Take-Two Interactive at Risk for Another SEC Investigation?

Yesterday was not a great day for the company. Tomorrow might not be any better. While shares of Take-Two Interactive TTWO are moving upward today, the company was among the many corporations that nearly lost their lunch on Monday. Granted, Take-Two's downfall can be partially attributed to its massive sales decline, which, according to GameSpot, resulted in an $8.7 million loss during the June quarter. But there is no doubt that the company is feeling the pain of Standard and Poor's downgrade. Today, Take-Two is getting hit hard by analysts, who are reducing their price targets on the ailing stock. Looking ahead to tomorrow, the Grand Theft Auto publisher might be faced with another SEC investigation. In a report dated July 25, 2011, Disclosure Insight adjusted its rating of the firm (from Medium Risk - Negative Bias to High Risk) due to a “risk of undisclosed SEC investigative activity.” “A response we received from the SEC to a Freedom of Information Act request indicated the risk of undisclosed SEC investigative activity as of 28-Jun-11,” Disclosure Insight reports. While the Securities and Exchange Commission has yet to comment on the matter, Take-Two is no stranger to SEC troubles. According to an SEC press release, the company started having problems when its former CEO, Ryan Ashley Brant, was charged with enriching “himself and others by granting undisclosed, ‘in the money' stock options to himself and to other Take-Two officers and employees.” Brant settled with the SEC for $6.3 million. In 2009, Take-Two was charged for committing a stock options backdating scheme, which alleged that the company falsified reports over a seven-year period. At that time, Christopher Conte, an Associate Director in the SEC's Division of Enforcement, had this to say on the matter: "Take-Two's seven-year backdating scheme was egregious and pervasive, and caused the company to materially misrepresent its financial condition to investors. Our enforcement action today underscores our commitment to holding public companies accountable for false reporting and disclosures, and imposing penalties where appropriate." While the possibility of another SEC investigation has inspired Disclosure Insight to take action, that isn't the only reason it considers Take-Two to be a high-risk firm. “There have been 10 director departures and a change in chairman,” Disclosure Insight added, citing frequent executive changes and extreme expenses. “Over the last five years, TTWO has recorded $40 million in impairment charges, $27 million in severance and reorganization charges, and $9.3 million in inventory write-downs.” The report went on to explain that Wal-Mart WMT and GameStop GME accounted for 10.8% and 19.2% of TTWO's FY11 sales, respectively. But while this information provides an interesting look at who's buying Take-Two's games and where, some of the most intriguing details surround Strauss Zelnick, the company's Chairman and CEO, and the President of ZelnickMedia. “ZelnickMedia provides TTWO with certain management, consulting, and executive level services,” Disclosure Insight added. “Over the last five years, TTWO recorded $16.9 million in consulting expenses to ZelnickMedia. Strauss Zelnick has served as Chairman since March 2007 and CEO since January 2011.” Follow me @LouisBedigian