Publisher Activision and a number of its key executives have been named as defendants in a class action lawsuit by a group of the company's shareholders, who claim that false statements were issued by the company to enable insider trading.
A suit filed with the US District Court for central California last Friday outlines a class action representing people who bought Activision (ATVI) stock between February 1st 2001 and December 17th 2002.
According to the claims made by the lawsuit, Activision executives issued false and misleading statements about the company's financial position and future prospects, thus causing the share price to rise and allowing them to sell their own personal stocks in the company at a large profit.
The end of the period covered by the class action is marked by the date on which Activision announced that it was cutting its forecasts for sales and profits in the coming 18 months, along with a significant drop in sales for the current quarter - with annual sales projections falling to $362 million, rather than the previous forecast of $435 million.
The document alleges that the named defendants - including CEO Robert Kotick, CFO William Chardavoyne and Activision Publishing president and CEO Ron Doornink, along with eight others - made around $483 million between them through sales of stock during the period in question.
The allegations made about the company's apparent misconduct are fairly wide ranging, but focus mainly on a claim that the company consistently shipped products to retailers despite already knowing that the products would be returned within two months of the shipment, and that it improperly recorded revenues from these sales and from "non-invoiced" discounts given to certain customers.
Bizarrely, however, the only product actually named as an example of these practices in action is a large shipment of Quake 2, which was subsequently returned - but Quake 2 came out in 1997, long before the period encompassed by this lawsuit.
The suit also accuses Activision of falsifying results by shipping products to retail which were not finished, naming True Crime - Streets of LA, Tony Hawk's Underground, Buzz Lightyear and SuperCar Street Challenge as four examples of this practice. Although if we're going to start suing publishers for releasing buggy games, the net would have to be cast a bit wider than Activision...
The lawyers presenting the class action believe that Activision's consistent announcements of stellar financial results and high projections throughout the period represent a deliberate attempt to mislead the stock market, and claim that the publisher violated GAAP and SEC rules in the process.
If the lawsuit proceeds - and there's a good chance it won't go anywhere, as class action suits are part and parcel of day to day business in the USA, and most never get past an initial hearing - it will be very damaging for Activision, which has recently been celebrating the huge success of its Christmas line-up, including Tony Hawk's Underground and True Crime, both of which are named in the suit as having been too buggy to ship.