UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS _________________________________________ X ALLEN EHRLICH, individually : and On Behalf Of All Others Similarly Situated, : Civil Action No. : : Plaintiff, : : vs. : CLASS ACTION COMPLAINT : FOR VIOLATION OF FEDERAL MIDWAY GAMES, INC., : SECURITIES LAWS NEIL D. NICASTRO, THOMAS E. POWELL, and : KENNETH J. FEDESNA, : : JURY TRIAL DEMANDED Defendants. : : __________________________________________X Plaintiff, Allen Ehrlich, (“Plaintiff”) individually and on behalf of all other persons similarly situated, by his undersigned attorneys, for his complaint against defendants, alleges the following based upon personal knowledge as to himself and his own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through his attorneys, which included, among other things, a review of the defendants’ public documents, conference calls and announcements made by defendants, United States Securities and Exchange Commission (“SEC”) filings, wire and press releases published by and regarding Midway Games, Inc. (“Midway” or the “Company”), and information readily obtainable on the Internet. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. -1- NATURE OF THE ACTION 1. This is a federal securities class action brought by the Plaintiff on behalf of himself and a Class consisting of all other persons who purchased the publicly traded securities of Midway Games, Inc. (NYSE: MWY), between December 11, 2001 and July 30, 2003, inclusive (the “Class Period”), seeking to recover damages caused by Defendants’ violations of federal securities laws and pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”). 2. The interactive entertainment sector is highly competitive and characterized by the continuous introduction of new titles and the development of new technologies. A developer’s ability to compete successfully is based in large part on the company’s ability to (1) select and develop popular titles, (2) identify and obtain rights to commercially marketable intellectual properties; and (3) adapt products for use with new technologies. 3. Industry analysts report that development costs and cycle length in the interactive entertainment sector have increased significantly between 2001 and 2002, making it paramount for publishers to closely manage the development process. To cope with these issues, Most major publishers have initiated “Greenlight” processes that enable senior management to monitor on-going costs, progression of creative design and overall gameplay for individual titles on a regular basis. With most publishers having more than 100 titles in active development, this can be a daunting task but is one which [Thomas Weisel Partners] believe is essential to a sector that is becoming more fiscally responsible. Thomas Weisel Partners, Entertainment Software: A White Paper on the Interactive Game Publishing Industry (2002)(emphasis added)(hereinafter referred to as the “White Paper”). 4. Moreover, unit sales for new titles are heavily skewed toward the first few weeks -2- following the product’s release. The White Paper emphasized: Unit sales for titles are front-end loaded, with over 50% of sales recorded in the first 2 weeks. Particularly in case of franchise titles, gamers know when new titles are scheduled to be released . This reinforces our belief that investors should evaluate the pipeline of game publishers and watch for initial data on new releases, particularly when a title is a publisher's marquee title. Id. (emphasis added). 5. The combination of increased development costs and longer product cycle length with front-loaded sales profits has created a strong correlation between the release of a marquee title and an interactive entertainment company’s earnings per period. Thus, the timely release of new titles is crucial to the Company’s ability to meet its earnings expectations for any given period. 6. Throughout the Class Period, Midway materially misrepresented the release dates of critical products, which in turn led to the Company’s inability to meet its earnings expectations. As discussed in detail below, Midway failed to disclose and/or misrepresented the operating problems within its studios regarding the development and release of its products and failed to disclose the fact that it was currently experiencing decreased demand for its products, resulting in the Company’s inability to meet revenue and earnings guidance provided by defendants for fiscal 2002 and beyond. JURISDICTION AND VENUE 7. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act, (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5). 8. This Court has jurisdiction over the subject matter of this action pursuant to §27 of -3- the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. § 1331. 9. Venue is proper in this Judicial District pursuant to §27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1391(b). Many of the acts and transactions alleged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this District. Additionally, the Company maintains its principal executive offices in this Judicial District. 10. In connection with the acts, conduct and other wrongs alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mails, interstate telephone communications and the facilities of the national securities exchange. THE PARTIES 11. Plaintiff, Allen Ehrlich, purchased Midway securities, as set forth in the accompanying certification attached hereto and incorporated herein by reference, and has suffered damages as a result of the wrongful acts of defendants as alleged herein. 12. Midway is a corporation organized and existing under the laws of Delaware with its principal place of business located within this judicial district at 2704 West Roscoe Street, Chicago, IL 60618. 13. Defendant Neil D. Nicastro (“Nicastro”) was, at all relevant times during the Class Period, the Company’s President, Chief Executive Officer, and Chief Operating Officer. 14. Defendant Thomas E. Powell (“Powell”) was, at all relevant times during the Class Period, the Company’s Executive Vice President, Chief Financial Officer and Treasurer. 15. Defendant Kenneth J. Fedesna (“Fedesna”) was, at all relevant times during the Class -4- Period, the Company’s Executive Vice President--Product Development and Director. 16. Defendants Nicastro, Powell and Fedsna are collectively referred to hereafter as the “Individual Defendants.” During the Class Period, each of the Individual Defendants, as senior executive officers and/or directors of Midway, was privy to non-public information concerning its business, finances, products, markets and present and future business prospects via access to internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided to them in connection therewith. Because of their possession of such information, the Individual Defendants knew or recklessly disregarded the fact that adverse facts specified herein had not been disclosed to, and were being concealed from, the investing public. 17. Each of the Individual Defendants is liable as a direct participant with respect to a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Midway publicly traded securities by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme deceived the investing public regarding Midway’s business, operations, management, and the intrinsic value of Midway publicly traded securities and caused Plaintiff and other members of the Class to purchase Midway securities at artificially inflated prices. 18. In addition, the Individual Defendants, by reason of their status as senior executive officers and directors were each a “controlling person” within the meaning of Section 20 of the Exchange Act and had the power and influence to cause the Company to engage in the unlawful conduct complained of herein. Because of their position of control, the Individual Defendants were -5- able to and did, directly or indirectly, control the content of various SEC filings, press releases, and other public statements pertaining to the Company during the Class Period. 19. The Individual Defendants, because of their positions with Midway were provided with copies of Midway’s reports and press releases alleged herein to be misleading, prior to or shortly after their issuance and had both the ability and opportunity to prevent their issuance or cause them to be corrected. The Individual Defendants had the opportunity to commit the fraudulent acts alleged herein. Accordingly, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein. 20. The Individual Defendants are liable, jointly and severally, as direct participants in and co-conspirators of, the wrongs complained of herein. CLASS ACTION ALLEGATIONS 21. Plaintiff