According to a press release dated June 18, 2007, Majesco Entertainment has reached a tentative settlement of a class action filed against it in 2005, interim CEO Jesse Sutton told analysts in a conference call late Thurs. If nailed down, a deal would then need approval by a U.S. dist. judge in N.J., the company said in a 10-Q SEC filing. The proposal calls for Majesco to pay about $2.5 million in company stock, with an undisclosed amount of cash to be paid by the firm's insurance carrier, said Sutton. The terms would have no effect on company operations, he said. Majesco expects its insurance will also be "adequate" to deal with a separate suit by shareholder Trinad Capital Master Fund that made similar charges against the company, the 10-Q said. But Majesco warned that any additional expenses "could have a material adverse effect on our financial condition." … [Four] suits followed Majesco's slashing its fiscal 2005 financial forecast because of "substantially weaker than expected sales across all of the company's product lines" and other factors (CED July 14/05 p4). A 5th suit was filed in Sept. 2005. In Oct., they were all consolidated. Trinad Capital filed its similar suit the same month.
On February 3, 2006, the defendants filed various motions to dismiss the Amended Consolidated Complaint. On October 2, 2006, the Court entered the Opinion and Order signed by U.S. District Judge Peter G. Sheridan denying the defendants’ motions to dismiss the Amended Consolidated Complaint.
As disclosed by the Company’s FORM 10-Q for the quarterly period ended July 31, 2006, on October 11, 2005, the Court consolidated the five cases and appointed a Lead Plaintiff. On December 14, 2005, the Lead Plaintiff filed an Amended Consolidated Complaint, which is now the operative Complaint.
The original Complaint alleges that defendants, Majesco and certain of its officers, represented that the Company's revenue and income would continue to grow over its impressive 2004 and first half of 2005 results in its fiscal year 2005, even as the Company increased its investment in product development and marketing. According to defendants, the Company expected $175-$185 million in net revenues and operating income of $16-$18 million in 2005, representing strong growth over Majesco's 2004 results. Unbeknownst to investors, however, Majesco's strong reported growth resulted, in material part, from the Company having inundated its retailers with product that defendants knew was in excess of end-user demand. Defendants representations regarding the Company's expected 2005 revenues and earnings lacked any basis and deceived investors about the true state of Majesco's business and prospects. As defendants knew or recklessly disregarded, the Company's strong growth was unsustainable because retailers would either return a material quantity of unsold products or would meet 2005 demand by selling off excess inventory instead of ordering new products. In addition, unbeknownst to investors, but known to or recklessly disregarded by defendants, two of the Company's new video game titles flopped, and the Company could not meet its earnings expectations without the success of these new titles. Defendants were motivated to engage in the wrongdoing alleged herein so that Majesco's planned secondary offering, which allowed many large stockholders, mostly institutions, to sell their personally held Majesco shares, would be priced higher than it would have been had investors known the truth about the Company's business.
The complaint further alleges that on or around July 12, 2005, after the close of regular trading, Majesco issued a press release announcing a dramatic reduction in its expected 2005 results. Rather than earning $16-$18 million in 2005, defendants announced that the Company would swing to a loss of $16-$19 million on revenues of $120 to $125 million. The Company attributed this astounding reversal to: substantially weaker demand for all of the Company's products; a glut of Majesco products sitting on retailers' shelves or in their stockrooms; and weak reorders. Majesco also announced that defendant Yankowski had resigned his positions as Majesco's Chairman and Chief Executive Officer. In response to this announcement, the price of Majesco common stock plummeted, falling by 48% in one day, from $6.89 per share on July 12, 2005 to $3.56 per share on July 13, 2005, earning it the dubious distinction of being the largest percentage loser on the Nasdaq for the day.