According to a press release dated June 13, 2005, Activision said in a 10-K SEC filing late last week that a consolidated lawsuit seeking class action status was dismissed May 16 in Cal. because the plaintiffs "failed to satisfy the heightened pleading standards" of the Private Securities Litigation Reform Act. The lawsuit was first filed against the company and some current and former officers and board members March 5, 2004, charging that the publisher's revenue and assets were overstated Feb. 1, 2001-Dec. 17, 2002. Five additional suits seeking class action status have been filed against Activision since, and all 6 were combined into one case. The publisher said the lead plaintiffs were given the chance to file an amended consolidated suit within 30 days of May 16. Activision said "we do not know whether the lead plaintiffs will file an amended consolidated complaint, but in the event that one is filed, we intend to vigorously defend the case at such time." Two derivative suits were also filed against Activision that named all current directors as defendants.
The complaint charges defendants with violations of the Securities Exchange Act of 1934. The complaint alleges that as part of their effort to boost the price of Activision stock, defendants misrepresented Activision's true prospects in an effort to conceal Activision's improper acts until they were able to sell at least $483 million worth of their own Activision stock, including a $250 million secondary offering by the Company. In order to overstate revenues and assets during the Class Period, Activision violated Generally Accepted Accounting Principles and SEC rules by engaging in an illegal accounting scheme.
Specifically, the complaint alleges that defendants' scheme had the effect of dramatically overstating revenues and assets. The true facts, known to the defendants but concealed from the investing public, were that: (i) Activision would ship products to retail customers that the defendants knew or consciously disregarded would subsequently be returned to Activision, usually within 45-60 days of the original shipment; (ii) the Company improperly booked revenue on 'consignment sales' in which the customer had the right to return product to Activision; (iii) when large orders came in from certain customers in Activision's Southern region, certain of these orders would be shipped to the customers, but the products would subsequently be returned to Activision (the physical returns were made to the point-of-origin, i.e., whichever of the third-party manufacturers had originally made and shipped the order); (iv) the Company failed to account for Return Request Authorizations; (v) Activision utilized 'side-letter agreements' with customers, providing extended payment terms or other beneficial terms for the customer that were not included in the formal documentation associated with the order; (vi) there were some products that were so bug-ridden that the problems were never resolved and the products were shipped anyway, only to be returned or require upgrades in the future; (vii) Activision would often re-package old products as being new or updated versions, when, in fact, these supposedly new products were barely different than the preceding versions; and (viii) as a result of the above, the Company's projections and even its reported earnings during the Class Period were grossly overstated and misleading.