 3rdQ 1998. Had THQ
4 maintained its allowance (in absolute terms) at the 2ndQ 1999
5 level, earnings would have been reduced by $0.04 to $0.21 from
6 the reported $0.25. Moreover, had the Company maintained its
7 allowance percentage at the 3rdQ 1998 level (54.0%), earnings
8 would have been lowered by $0.35 to negative $0.10.
9 • THQIs operating cash flows declined significantly in each
10 of the second and third 1999 quarters. Despite net income
11 more than doubling year-over-year in the-.3rdQ 1999, cash flows
12 from operations (CFFO) fell by $8.4 million to negative $9.3
13 million. The Company also posted a $9.6 million CFFO deficit
14 in the 2ndQ 1999.
15 FIRST CLAIM FOR RELIEF
16 For Violation of §10(b) of the 1934 Act and Rule 10b-5 Against All Defendants 17 42. Plaintiff incorporates ¶¶1-41 by reference. 18 43. During the Class Period, defendants disseminated or 19 approved the false statements specified above, which they knew or 20 recklessly disregarded were misleading in that they contained 21 misrepresentations and failed to disclose material facts necessary 22 in order to make the statements made, in light of the circumstances 23 under which they were made, not misleading. 24 44. Defendants violated §10 (b) of the 1934 Act and Rule 10b-5 25 in that they: 26 (a) Employed devices, schemes, and artifices to defraud; .f. 27 - (b) Made untrue statements of material--ctsr o 28 - -= -1 to state material facts necessary in order to make statements made,-
- 21 - 1 in light of the circumstances under which they were made, not
2 misleading; or
3 (c) Engaged in acts, practices, and a course of business
4 that operated as a fraud or deceit upon plaintiff and others
5 similarly situated in connection with their purchases of THQ
6 publicly traded securities during the Class Period.
7 45. Plaintiff and the Class have suffered damages in that, in
8 reliance on the integrity of the market, they paid artificially
9 inflated prices for THQ publicly traded securities . Plaintiff and
10 the Class would not have purchased THQ publicly traded securities
11 at the prices they paid, or at all, if they had been aware that the
12 market prices had been artificially and falsely inflated by
13 defendants' misleading statements.
14 46. As a direct and proximate result of these defendants'
15 wrongful conduct, plaintiff and the other members of the Class
16 suffered damages in connection with their purchases of THQ publicly
17 traded securities during the Class Period.
18 SECOND CLAIM FOR RELIEF
19 For Violation of §20(a) of the 1934 Act Against Defendants THQ, Farrell , Gysi, Locke, Haller and Lapin 20 47. Plaintiff incorporates ¶¶1-46 by reference. 21 48. The Individual Defendants acted as controlling persons of 22 THQ within the meaning of §20(a) of the 1934 Act. By reason of 23 their positions as officers and/or directors and their ownership of 24 THQ stock, defendants Farrell, Gysi, Locke, Haller and.Lapin had 25 the power and authority to cause THQ to engage in the wrongful 26 conduct complained of herein. THQ controlled each of the 27 Individual Defendants and all of its employees- -Ben of 2 8 U - 22 - 1 conduct, defendants Farrell, Gysi, Locke, Haller, Lapin and THQ are
2 liable pursuant to §20(a) of the 1934 Act.
3 CLASS ACTION ALLEGATIONS
4 49. Plaintiff brings this action as a class action pursuant
5 to Rule 23 of the Federal Rules of Civil Procedure on behalf of all
6 persons who purchased THQ publicly traded securities (the "Class")
7 on the open market during the Class Period. Excluded from the
8 Class are defendants.
9 50. The members of the Class are so numerous that joinder of
10 all members is impracticable. The disposition of their claims in
11 a class action will provide substantial benefits to the parties and
12 the Court. THQ had more than 12 million shares of stock'
13 outstanding, owned by hundreds if not thousands of persons.
14 51. There is a well-defined community of interest in the
15 questions of law and fact involved in this case. Questions of law
16 and fact common to the members of the Class which predominate over.
17 questions which may affect individual Class members include:
18 (a) Whether the 1934 Act was violated by defendants;
19 (b) Whether defendants omitted and/or misrepresented
20 material facts;
21 (c) Whether defendants' statements omitted material
22 facts necessary to make the statements made, in light of the
23 circumstances under which they were made, not misleading;
24 (d) Whether defendants knew or recklessly disregarded
25 that their statements were false and misleading;
26 (e) Whether the price of THQ's publicly traded
27 securities was artificially inflated; and--.-
28
- 23 - 1 (f) The extent of damage sustained by Class members and
2 the appropriate measure of damages.
3 52. Plaintiff's claims are typical of those of the Class
4 because plaintiff and the Class sustained damages from defendants'
5 wrongful conduct.
6 53. Plaintiff will adequately protect the interests of the
7 Class and has retained counsel who are experienced in class action
8 securities litigation. Plaintiff has no interests which conflict
9 with those of the Class.
10 54. A class action is superior to other available methods for
11 the fair and efficient adjudication of this controversy.
12 STATUTORY SAFE HARBOR
13 55. The statutory safe harbor provided for forward-looking
14 statements under certain circumstances does not apply to any of the
15 allegedly false forward-looking statements pleaded in this
16 Complaint. The safe harbor does not apply to THQ's allegedly false
17 financial statements. None of the written forward-looking
18 statements made were identified as forward-looking statements, nor
19 was it stated that actual results "could differ materially from
20 those projected." Nor did meaningful cautionary statements
21 identifying important factors that could cause actual results to
22 differ materially from those in the forward-looking statements
23 accompany those forward-looking statements. Each of the forward-
24 looking statements alleged herein to be false was authorized by an
25 executive officer of THQ and was actually known by each of the
26 Individual Defendants to be false when made.
27
28
- 24 - 11 PRAYER FOR RELIEF
2 WHEREFORE, plaintiff prays for judgment as follows: I
3 1. Declaring this action to be a proper class action
4 pursuant to Rule 23;
5 2. Awarding plaintiff and the members of the Class damages,
6 interest and costs;
7 3. Awarding equitable and/or injunctive relief as permitted
8 by law or equity , including the imposition of a constructive trust
9 upon the proceeds of -defendantsI insider trading , pursuant to Rules
10 64, 65, and any appropriate state law remedies; and
11 4. Awarding such other relief as the Court may deem just and
12 proper..
13 JURY DEMAND
14 Plaintiff demands a trial by jury.
15 DATED: June /t , 2000 MILBERG WEISS BERSHAD HYNES & LERACH LLP 16 JEFF S. WH'STERMAN / 17
18 //'V JEFF S. WESTERMAN 19 355 South Grand Avenue 20 Suite 4170 Los Angeles, CA 90071 21 Telephone: 213/617-9007 213/617-9185 (fax) 22
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- 25 - 1 MILBERG WEISS BERSHAD HYNES & LERACH LLP 2 WILLIAM S. LERACH TRICIA L. McCORMICK 3 600 West Broadway, Suite 1-800 4 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) 5 SPECTOR, ROSEMAN & KODROFF, P.C. 6 JAMES A. CAPUTO 600 West Broadway , Suite 1600 7 San Diego , CA 92101 Telephone : 619/338-4514 8 619/231-7423 (fax) 9 SPECTOR, ROSEMAN & KODROFF, P.C. ROBERT M. ROSEMAN 10 JEFFREY L. KODROFF 1818 Market Street, Suite 2500 11 Philadelphia, •'PA 19103 Telephone : 215/496-0300 12 215/496-6611 (fax) 13 Co-Lead Counsel for Plaintiffs 14 CAULEY & GELLER, LLP STEVEN E. CAULEY 15 11311 Arcade Drive, Suite 201 Little Rock , AR 72212 16 Telephone: 501/312-8500 501/312-8505 (fax) 17 WHITTINGTON, VON STERNBERG, 18 EMERSON & WILSHER , L.L.P. JOHN G. EMERSON, JR. 19 2600 South Gessner, Suite 600 Houston, TX 77063-3291 20 Telephone : 713/789-8850 713/789-0033 (fax) 21 Attorneys for Plaintiffs 22
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- 26 - 1 DECLARATION OF SERVICE BY MAIL
2 I, the undersigned , declare:
3 1. That declarant is and was, at all times herein mentioned,
4 a resident of the County of Los Angeles , over the age of 18 years,
5 and not a party to or interest in the within action; that
6 declarant I s business address is 355 South Grand Avenue , Suite 4170,
7 Los Angeles, California 90071.
8 2. That on June 16, 2000 , declarant served the CONSOLIDATED
9 CLASS ACTION COMPLAINT by depositing a true copy thereof in a
10 United States mailbox at Los Angeles , California in a sealed
11 envelope with postage thereon fully prepaid .,,- and addressed to the
12 parties listed on the attached Service List.
13 3. That there is a regular communication by mail between the
14 place of mailing and the places so addressed.
15 I declare under penalty of perjury that the foregoing is true
16 and correct. Executed this 16th day of June , 2000 , at Los Angeles,.'
17 California.
18
19 ANITA VILLANUEVA 20
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28 THQ Service List - 06/12/00 Page 1
i COUNSEL FOR PLAINTIFF(S)
Jeff S. Westerman Steven E. Cauley MILBERG WEISS BERSHAD HYNES & CAULEY & GELLER, LLP LERACH LLP 11311 Arcade Drive, Suite 201 355 South Grand Avenue Little Rock, AR 72212 Suite 4170 501/312-8500 Los Angeles, CA 90071 501/312-8505 (fax) 213/617-9007 213/617-9185 (fax)
John G. Emerson, Jr. William S. Lerach WHITTINGTON, VON STERNBERG, Tricia L. McCormick EMERSON & WILSHER, L.L.P. MILBERG WEISS BERSHAD HYNES & 2600 South Gessner, Suite 600 LERACH LLP Houston, TX 77063-3291 600 West Broadway, Suite 1800 713/789-8850 San Diego, CA 92101-5050 713/789-0033 (fax) 619/231-1058 619/231-7423 (fax) i
Robert M. Roseman Jeffrey L. Kodroff SPECTOR, ROSEMAN & KODROFF, P.C. 1818 Market Street, Suite 2500 Philadelphia, PA 19103 215/496-0300 215/496-6611 (fax)
COUNSEL FOR DEFENDANTS
Martin C. Washton GIBSON, DUNN & CRUTCHER LLP 333 South Grand Avenue Los Angeles, CA 90071-3197 213/229-7000 213/229-7520 (fax)
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