Take-Two case: SEC punishes distributor

The US Securities and Exchange Commission (SEC) has imposed penalties on a distributor that it alleges helped Grand Theft Auto publisher, Take-Two Interactive, inflate revenue reports. Despite this, investigations continue into the events, which took place between 2000 and 2003, the SEC announced yesterday.

The games distributor, Capitol Distributing, did not admit or deny the allegations, but accepted various, apparently minor, restrictions on its behavior. The company's founder was fined $50,000.

SEC documents released in the case describe how games and cash were exchanged in the complex accounting scheme that added more than $5 million to Take-Two's apparent revenue.

Accounting scheme described

“Take-Two shipped Capitol hundreds of thousands of video games at the end of reporting periods and fraudulently recorded those shipments as sales,” according to SEC documents. “In fact, Capitol only temporarily warehoused (or “parked”) the games for Take-Two and had no intention of selling them. To make it appear that Take-Two was receiving payments for the games (thereby legitimizing Take-Two’s fraudulent accounting for the transactions as sales).”

Take-Two itself then sent money to Capitol to pay for the games. "Capitol made no attempt to sell the games. Instead, it warehoused the games for a short time, then returned them to Take-Two with invoices that falsely described the returns as “purchases”, according to SEC documents.

$5.4mn falsely added

The SEC describes how the scheme was used to boost Take-Two's apparent revenue right at the end of the fiscal year: "On October 31, 2000, the last day of Take-Two’s fiscal year, Capitol accepted shipment of 230,000 video games from Take-Two with the understanding that Capitol would park them for a short time and then return the shipment to Take-Two. Take-Two improperly recorded $5.4 million as revenue from the shipment – the most revenue from a single sale Take-Two had recognized up to that time."

In an e-mail exchange two employees of the distributor discussed the plan. Games would  "come to Capital then shipped back to Take-Two for distribution," one of them wrote, "We are buying it from [Take-Two] and then shipping it back to them... We are just going to park goods.”

Take-Two fined

Take-Two paid $7.5 million in fines to settle the case in 2005. Senior company executives, who have since left Take-Two, were also fined a total of several million dollars.

While the SEC has noted that investigations continue, it has not stated which companies it is investigating.

As well as the chart-topping GTA series, developed by subsidiary RockStar Games, companies controlled by Take-Two have published many other popular games, including Max Payne and Civilization.