On June 12, 2007 the judge entered his final order dismissing the case with prejudice according to the terms of settlement. Plaintiffs were awarded $2.8 million, while counsel for the plaintiffs were awarded one third of the total settlement and another $100,000 in expense reimbursement.
According to a press release dated March 2, 2007, Progressive Gaming International Corporation (Nasdaq:PGIC) (the Company), a leading provider of systems and technology used in the gaming industry worldwide, announced that it has reached an agreement to settle the class action securities litigation currently pending in the United States District Court for the District of Nevada. The case, In re Mikohn Gaming Corp. Securities Litigation, has been pending since November 2005. Under the terms of the settlement, the plaintiffs agree to dismiss with prejudice all claims against all defendants, including the Company and its current and former officers and directors, in exchange for a payment in the amount of $2.8 million, virtually all of which is being provided pursuant to the Company's insurance coverage. Substantially all of the Company's costs related to the litigation will be reflected in the financial statements for the year ended December 31, 2006.
As summarized by the Company’s FORM 10-Q For The Quarterly Period Ended: September 30, 2006, commencing on November 28, 2005, four similar purported class action complaints were filed in the United States District Court for the District of Nevada naming the Company and two of its officers as defendants. The complaints were consolidated into a single action, and an amended complaint was filed on April 13, 2006. The amended complaint added allegations that the registration statement filed by the Company in connection with the acquisition of VirtGame Corp. did not accurately represent the Company's historical financial results for the period from 2000 through the first quarter of 2005, and added a claim that the defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (“Securities Act”) in connection with the registration Statement. Defendants moved to dismiss the amended complaint, and on September 1, 2006, the court issued an order granting the motion in part and denying it in part. The court dismissed, with leave to amend, the claims for violation of Sections 10(b) and 20(a) of the Exchange Act and Section 12(a)(2) of the Securities Act. The court held that the claims for violation of Sections 11 and 15 of the Securities Act had been sufficiently pleaded and could proceed. By agreement of the parties, pending court approval, the time for plaintiffs to file an amended complaint has been extended to mid-November, 2006. The case is at an early stage; no discovery has been conducted and no trial date has been set.
The original Complaint alleges that Defendants, PGIC, its CEO and its CFO, violated federal securities laws by issuing false or misleading financial statements. The complaint alleges that PGIC is a supplier of Integrated Casino Management Systems software and games for the gaming industry.
Specifically, the complaint alleges that defendants issued quarter after quarter of strong financial results, and issued strong forecasts for future quarters. For example, for the third quarter of 2005, Defendants assured investors that PGIC would report earnings per share of between $0.08 and $0.10. This strong growth projection was crucial to enable Defendants to close on a highly-anticipated strategic acquisition of a related gaming company, VirtGame Corporation, which acquisition was scheduled to close in the second quarter of 2005, and to complete a secondary offering of common stock announced on August 31, 2005.
The Complaint alleges that defendants knew that VirtGame shareholders would vote on the acquisition in September 2005. As a result, they knew it was vital to the closing of the acquisition to keep the stock price artificially inflated and to avoid the disclosure of any adverse information during this time. Therefore, Defendants engaged in accounting fraud by failing to comply with Generally Accepted Accounting Principles ("GAAP"). In particular, Defendants failed to disclose the impact of the Financial Accounting Standards Board's Accounting Standard ("SFAS") 153 which applies to exchanges of non-monetary assets. Despite the fact that SFAS 153 was issued in December 2004, and took effect in June 2005, Defendants failed to include any discussion of the impact of its application in PGIC's public filings.
The complaint further alleges that on or around October 20, 2005, Defendants shocked the market by revealing that because the Company failed to properly account for two non-monetary transactions in accordance with SFAS 153, the Company expected to report a loss of $.09 a share rather than a gain of $.08-$.10, as Defendants had previously represented. According to Defendants, the accounting treatment had to be changed after the national office of the Company's auditor, BDO Seidman, informed the Company that it had to comply with SFAS 153 and could not recognize the revenues in the third quarter from these two transactions. In response to this shocking news, the price of PGIC stock plunged by nearly 30% on unusually large trading volumes of over 6.6 million shares traded.