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In Re: Electronic Arts Inc. Securities Litigation 05-CV-01219

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In Re: Electronic Arts Inc. Securities Litigation 05-CV-01219 1 MILBERG WEISS BERSHAD & SCHULMAN LLP 2 JEFF S. WESTERMAN (SBN 94559) ELIZABETH P. LIN (SBN 174663) 3 KRISTEN MCCULLOCH (SBN 177558) 355 S. Grand Ave., Suite 4170 4 Los Angeles, CA 90071-3172 Telephone: (213) 617-1200 5 Facsimile: (213) 617-1975 -and- 6 MAYA SAXENA (Pro Hac Vice) CHRISTOPHER S. JONES (Pro Hac Vice) 7 5200 Town Center Circle Tower One, Suite 600 8 Boca Raton, FL 33486 Telephone: (561) 361-5000 9 Facsimile: (561) 367-8400 10 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. LISA M. MEZZETTI (Pro Hac Vice) 11 DANIEL S. SOMMERS (Pro Hac Vice) 1100 New York Avenue, N.W. 12 Suite 500, West Tower Washington, D.C. 20005 13 Telephone: (202) 408-4600 Facsimile: (202) 408-4699 14 Co-Lead Counsel 15 UNITED STATES DISTRICT COURT 16 NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION 17 18 )Case No. 3:05-cv-1219-MMC In re ELECTRONIC ARTS, INC. ) 19 SECURITIES LITIGATION )CONSOLIDATED AMENDED )COMPLAINT FOR VIOLATIONS OF 20 This Document Relates To: All Actions )FEDERAL SECURITIES LAWS ) 21 ) JURY TRIAL DEMANDED 22 23 24 25 26 27 28 CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS Case No. 3:05-cv-1219-MMC 1 Lead Plaintiffs allege the following based upon the investigation of Plaintiffs’ Counsel, 2 which included (among other things) a review of regulatory filings and reports, securities analyst 3 reports and advisories about Electronic Arts, Inc. (“Electronic Arts,” “EA” or the “Company”), press 4 releases and other public statements issued by the Company, and media reports about the Company. 5 NATURE OF THE ACTION AND SUMMARY OF ALLEGATIONS 6 1. This is a federal class action on behalf of persons or entities who purchased the 7 securities of Electronic Arts between January 26, 2005 through March 21, 2005, inclusive (the 8 “Class Period”), and who were damaged thereby, seeking to pursue remedies under the Securities 9 Exchange Act of 1934 (the “Exchange Act”). 10 2. Electronic Arts is a Redwood City-based developer and marketer of software games 11 usable on several popular platforms, such as PlayStation 2, Xbox and GameCube, among others. 12 3. This complaint alleges that Defendants disseminated knowingly false favorable 13 projections for the Company’s fourth quarter, ending on March 31, 2005, so that the Individual 14 Defendants and other Company insiders could sell their personally-held Electronic Arts stock at 15 artificially inflated prices. The timing of events in this action evidences Defendants’ fraudulent 16 scheme and illegal course of conduct. 17 4. As evidence of this scheme, on January 25, 2005, Defendants issued a press release 18 which included guidance on earnings for the Company’s fiscal year 2005, which would end on 19 March 31, 2005. Although Defendants slightly reduced their earlier guidance, they gave investors 20 highly positive earnings per share estimates, and were extremely bullish for calendar year 2005. In 21 reaction to this announcement, the price of Electronic Arts stock jumped by $5.30 per share in one 22 day. Almost immediately following their good news, on January 28, 2005, and during the next three 23 trading days, Electronic Arts insiders, including the Individual Defendants, dumped a total of 24 926,739 shares of the Company’s common stock for gross proceeds of $58,459,056. 25 5. On March 21, 2005, prior to the open of trading, Electronic Arts announced that its 26 results for the quarter would be materially less than the company had said they would be in the 27 January conference call. In a telephone interview with Bloomberg News, Defendant Jenson, who 28 CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS Case No. 3:05-cv-1219-MMC - 2 - 1 sold 200,000 shares during the Class Period, attributed the shortfall to poor sales of holiday releases. 2 In reaction to this announcement, the price of Electronic Arts’ common stock plummeted, falling 3 $11.20 per share, or 16.8%, on unusually high trading volume of over 39.5 million shares. 4 6. Unbeknownst to investors, however, from the inception of the Class Period, 5 Defendants knew that the 2004 holiday releases, which had been selling for more than a month, were 6 not meeting expectations and that the quarter’s results would foreseeably be below these projected 7 amounts. Rather than disclose this fact at the time, Defendants waited until insiders unloaded more 8 than $58 million in their personally held EA stock while share prices were inflated by Defendants’ 9 false and misleading positive representations. 10 7. Moreover, rather than disclose the full extent and magnitude of their earnings 11 shortfall, Defendants engaged in a host of undisclosed and improper sales practices used to 12 artificially boost the Company’s bottom line. As analysts at PiperJaffray reported on March 22, 13 2005, Defendants had resorted to “channel stuffing” in December 2004, as an illegal and improper 14 means of loading EA’s distribution channels with inventory far in excess of known market demand, 15 in order to falsely portray Electronic Arts as on track to achieving improving financial results. 16 8. As analysts at PiperJaffray have reported, and as witnesses have now confirmed, in 17 order to artificially boost sales during 3Q:F05, Defendants offered unusual price protections which 18 deviated from their normal price protection policies. For example, although the Company did not 19 offer price protection until a title began to lose popularity and sales, the Company was offering price 20 protection on its newly issued “Madden NFL” title by the end of 3Q:F05. Also related to its unusual 21 grants of price protection, by the inception of the Class Period, Electronic Arts’ sales staff was also 22 forcing retailers to purchase unpopular, slow-moving titles in order to receive the new and more 23 popular games. Yet, by tying the product sales in this manner, Defendants created a significant 24 undisclosed risk in the market, since if any of the “hot” titles failed to sell according to forecast, 25 there would be a glut of Electronic Arts games in the distribution channels. Accordingly, this tie-in 26 exacerbated the ultimate earnings miss. 27 28 CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS Case No. 3:05-cv-1219-MMC - 3 - 1 9. Moreover, as a result of the undisclosed sales practices of channel stuffing and 2 product tying, at all times during the Class Period, Defendants knew a significant portion of the 3 excess inventory would have to come back in the form of returns, or additional price protections. In 4 fact, at the end of the Class Period, Defendants were forced to admit that the Company had failed to 5 adequately reserve for price protection granted in 3Q:F05 and that, in the quarter ended March 31, 6 2005, Electronic Arts incurred higher actual returns and price protection and had to increase these 7 reserves materially. The analyst report issued by PiperJaffray on March 22, 2005 reported on the 8 Company’s dismal results, noting “credibility issues creep up on management” and finding that “the 9 Company stuffed the channel in December.” 10 10. Rather than disclose the true operational and financial condition of the Company, the 11 Individual Defendants and other Company insiders quickly cashed out their personally held EA 12 stock, as detailed in the chart below: 13 Electronic Arts Daily Common Stock Price Class Period January 26, 2005 - March 21, 2005 14 $75.00 3/21/05 15 Co. announces revised estimates for FY Ending 3/31/05. CEO: "Results 1/28/05 - 2/2/05 Insiders are clearly disappointing." 16 sell 926,739 shares for $70.00 proceeds of $58.4 million. 17 18 19 $65.00 20 21 $60.00 22 23 $55.00 1/25/05 Co. reports Q3:F04 results. 24 Fiscal Year Expectations - Ending 3/31/05 3/22/05 Net revenue expected to be between $3.27 closing price: $55.15 and $3.32 Billion for FY 2005 25 $50.00 26 25-Jan-05 01-Feb-05 08-Feb-05 15-Feb-05 23-Feb-05 02-Mar-05 09-Mar-05 16-Mar-05 23-Mar-05 27 28 CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS Case No. 3:05-cv-1219-MMC - 4 - 1 JURISDICTION AND VENUE 2 11. The claims asserted herein arise under and pursuant to Sections 10(b), 20(a) and 20A 3 of the Exchange Act,15 U.S.C. §§78j(b), 78t(a) and 78t-1, and the regulations promulgated 4 thereunder by the SEC, including Rule 10b-5, 17 C.F.R. §240.10b-5. 5 12. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. 6 §§1331 and 1337, and Section 27 of the Exchange Act. 7 13. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28 8 U.S.C. §1391(b). Many of the acts charged herein occurred in substantial part in this District and 9 Electronic Arts conducts business in this District. 10 14. In connection with the acts alleged in this complaint, Defendants, directly or 11 indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, 12 the mails, interstate telephone communications and the facilities of the national securities markets. 13 PARTIES 14 15. Plaintiffs Stationary Engineers Local 39 Pension Trust Fund (the “Stationary 15 Engineers Pension Fund”), City Pension Fund for Firefighters and Police Officers in the City of 16 Miami Beach (the “Miami Beach Pension Fund”), Baden-Wuerttembergische 17 Kapitalanlagegesellschaft mbH (“BWK”) and Activest Investmentgesellschaft mbH (“Activest”) 18 were appointed Lead Plaintiffs on June 13, 2005.
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