1 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 2 PATRICK J. COUGHLIN (111070) 100 Pine Street, Suite 2600 3 San Francisco, CA 94111 Telephone: 415/288-4545 4 415/288-4534 (fax) – and – 5 WILLIAM S. LERACH (68581) DARREN J. ROBBINS (168593) 6 401 B Street, Suite 1600 San Diego, CA 92101 7 Telephone: 619/231-1058 619/231-7423 (fax) 8 Attorneys for Plaintiff 9 10 UNITED STATES DISTRICT COURT 11 NORTHERN DISTRICT OF CALIFORNIA 12 DANIEL SWANTKO, On Behalf of Himself ) No. 13 and All Others Similarly Situated, ) ) CLASS ACTION 14 Plaintiff, ) ) COMPLAINT FOR VIOLATION OF THE 15 vs. ) FEDERAL SECURITIES LAWS ) 16 ELECTRONIC ARTS, INC., BRUCE ) McMILLAN, JOEL LINZNER, LAWRENCE ) 17 F. PROBST, III, GERHARD FLORIN, ) WARREN C. JENSON, DON A. MATTRICK, ) 18 NANCY L. SMITH and J. RUSSELL RUEFF, ) JR., ) 19 ) Defendants. ) 20 ) DEMAND FOR JURY TRIAL 21 22 23 24 25 26 27 28 1 INTRODUCTION 2 1. This is a securities class action on behalf of purchasers of the publicly traded 3 securities of Electronic Arts, Inc. (“Electronic Arts” or the “Company”) between December 6, 2004 4 and March 21, 2005 (the “Class Period”), against Electronic Arts and certain of its officers and 5 directors for violations of the Securities Exchange Act of 1934 (the “1934 Act”). 6 2. During the Class Period, defendants made false and misleading statements about 7 Electronic Arts’ business and prospects. As a result of the defendants’ false statements, Electronic 8 Arts stock traded at inflated levels during the Class Period, increasing to as high as $69.46 on March 9 9, 2005, allowing the Company’s top officers and directors to sell more than $56 million worth of 10 their own shares at inflated prices. 11 3. On March 21, 2005, Electronic Arts announced “revised estimates for the Company’s 12 fiscal year ending March 31, 2005,” stating that the “changes are primarily the result of lower than 13 expected sales in both North America and Europe.” For its year ending March 31, 2005, Electronic 14 Arts revealed that it now expected earnings per share (“EPS”) between $1.62 and $1.64 a share, 15 badly missing its prior guidance of $1.82 to $1.87 a share. The Company’s revenue projections were 16 also reversed and lowered to between $3.100 billion and $3.125 billion, from $3.275 billion and 17 $3.325 billion. 18 4. The dramatic reductions in the Company’s projections shocked the investment 19 community, but were of no surprise to defendants. In fact, defendants realized as early as 20 December 2004 the long-term nature of the hardware shortages which would have a deleterious 21 effect on the Company’s game sales until the next-generation models were finally released. 22 Defendants knew this would severely impact their sales – without the game consoles, consumers 23 have no incentive to buy the games. 24 5. In response to revelations of the Company’s misleading projections and questionable 25 explanation for the Company’s various quarterly failures, the Company’s shares were pummeled by 26 a massive wave of selling which exceeded 39 million shares in a single day. Public investors 27 incurred hundreds of millions in losses as a result of defendants’ scheme to line their own pockets. 28 On March 22, 2005, shares of the Company fell $11.20 per share, to close at $55.15 per share. COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 1 - 1 6. The true facts, which were known by each of the defendants but concealed from the 2 investing public during the Class Period, were as follows: 3 (a) The Company was experiencing a dramatic adverse trend in the Company’s 4 sales of its holiday releases; 5 (b) The Company’s internal sales reports were revealing that contrary to growth, 6 the Company was actually experiencing year over year decline in revenue and market share in the 7 Company’s Q4 2005 (this followed similar results in Q3 2005); 8 (c) Due to a lack of game consoles (which were necessary for utilizing 9 defendants’ products) defendants knew that consumer demand would dramatically deteriorate while 10 the Company’s public forecasting actually called for increasing sales growth; and 11 (d) As a result of (a)–(c) above, the Company’s claim of achieving Q4 2005 EPS 12 growth reaching $1.82-$1.87 per share was materially overstated. 13 JURISDICTION AND VENUE 14 7. Jurisdiction is conferred by §27 of the 1934 Act. The claims asserted herein arise 15 under §§10(b) and 20(a) of the 1934 Act and Rule 10b-5. 16 8. Venue is proper in this District pursuant to §27 of the 1934 Act. Many of the false 17 and misleading statements were made in or issued from this District. 18 9. The Company’s principal executive offices are in Redwood City, California, where 19 the day-to-day operations of the Company are directed and managed. 20 THE PARTIES 21 10. Plaintiff Daniel Swantko purchased Electronic Arts publicly traded securities as 22 described in the attached certification and was damaged thereby. 23 11. Defendant Electronic Arts develops, markets, publishes and distributes interactive 24 software games that are payable by consumers. 25 12. Defendant Bruce McMillan (“McMillan”) is Executive Vice President, Worldwide 26 Studios, of Electronic Arts. During the Class Period, McMillan sold more than $8.1 million worth of 27 his Electronic Arts stock. 28 COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 2 - 1 13. Defendant Joel Linzner (“Linzner”) is Senior Vice President of Business & Legal 2 Affairs of Electronic Arts. During the Class Period, Linzner sold more than $1.7 million worth of 3 his Electronic Arts stock. 4 14. Defendant Lawrence F. Probst, III (“Probst”) is Chairman and Chief Executive 5 Officer of Electronic Arts. During the Class Period, Probst sold more than $6.3 million worth of his 6 Electronic Arts stock. 7 15. Defendant Gerhard Florin (“Florin”) is Senior Vice President and Managing Director, 8 European Publishing, of Electronic Arts. During the Class Period, Florin sold more than 9 $3.8 million worth of his Electronic Arts stock. 10 16. Defendant Warren C. Jenson (“Jenson”) is Chief Financial Officer and Chief 11 Administrative Officer of Electronic Arts. During the Class Period, Jenson sold more than 12 $12.5 million worth of his Electronic Arts stock. 13 17. Defendant Don A. Mattrick (“Mattrick”) is President, Worldwide Studios, of 14 Electronic Arts. During the Class Period, Mattrick sold more than $17 million worth of his 15 Electronic Arts stock. 16 18. Defendant Nancy L. Smith (“Smith”) is Executive Vice President of Electronic Arts. 17 During the Class Period, Smith sold more than $4.2 million worth of her Electronic Arts stock. 18 19. Defendant J. Russell Rueff, Jr. (“Rueff”) is Executive Vice President, Human 19 Resources, of Electronic Arts. During the Class Period, Rueff sold more than $2.5 million worth of 20 his Electronic Arts stock. 21 20. The individuals named as defendants in ¶¶12-19 are referred to herein as the 22 “Individual Defendants.” The Individual Defendants, because of their positions with the Company, 23 possessed the power and authority to control the contents of Electronic Arts’ quarterly reports, press 24 releases and presentations to securities analysts, money and portfolio managers and institutional 25 investors, i.e., the market. Each defendant was provided with copies of the Company’s reports and 26 press releases alleged herein to be misleading prior to or shortly after their issuance and had the 27 ability and opportunity to prevent their issuance or cause them to be corrected. Because of their 28 positions and access to material non-public information available to them but not to the public, each COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS - 3 - 1 of these defendants knew that the adverse facts specified herein had not been disclosed to and were 2 being concealed from the public and that the positive representations being made were then 3 materially false and misleading. The Individual Defendants are liable for the false statements 4 pleaded herein at ¶42, as those statements were “group-published” information, the result of the 5 collective actions of the Individual Defendants. 6 SCIENTER 7 21. In addition to the above-described involvement, each Individual Defendant had 8 knowledge of Electronic Arts’ problems and was motivated to conceal such problems and each 9 reaped millions of dollars in insider trading proceeds – all transpiring in just a few days. During this 10 brief window of time, each defendant was able to individually trump their own salary by insider 11 trading. Although their salary would require defendants to wade through 365 days of fulfilling their 12 official duties, defendants in just minutes (individually) were able to realize millions of dollars above 13 and beyond their salaries. Probst, Linzner, Jenson and Mattrick, as Chairman/CEO, Vice President 14 of Legal Affairs, CFO/CAO and President, respectively, were responsible for financial reporting 15 and/or communications with the market. Many of the internal reports showing Electronic Arts’ 16 forecasted and actual growth were prepared by the finance department, with input from Linzner, 17 Jenson and Mattrick, all of which would impact the financial results and press releases issued by the 18 Company or results associated with their own individual departments. Each Individual Defendant 19 sought to demonstrate that he/she could lead the Company successfully and generate the growth 20 expected by the market for Q4 2005 and FY 2005. 21 FRAUDULENT SCHEME AND COURSE OF BUSINESS 22 22. Each defendant is liable for (i) making false statements, or (ii) failing to disclose 23 adverse facts known to him/her about Electronic Arts.