Case 2:12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 1 of 36 Page ID #:5
Individually and on Behalf of All Others Similarly Situated,
Plaintiff,
Vs.
THO INC. BRIAN J. FARR:ELL and PAUL J. PUCINO,
Defendants.
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Jr OF CLlF SANT4 MiA
VIA FA12 - 5227 GAl? (JEM)
No.
CLASS ACTION
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS
DEMAND FOR JURY TRIAL.
12
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
SOUTHERN DIVISION
2:12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 2 of 36 Page ID #:6
1
Plaintiff alleges the following based upon the investigation of plaintiff's
2 counsel, which included a review of United States Securities and Exchange
3 Commission ("SEC") filings by THQ Inc. ("THQ" or the "Company"), as well as
4 regulatory filings and reports, securities analysts' reports and advisories about the
5 Company, press releases and other public statements issued by the Company, and
6 media reports about the Company, and plaintiff believes that substantial additional
7 evidentiary support will exist for the allegations set forth herein after a reasonable
8 opportunity for discovery.
9
JURISDICTION AND VENUE
10
1. The claims asserted herein arise under and pursuant to § § 10(b) and 20(a)
11 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § §78j(b) and
12 78t(a)J and Rule lob-S promulgated thereunder by the SEC [17 C.F.R. §240.10b-5].
13
2. This Court has jurisdiction over the subject matter of this action pursuant
14 to 28 U.S.C. §1331 and §27 of the Exchange Act.
15
3. Venue is proper in this District pursuant to 28 U.S.C. § 1391(b), because
16 defendants maintain an office in this District and many of the acts and practices
17 complained of herein occurred in substantial part in this District.
18
4. In connection with the acts alleged in this complaint, defendants, directly
19 or indirectly, used the means and instrumentalities of interstate commerce, including,
20 but not limited to, the mails, interstate telephone communications and the facilities of
21 the national securities markets.
22
NATURE OF THE ACTION
23
5. This is a federal securities class action on behalf of purchasers of the
24 common stock of THQ between May 3, 2011 and February 3, 2012, inclusive (the
25 "Class Period"), seeking to pursue remedies under the Exchange Act.
26
27
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1
PARTIES
2
6. Plaintiff as set forth in the accompanying certification
3 and incorporated by reference herein, purchased the common stock of THQ during the
4 Class Period and has been damaged thereby.
5
7. Defendant THQ develops, publishes, and distributes interactive
6 I entertainment software for various game systems, personal computers ("PC"),
7 wireless devices, and the Internet.
8
8. Defendant Brian J. Farrell ("Farrell") was, at all relevant times, Executive
9 Chairman, Chief Executive Officer and President of THQ.
10
9. Defendant Paul J. Pucino ("Pucino") was, at all relevant times, Chief
11 Financial Officer and Executive Vice President of THQ.
12
10. The defendants referenced above in ¶8-9 are referred to herein as the
13 I "Individual Defendants."
14
11. During the Class Period, the Individual Defendants, as senior executive
15 officers and/or directors of THQ, were privy to confidential and proprietary
16 information concerning THQ, its operations, finances, financial condition and present
17 and future business prospects. The Individual Defendants also had access to material
18 adverse non-public information concerning THQ, as discussed in detail below.
19 Because of their positions with THQ, the Individual Defendants had access to non-
public information about its business, finances, products, markets and present and
21 future business prospects via internal corporate documents, conversations and
22 connections with other corporate officers and employees, attendance at management
23 and/or board of directors meetings and committees thereof and via reports and other
24 information provided to them in connection therewith. Because of their possession of
25 such information, the Individual Defendants knew or recklessly disregarded that the
26 adverse facts specified herein had not been disclosed to, and were being concealed
27 from, the investing public.
28
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1
12. The Individual Defendants are liable as direct participants in the wrongs
2 complained of herein. In addition, the Individual Defendants, by reason of their status
3 as senior executive officers and/or directors, were "controlling persons" within the
4 meaning of §20(a) of the Exchange Act and had the power and influence to cause the
5 Company to engage in the unlawful conduct complained of herein. Because of their
6 positions of control, the Individual Defendants were able to and did, directly or
7 indirectly, control the conduct of THQ's business.
8
13. The Individual Defendants, because of their positions with the Company,
9 I controlled and/or possessed the authority to control the contents of its reports, press
10 releases and presentations to securities analysts and through them, to the investing
11 public. The Individual Defendants were provided with copies of the Company's
12 reports and press releases alleged herein to be misleading, prior to or shortly after their
13 issuance and had the ability and opportunity to prevent their issuance or cause them to
14 be corrected. Thus, the Individual Defendants had the opportunity to commit the
'51 fraudulent acts alleged herein.
16
14. As senior executive officers and/or directors and as controlling persons of
'71 a publicly traded company whose common stock was, and is, registered with the SEC
18 pursuant to the Exchange Act, and was, and is, traded on the NASDAQ Stock Market
19 ("NASDAQ") and governed by the federal securities laws, the Individual Defendants
20 had a duty to promptly disseminate accurate and truthful information with respect to
21 THQ's financial condition and performance, growth, operations, financial statements,
22 business, products, markets, management, earnings and present and future business
23 prospects, and to correct any previously issued statements that had become materially
24 misleading or untrue, so that the market price of THQ common stock would be based
25 upon truthful and accurate information. The Individual Defendants'
26 misrepresentations and omissions during the Class Period violated these specific
27 requirements and obligations.
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1
15. The Individual Defendants are liable as participants in a fraudulent
2 scheme and course of conduct that operated as a fraud or deceit on purchasers of THQ
3 common stock by disseminating materially false and misleading statements and/or
4 I concealing material adverse facts. The scheme: (i) deceived the investing public
5 I regarding THQ's business, operations and management and the intrinsic value of THQ
common stock; (ii) enabled the Company to enter into a credit facility whereby the
7 I Company could borrow up to $75 million in capital; and (iii) caused plaintiff and
8 I members of the Class to purchase THQ common stock at artificially inflated prices.
9
CLASS ACTION ALLEGATIONS
10
16. Plaintiff brings this action as a class action pursuant to Federal Rule of
11 Civil Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons or
12 entities who purchased the common stock of THQ during the Class Period (the
13 "Class"). Excluded from the Class are defendants and their families, the officers and
14 directors of the Company, at all relevant times, members of their immediate families
15 and their legal representatives, heirs, successors or assigns and any entity in which
16 defendants have or had a controlling interest.
17
17. The members of the Class are so numerous and geographically dispersed
18 I that joinder of all members is impracticable. THQ stock was actively traded on the
19 NASDAQ. While the exact number of Class members is unknown to plaintiff at this
20 time and can only be ascertained through appropriate discovery, plaintiff believes that
21 there are hundreds of members in the proposed Class. Record owners and other
22 members of the Class may be identified from records maintained by THQ or its
23 transfer agent and may be notified of the pendency of this action by mail, using the
24 form of notice similar to that customarily used in securities class actions.
25 18. Plaintiff's claims are typical of the claims of the members of the Class as
261 all members of the Class are similarly affected by defendants' wrongful conduct in
27 violation of federal law that is complained of herein.
A
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1
19. Plaintiff will fairly and adequately protect the interests of the members of
2 the Class and has retained counsel competent and experienced in class and securities
3 litigation.
4
20. Common questions of law and fact exist as to all members of the Class
5 and predominate over any questions solely affecting individual members of the Class.
6 Among the questions of law and fact common to the Class are:
7
(a) whether the federal securities laws were violated by defendants'
8 acts as alleged herein;
9
(b) whether statements made by defendants to the investing public
10 misrepresented material facts about the business, operations and management of THQ;
11
(c) whether the price of THQ common stock was artificially inflated
12 during the Class Period; and
13
(d) to what extent the members of the Class have sustained damages
14 and the proper measure of damages.
15
21. A class action is superior to all other available methods for the fair and
16 efficient adjudication of this controversy since joinder of all members is
17 impracticable. Furthermore, as the damages suffered by individual Class members
18 may be relatively small, the expense and burden of individual litigation make it
19 impossible for members of the Class to individually redress the wrongs done to them.
20 There will be no difficulty in the management of this action as a class action.
21
SUBSTANTIVE ALLEGATIONS
22
22. Defendant THQ describes itself as a "leading worldwide developer and
23 publisher of interactive entertainment software. The company develops its products
24 for all popular game systems, personal computers and wireless devices."
25
23. THQ develops games for the three major game consoles: Microsoft's
26 Xbox 360, Sony's Playstation 3 ("Playstation 3" or "PS3"), and Nintendo's Wii. Each
27 system generally carries a specific demographic fan base. For example, Xbox 360 and
28
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1 Playstation 3 attract generally more mature audiences, while the Wii is used by
2 younger children, families, and casual garners.
3
24. On August 17, 2010, the Company issued a press release announcing that
4 it was launching its uDrawTM GameTabletTM for the Nintendo WiiTM gaming system
5 during the 2010 holiday season. According to the Company, the device is a "small
6 white handheld tablet with a 4" x 6" drawing space and detachable, pressure-sensitive
7 stylus designed to offer more subtle control and precision than available on the
8 traditional Wii RemoteTM."
9
25. On November 15, 2010, defendants issued a press release announcing
10 that the uDraw GameTabletTM was available at retailers for the 2010 holiday season.
11 The tablet would be sold at a suggested retail price of $69.99 and would be bundled
12 with the uDraw StudioTM video game. Moreover, the Company announced that two
13 additional video games would be available to the public - PictionaryTM and Dood's
14 Big AdventureTM - at a suggested retail price of $29.99 each.
15
26. The Class Period begins on May 3, 2011. On that date, THQ issued a
16 press release announcing its financial results for the fiscal fourth quarter and year-end
17 2011, the period ended March 31, 2011. For the quarter, the Company reported
18 GAAP net sales of $124.2 million and a GAAP net loss of $44.1 million, or a $0.65
19 GAAP diluted loss per share. Moreover, based on the purported success of the uDraw
20 GameTabletTM for the Nintendo WiiTM, defendants announced that THQ planned to
21 develop its uDraw GameTabletTM for the Microsoft Xbox 360 and Sony Playstation 3
22 during the 2011 holiday season. Defendant Farrell, commenting on the results, stated,
23 in pertinent part, as follows:
24
"THQ posted strong fourth quarter results primarily driven by the
25
success of Homefront .... We have already shipped 2.6 million units, a
26 solid start for this new franchise, which kicks off the strongest pipeline
27 of AAA core games in our history. We also continued to grow the
28 uDraw franchise with the successful international debut of this
S
Case 2:12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 8 of 36 Page ID #:12
1 compelling new tablet. Today, I am pleased to announce that we plan
2
to bring exclusively designed uDraw Game Tablets to Microsoft Xbox
3
360 and Sony PS3 platforms this holiday."
4
We expect to generate significant growth, profitability and
5 cash in fiscal 2012, driven by the latest installments of multi-million unit
6 selling franchises, Saints Row, Red Faction, Warhammer 40,000, MX
7
vs. ATV, UFC, WWE, and uDraw. We are creating a digital ecosystem
8
for each of these games that will continue to keep consumers engaged
9 and generate additional revenue opportunities beyond the initial retail
10 sale. We also continue to aggressively invest in our digital initiatives,
11
including online social and mobile offerings as well as our Warhammer
12
40,000: Dark Millennium Online MMO."
13 With regard to the uDraw GameTablet, the press release stated, in pertinent part, as
14 follows:
15
THQ brought to market the uDraw GameTablet, a first-of-its-kind,
16
innovative new gaming accessory, which hit retail store shelves
17
worldwide in fiscal 2011, gaining instant popularity for its creativity and
18 unique functionality. Today the company announced plans to bring
19 exclusively designed uDraw Game Tablets to Microsoft Xbox 360 and
20
Sony PS3 platforms this holiday.
21
27. Following the issuance of the press release, THQ held a conference call
22 with analysts and investors to discuss the earnings announcement and the Company's
23 operations. With regard to the Company's outlook, defendant Farrell, stated, in
24 pertinent part, as follows:
25
As we conclude fiscal 2011, we have positioned THQ for future growth
26 and profitability, based on the strategy we outlined over two years ago.
27
In fiscal '10, we drove a dramatic turnaround. Fiscal '11 was our
28
investment year as we developed a pipeline of quality products for this
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Case 2 :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 9 of 36 Page ID #:13
1 year and beyond and as Paul will discuss in a few minutes, our guidance
2
for fiscal '12 demonstrates that we believe the continued execution on
3 our strategy will return THQ to significant growth, profitability and cash
4
generation.
5 * * *
6
Consistent with the strategy that we've outlined for you over the
7
last two years, we were expecting significant growth in THQ's fiscal '12
8 and '13. Our growth will be driven by three focus areas, one, a steady
9
flow of core game franchises; two, expansion of our casual and lifestyle
10 products like our uDraw Game Tablet; and three, increasing digital
11 revenues. In fiscal '12 we plan to launch the strongest core game lineup
12
in THQ's history. Our lineup includes the latest installment of multi-
13 million unit selling franchises. MX versus ATV Alive slated for May
14
10th, Red Faction Armageddon scheduled for June 7, UFC Personal
15
Trainer set to launch June 14, Warhammer 40,000 Space Marine slated
16
for August, Saint's Row III at holiday, an all new WWE game also for
17
holiday and UFC 3 scheduled to return in the fourth quarter of fiscal '12.
18 * * *
19
In conclusion, with a strong pipeline of games, we are well
20 positioned for fiscal '12 and beyond. I'm most pleased with our growing
21 portfolio of owned AAA franchises which generate high margins and
22 provide a platform for extensive digital revenue opportunities. We plan
23
to sequel and extend these franchises to fuel consistent growth over the
24
long term. This pipeline should drive significant sales and improve
25 margins which will increase profitability and cash generation. And, as
26 we have said in the past, we will continue to look for efficiencies in our
27 operating structure. I want to thank and acknowledge everyone at THQ
28
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1
for their continued efforts in bringing THQ' s best product pipeline in our
2
history to market.
3 I With regard to the Company's outlook, defendant Pucino stated, in pertinent part, as
4 I follows:
5
Now, I'd like to share with you our guidance and perspective on
6 our business starting with the fiscal '12 full year. We expect to report
7
fiscal '12 net sales in the range of $925 million to $1 billion which
8 represents a 15% to 25% increase from fiscal '11. We expect to report
9
net income per share in the range of $0.25 to $0.40 versus a loss of $0.24
10
for fiscal '11. The three key drivers of fiscal '12 financial results are,
11 one, the strongest lineup of AAA titles in the history of the Company;
12
two, uDraw for Wii, X-Box 36 and PS3; and three, increasing digital
13
revenues.
14
Now, let's take a moment to review the flow of results throughout
15
the year. Fiscal '12 will be characterized by significant investments in
16
the first half of the year including the timing of capitalization based on
17 where development projects are in their life cycle and heavy investments
18
in product development for digital releases which are not currently
19 capitalized under accounting rules. It also reflects investment in
20 marketing for current period releases and for titles launching in the
21 second half of the year and early fiscal '13. Also, our software
22 amortization will be significantly higher as a percent of net sales in the
23
first half of the year reflecting amortization for titles released late in the
24
fourth quarter of fiscal '11, as well as heavy amortization associated with
25 release of eight key titles in the first half of this year versus two key titles
26
for the prior year first half.
27
Moving on to the first quarter of fiscal '12, we expect to report net
28 sales in the range of $165 million to $180 million compared with $160
S
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1 million a year ago. Key titles driving our first quarter results this year
2
include Red Faction Armageddon, MX versus ATV Alive and UFC
3
Personal Trainer. We expect to report a net loss per share in the range of
4
$0.50 to $0.60. This compares with a net loss per share of $0.21 a year
5 ago. Our share count for the quarter is approximately 69 million. We
6 expect Q2 revenues to be nearly double last year's $70 million.
7
Warhammer 40,000 Space Marine and continued revenues from first
8 quarter releases are the key drivers for the quarter. We expect to report
9 second quarter operating results moderately better than Q of fiscal '12.
10
As we head into holiday, we anticipate Saint's Row III, WWE and
11 uDraw for three platforms to deliver significantly higher net sales and
12
profitability in our fiscal third quarter than the prior year. Finally, we
13 are expecting a profitable Q4 with the return of the next installment of
14 our UFC franchise.
15
Accordingly, our operating model for fiscal '12 is as follows.
16
Product costs as a percent of net sales, mid-3 0%s; software amortization
17 as a percent of net sales, approximately 20% and, once again, software
18 amortization will be significantly higher as a percent of net sales in the
19
first half of the year than in the second half. License amortization and
20
royalties as a percent of net sales about 5% to 6%. Product development
21 expense of about $80 million for the year with about $45 million of
22 expense in the first half of the year and $35 million in the second half of
23
the year. Selling and marketing expense of approximately 16% to 18%
24 of net sales for the year with significantly higher percentages in the first
25
half of the year. G&A of approximately $50 million. Net interest
26 expense of about $6 million, tax rate of 15% and finally share count of
27
about 71 million.
28
(SE
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1
28. In response to these announcements, on May 4, 2011, the price of THQ
2 stock rose $0.30 per share, or 7%, to close at $4.42 per share, on heavy trading
3 I volume.
4
29. On June 3,2011, the Company issued a press release announcing that its
5 uDraw GameTablet "will come to the Xbox 360® and PlayStation®3 consoles" in the
6 fall of 2011. Defendant Farrell, commenting on the launch, stated, in pertinent part, as
7 I follows:
8
"As soon as we introduced uDraw last year, Xbox 360 and PS3 fans
9
began asking when they could experience it, too - and beginning this
10
fall, they can.... The uDraw offers amazing innovation and opens new
11
doors of artistic possibility. There's no console-based artistic tool like
12
it."
13
30. On July 27, 2011, THQ issued a press release announcing its financial
14 results for the fiscal first quarter of 2012, the period ended June 30, 2011. For the
15 quarter, the Company reported net sales of $195.2 million, and a net loss of $38.4
16 million, or $0.56 per diluted share. Defendant Farrell, commenting on the results,
17 stated, in pertinent part, as follows:
18
"We are disappointed in our first quarter financial performance.
19
Sales of Red Faction: Armageddon and our licensed kids titles were
20
below our expectations, and the late release of LTC Personal Trainer
21
also adversely impacted the quarter. ... Despite a light first half, we
22 are looking forward to a strong and profitable second half, including
23 what we expect to be the biggest third quarter, both in revenue and
24 earnings per share, in our company's history, with proven franchises
25
Saints Row, WWE and the uDraw GameTablet, all launching in
26
November."
27 I With regard to the uDraw GameTablet, the press release stated, in pertinent part, as
28 I follows:
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1
Building on last year's successful launch of the uDraw GameTablet for
2
Wii, THQ unveiled plans to bring uDrawTM to Xbox 360® and
3
PlayStation® 3 high-definition consoles this fall with new creative
4
functions and touch-screen features. The company is in production of a
5 number of new uDraw titles, including Disney Princess, Marvel Super
6
Hero Squad, and upgraded versions of our uDraw StudioTM software and
7
Pictionary.
8
31. Following the press release, THQ held a conference call with analysts
9 and investors to discuss the earnings announcement and the Company's operations.
10 With regard to the Company's outlook, defendant Farrell, stated, in pertinent part, as
11 I follows:
12
We expect to demonstrate positive leverage in the second half of the
13 year, with strong revenues and profitability driven by our robust lineup
14 of proven franchises, including Saints Row, uDraw, and the latest
15 editions from WWE and UFC. In fact, we now expect our fiscal third
16 quarter to be the biggest in terms of both revenue and profitability in
17
the Company's history.
18 * * *
19
Thanks, Paul. Now, I'd like to drill down on how we intend to
20
deliver our strong second half performance. Our confidence comes
21
from our upcoming titles based on four proven franchises; Saints Row
22
the Third, WWE '12, uDraw for high-def consoles and Wii, and UFC
23
Undisputed 3. As we recently announced, Saints Row the Third is
24
scheduled to hit stores on November 15, and based on the positive
25 response we received from our Retail Partners at E3, and strong pre-
26 orders, we feel this title has great potential. This high quality game is
27 uniquely positioned in the holiday window, and we intend to support it
28 with a robust and innovative marketing and PR campaign. Also this
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1
holiday, we are launching WWE '12. Our signature WWE experience
2
has been revamped with new technology and positioning, and more
3 marketing synergy and integration with our long-time licensing partner.
4
This title is being recognized by the game press as the next generation of
5
WWE video games, and we're getting very positive fan response to the
6
upgrades we've made.
7
We believe uDraw will perform well at holiday. We're gearing
8 up for the launch in November of a slimmer and sleeker design of this
9
innovative gaming accessory for the PS3 andX-Box 360, along with a
10 new updated version for the Wii. Throughout fiscal '12 we plan to
11 expand the uDraw library of games with the debut of 6 new titles. They
12
include upcoming games based on the popular Disney Princess brand, a
13
Marvel superhero squad title, and upgraded graded versions of our
14 uDraw studio software, and Pictionary. As we discussed at E3, we're
15 also working with Disney to bring the magic of classic Disney characters
16 and animation to the world of uDraw. To round out the year, our fiscal
17
fourth quarter will be anchored by the next major installment of our
18 multi-million unit UFC franchise, UFC Undisputed 3. The new game is
19
being enhanced to include new features, including a new mode based on
20
the edgy pride fighting league, and game play that appeals to both the
21 core and casual gamer. Our confidence in this title is underscored by the
22
fact that the first 2 iterations of UFC have shipped more than 7 million
23 units life-to-date, and this release will be hitting shelves more than 20
24
months after the last one.
25 In response to'a question regarding the uDraw GameTablet sales forecast, defendant
26 Farrell responded, in pertinent part, as follows:
27
[ARVIND BHATIA:] One more question, Brian. On uDraw,
28 when you put it all together with the additional platforms, and the attach
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1
rate that you expect to get on the Wii, et cetera, how much growth, big
2
picture, are you expecting on that franchise versus last year? Can you
3
give us a ballpark?
4
[FARRELL:] That's a good question. I'm not sure people really
5
focused on this yet. Let me remind everyone, last year we had the
6
uDraw on the Wii format only, and only in North America. And in Q3,
7
the holiday quarter - let me remind everyone that the uDraw is a very
8
seasonally sensitive product, it's obviously very good for children, gift
9
giving, family, that kind of thing, so it performed very well in Q3 of last
10
year. As we think about this year, we've actually planned Wii
11
hardware units down, yet with the addition of both 360 andPS3, and a
12
global launch of all three platforms, obviously there's a fairly
13 significant increase in the amount of uDraw hardware we plan in this
14
fiscal third quarter.
15
32. In reaction to the announcement, on July 28, 2011, the price of THQ
16 stock fell $0.48 per share, or 15%, to close at $2.72 per share, on heavy trading
17 volume. However, defendants continued to conceal the true scope of the problems at
18 the Company.
19
33. On September 28, 2011, the Company issued a press release announcing
20 that it had "entered into a four-year, asset-based credit facility with Wells Fargo
21 Capital Finance, LLC. The credit facility provides for borrowings up to $50 million
22 for working capital requirements, letters of credit and other general corporate
23 purposes, and increases to $75 million during the upcoming peak sales period."
24 Defendant Pucino, commenting on the new credit facility, stated, in pertinent part, as
25 I follows:
26
"We are pleased to establish this new, larger credit facility with
27
Wells Fargo.... This new line, along with THQ's capacity to generate
28
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strong cash flows, provide the company with substantial financial
flexibility as it executes on plans for growth in the coming years."
34. On November 2, 2011, THQ issued a press release announcing its
financial results for the fiscal second quarter of 2012, the period ended September 30,
5 2011. For the quarter, the Company reported net sales of $146.0 million, and a net
6 loss of $92.4 million, or $1.35 per diluted share. Defendant Farrell, commenting on
7 the results, stated, in pertinent part, as follows:
8
"We are encouraged that our second quarter performance
9 exceeded our expectations, particularly in a quarter with a light release
10 schedule.... Our two biggest quarters of the year remain ahead of us,
11 and we are focused on execution. In Q3 we are planning for the largest
12 quarter in our history, in terms of sales and earnings, driven by Saints
13
Row: The Third, the uDraw GameTablet, and WWE '12. With UFC
14
Undisputed 3 launching in the fourth quarter, we are well-positioned to
15
deliver a strong second half of fiscal 2012."
16
35. Following the press release, THQ held a conference call with analysts
17 I and investors to discuss the earnings announcement and the Company's operations.
18 I With regard to the Company's outlook, defendant Farrell, stated, in pertinent part, as
19 1 follows:
20
We are executing on our plan, and are excited about our near term
21 slate of games, starting with the launch of Saints Row on November 15.
22
Retail and consumer reaction has been very positive, and pre-orders are
23
tracking more than 4 times those of Saints Row 2 at 2 weeks before
24
launch. In addition to Saints Row, we are introducing uDraw for the HD
25 consoles, as well as new version for the Wii, and a new WWE fighting
26 game, featuring upgraded technology and a new look and feel. In the
27
fiscal fourth quarter, we intend to launch the newly enhanced and more
28
approachable UFC Undisputed 3.
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Case 2:12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 17 of 36 Page ID #:21
1 I Defendant Pucino, commenting on the Company's guidance for the third quarter,
2 stated, in pertinent part, as follows:
3
Now I would like to share with you our guidance for the balance
4 of year. Starting with the third quarter of fiscal 2012, which we expect
5
to be the largest quarter for sales and earnings in the Company's history.
6
We expect to report net sales in the range of $510 million to $550
7 million, compared with $323 million a year ago. Key titles driving our
8 results in the quarter include Saints Row The Third, uDraw and WWE
9
'12. We expect to report third quarter earnings per share in the range of
10
$1.20 to $1.50. This compares with earnings per share of $0.42 one year
11
ago.
12 With regard to the sales forecast for the uDraw GameTablet, defendant Farrell stated,
13 in pertinent part, as follows:
14
November 15 is also the date of the expansion of our successful
15 uDraw game tablet, across all three gaming platforms in North America,
16
Europe and Asia-Pacific. uDraw will come bundled with brand new
17
instant artist software, and will be merchandised with 6 other titles,
18 providing our consumer with a wide choice for this innovative game
19
tablet. uDraw was recently named to Toy Insiders Hot 20 list of the
20 most anticipated toys of this holiday season. And again, we're looking
21
forward to uDraw being a popular gift item. Like last year, we expect
22 sales of uDraw to ramp up from release through the holidays. Here's
23
how we're thinking about uDraw. You will recall that last year, we
24
introduced uDraw only on the Wii and only in North America, and while
25 supply constrained, we shipped 1.3 million units in our third quarter.
26
For the third quarter offiscal '12, we expect to ship less than double
27 that amount across all 3 consoles, and across our 3 major geographic
28
territories.
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Case 2:12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 18 of 36 Page ID #:22
36. In reaction to these announcements, on November 3, 2011, the price of
THQ stock rose $0.26 per share, or 12%, to close at $2.39 per share, on heavy trading
I volume.
37. The statements referenced above in ¶ 26-27,29-31 and 34-3 5 were each
5 materially false and misleading when made because they misrepresented and failed to
6 disclose the following adverse facts, which were known to defendants or recklessly
7 disregarded by them:
8
(a) that demand for the Company's uDrawTMGameTabletTM was well
9 below internal expectations and the Company would have to take back, or provide
10 price protection, on hundreds of thousands of uDraw units that it had sold;
11
(b) that the uDrawTMGameTabletTM for the Microsoft Xbox 360® and
12 Sony PlayStation® 3 was a failure and not being purchased by owners of those
13 gaming systems; and
14
(c) as a result of the foregoing, defendants lacked a reasonable basis
15 for their positive statements about the Company and its prospects.
16
38. On December 7, 2011, THQ issued a press release updating its outlook
17 for the fiscal third quarter, the period ending December 31, 2011. For the quarter, the
18 Company expected to report net sales of approximately 25% below its previously
19 announced guidance of $510 million to $550 million, due to "weaker-than-expected
20 initial sales of its uDraw GameTablet® for Xbox 360@ and PlayStation® 3."
21 Defendant Farrell, commenting on the reduced outlook, stated, in pertinent part, as
22 1 follows:
23
"Despite uDraw's strong success on the Wii in fiscal 2011 and
24 market research indicating strong demand for uDraw on Xbox 360 and
25
PlayStation 3, initial sales of our uDraw tablet and software on these
26
high-definition platforms have been weaker than expected.... WWE
27
'120 and Saints Row®: The ThirdTM are expected to perform at or
28
better than the levels we discussed on our fiscal 2012 second quarter
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Case :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 19 of 36 Page ID #:23
1 earnings call. As we continue to move through the third quarter, we are
2
focused on driving sales of our key holiday titles and maximizing
3
profitability."
4
39. In reaction to the announcement, on December 8, 2011, the price of THQ
5
I stock fell $0.56 per share, or 38%, to close at $0.90 per share, on extremely heavy
6
trading volume. However, defendants continued to conceal the true scope of the
7
I problems at the Company.
8
40. On January 25, 2012, the Company issued a press release announcing its
9
I updated business strategy whereby the Company would exit traditional kids' licensed
10
I video games and focus on its core video game franchises and digital initiatives for the
11
I future. In that regard, defendant Farrell stated, in pertinent part, as follows:
12
"THQ will be a more streamlined organization focused only on
13 our strongest franchises.... The success of Saints Row®: The Thi rdTM
14
is an example of what our revised strategy and focus can achieve. We
15
have now shipped 3.8 million units globally and are currently expecting
16
to ship between five and six million units lifetime on this title.
17
Additionally, our robust digital content offerings for this game have
18 resulted in the highest digital revenue of any console title in our history."
19
41. Then, on February 2, 2012, THQ issued a press release announcing its
20
financial results for the fiscal third quarter of 2012, the period ended December 31,
21
2011. For the quarter, the Company reported net sales of $404.4 million, and a net
22
loss of $55.9 million, or $0.82 per diluted share. Moreover, the Company announced
23
that it took a $30.3 million impairment charge on "kids movie-based licenses."
24
Defendant Farrell, commenting on the third quarter results and new business strategy,
25
stated, in pertinent part, as follows:
26
"Saints Row* The Third'M and 1VWE '12 demonstrate the
27 strengths of THQ's core gaming capabilities. These titles performed at
28 or better than the expectations we shared during our last investor
Case :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 20 of 36 Page ID #:24
1 conference call, driven by favorable critical reviews, community
2 engagement and outstanding marketing efforts. ... Sales of the uDraw
3
GameTablet and related software, and other titles in the kids, family and
4 casual category were far weaker than anticipated, substantially reducing
5
our financial results for the quarter."
6
"We have since concluded an extensive review of our operations
7
to realign our business, focusing on our key franchises with the most
8 potential.... We are implementing a plan to bring costs in line with our
9
lower anticipated level of revenue. With our focused product plan,
10
leaner cost structure, cash balance, and existing credit facility, we
11
believe the company has adequate resources to execute on our plan and
12
deliver on our strong multi-year pipeline of games."
13
With regard to the Company's business realignment, the press release stated, in
14
I pertinent part, as follows:
15
THQ announced recently that it is exiting development of
16
traditional kids' licensed console games. The company has concluded
17 negotiations with two licensors and is negotiating arrangements with two
18 others. The company is also substantially eliminating its ongoing
19
financial commitment with developers as it exits this business.
20
Additionally, THQ has no future commitments or plans to manufacture
21 uDraw hardware. THQ's strategy is to focus on its premium core and
22
fighting franchises and to expand its digital revenues.
23
As part of this business realignment, the company is implementing
24
initiatives to streamline its organization and cost structure. The company
25 currently expects these actions will result in a reduction in its annualized
26 run rate of selling, general and administrative expenses of approximately
27
$60 million, and a reduction of its annualized product development
28
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Case 2 :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 21 of 36 Page ID #:25
1 expenditures of approximately $100 million, primarily due to its exit
2
from the kids' licensed console games category.
3
Total charges related to these actions are estimated at
4
approximately $11.0 million, of which $2.5 million are non-cash. The
5 majority of these charges are expected to be recorded by the end of the
6
2012 fiscal year and will be excluded from the company's non-GAAP
7
results.
8
42. Following the press release, THQ held a conference call with analysts
9 and investors to discuss the earnings announcement and the Company's operations.
10 With regard to the Company's third quarter results, defendant Farrell, stated, in
11 pertinent part, as follows:
12
On our last call we told you we anticipated that our third quarter would
13
be the largest in our Company's history. Unfortunately, we were
14 wrong. The disappointing performance of uDraw this holiday and
15 continued weakness in the kids' licensed category overshadowed the
16
very successful releases of Saints Row The Third and WWE 12. UDraw
17
hardware and software sales were approximately $100 million below
18 our plan and our other casual titles were approximate[lyJ $25 million
19
below plan substantially reducing our revenue and profit for the
20 quarter. We are confident that uDraw would resonate again this holiday
21 given last year's robust sell through and two independent studies
22
indicating we were addressing a sizable market on the HD platforms.
23
Our confidence was misplaced. What we had viewed to be a product
24
that would generate revenues and profits while we continued to build our
25 portfolio of core gaming franchises has instead created a catalyst for us
26
to evaluate our business from top to bottom.
27
Here's what we've done to address these issues. First, we have
28 ceased production of uDraw hardware and have developed a plan to
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Case 2 :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 22 of 36 Page ID #:26
1 move remaining inventory through the channel. We have no other
2 remaining commitments with respect to uDraw. Second, last week we
3 announced the refinement of our strategy to focus exclusively on high
4 quality core games and connected experiences for our key franchises and
5 are in the process of exiting the traditional kids' video game business.
6
As part of our exit we have reached agreement with two of our licensors
7 and are in ongoing discussions with two others. Additionally, we have
8 substantially eliminated our development expenditures for this category.
9
These two actions have significantly reduced our financial commitments
10
as we exit this business.
11 With regard to uDraw GameTablet sales, defendant Pucino stated, in pertinent part, as
12 I follows:
13
Moving onto Q3 results, for the three months ended December 31,
14
2011, we reported net sales of $404 million. A 25% increase versus the
15 prior year Q3. In line with our revised guidance. Our Q3 sales [were]
16
driven primarily by our new releases, Saints Row The Third and WWE
17
12. Net sales [were] higher than the year ago quarter primarily due to
18 sales of Saints Row The Third because there was no comparable core
19
title in the year ago quarter. UDraw's under performance in the quarter
20
had the single biggest impact on our financial results. As Brian
21 mentioned, net sales of the tablet and related software were
22 approximately $100 million below our expectations. We shipped
23 approximately 1 million tablets in the quarter and sell through was
24 poor. Resulting in higher levels ofprice protection, inventory reserves
25 and retail concessions. To give you context, our quarterly earnings
26 would have more than doubled without uDraw. We believe we are
27 sufficiently reserved for units we have in inventory and we're working
28 with our retail partners to move remaining units into the channel.
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Case :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 23 of 36 Page ID #:27
1
43. In reaction to these announcements, on February 3, 2012, the price of
2
1 THQ stock fell $0.23 per share, or 30%, to close at $0.53 per share, on extremely
3
heavy trading volume.
4
44. The market for THQ common stock was open, well-developed and
5 efficient at all relevant times. As a result of these materially false and misleading
6 statements and failures to disclose, THQ common stock traded at artificially inflated
7 prices during the Class Period. Plaintiff and other members of the Class purchased or
8 otherwise acquired THQ common stock relying upon the integrity of the market price
9 of THQ common stock and market information relating to THQ, and have been
10
damaged thereby.
11
45. During the Class Period, defendants materially misled the investing
12 public, thereby inflating the price of THQ common stock, by publicly issuing false
13 and misleading statements and omitting to disclose material facts necessary to make
14
defendants' statements, as set forth herein, not false and misleading. Said statements
15 and omissions were materially false and misleading in that they failed to disclose
16 material adverse information and misrepresented the truth about the Company, its
17
business and operations, as alleged herein.
18
46. At all relevant times, the material misrepresentations and omissions
19 particularized in this complaint directly or proximately caused, or were a substantial
20 contributing cause of, the damages sustained by plaintiff and other members of the
21
Class. As described herein, during the Class Period, defendants made or caused to be
22 made a series of materially false or misleading statements about THQ's business,
23 prospects and operations. These material misstatements and omissions had the cause
24 and effect of creating in the market an unrealistically positive assessment of THQ and
25
its business, prospects and operations, thus causing the Company's common stock to
26
be overvalued and artificially inflated at all relevant times. Defendants' materially
27
false and misleading statements during the Class Period resulted in plaintiff and other
28
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Case :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 24 of 36 Page ID #:28
1 members of the Class purchasing the Company's common stock at artificially inflated
2
I prices, thus causing the damages complained of herein.
3
ADDITIONAL SCIENTER ALLEGATIONS
4
47. As alleged herein, defendants acted with scienter in that defendants knew
5
that the public documents and statements issued or disseminated in the name of the
6
Company were materially false and misleading; knew that such statements or
7
documents would be issued or disseminated to the investing public; and knowingly
8 and substantially participated or acquiesced in the issuance or dissemination of such
9 statements or documents as primary violations of the federal securities laws. As set
10
forth elsewhere herein in detail, defendants, by virtue of their receipt of information
11 reflecting the true facts regarding THQ, their control over, and/or receipt and/or
12 modification of THQ's allegedly materially misleading misstatements and/or their
13 associations with the Company, which made them privy to confidential proprietary
14
information concerning THQ, participated in the fraudulent scheme alleged herein.
15
48. Defendants were further motivated to engage in this course of conduct in
16 order to enable the Company to enter into a credit facility whereby the Company
17
could borrow up to $75 million in capital.
18
LOSS CAUSATION/ECONOMIC LOSS
19
49. During the Class Period, as detailed herein, defendants engaged in a
20 scheme to deceive the market and a course of conduct that artificially inflated the
21 price of THQ common stock and operated as a fraud or deceit on Class Period
22 purchasers of THQ common stock by failing to disclose and misrepresenting the
23 adverse facts detailed herein. When defendants' prior misrepresentations and
24
fraudulent conduct were disclosed and became apparent to the market, the price of
25
THQ common stock fell precipitously as the prior artificial inflation came out of the
26 stock price. As a result of their purchases of THQ common stock during the Class
27
Period, plaintiff and the other Class members suffered economic loss, i.e., damages,
28 under the federal securities laws.
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Case :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 25 of 36 Page ID #:29
1
50. By failing to disclose to investors the adverse facts detailed herein,
defendants presented a misleading picture of THQ's business and prospects.
Defendants' false and misleading statements had the intended effect and caused THQ
common stock to trade at artificially inflated levels throughout the Class Period,
reaching as high as $4.59 per share on May 10, 2011.
51. As a direct result of defendants' disclosures on December 7, 2011 and
February 2, 2012, the price of THQ common stock fell precipitously, falling from its
closing price of$ 1.46 per share on December 7, 2011 to $0.53 per share on February
9 3, 2012 - a loss of $0.93 per share, or 64%. These drops removed the inflation from
10 the price of THQ common stock, causing real economic loss to investors who had
11 purchased THQ common stock during the Class Period.
12
52. The 64% decline was a direct result of the nature and extent of
13 defendants' fraud finally being revealed to investors and the market. The timing and
14 magnitude of the price decline in THQ common stock negates any inference that the
15 loss suffered by plaintiff and the other Class members was caused by changed market
16 I conditions, macroeconomic or industry factors or Company-specific facts unrelated to
17 defendants' fraudulent conduct. The economic loss, i.e., damages, suffered by
18 plaintiff and the other Class members was a direct result of defendants' fraudulent
19 I scheme to artificially inflate the prices of THQ common stock and the subsequent
20 I significant decline in the value of THQ common stock when defendants' prior
21 I misrepresentations and other fraudulent conduct were revealed.
22 APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD ON THE MARKET DOCTRINE 23
53. At all relevant times, the market for THQ common stock was an efficient 24
market for the following reasons, among others: 25
(a) THQ common stock met the requirements for listing, and was 26
I listed and actively traded on the NASDAQ, a highly efficient and automated market; 27
28
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Case 12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 26 of 36 Page ID #:30
1
(b) as a regulated issuer, THQ filed periodic public reports with the
2
SEC and the NASDAQ;
3
(c) THQ regularly communicated with public investors via established
4 market communication mechanisms, including regular disseminations of press
5 releases on the national circuits of major newswire services and other wide-ranging
6 public disclosures, such as communications with the financial press and other similar
7
reporting services; and
8
(d) THQ was followed by several securities analysts employed by
9 major brokerage firms who wrote reports which were distributed to the sales force and
10 certain customers of their respective brokerage firms. Each of these reports was
11
publicly available and entered the public marketplace.
12
54. As a result of the foregoing, the market for THQ common stock promptly
13
digested current information regarding THQ from all publicly available sources and
14 reflected such information in the prices of the stock. Under these circumstances, all
15 purchasers of THQ common stock during the Class Period suffered similar injury
16
through their purchase of THQ common stock at artificially inflated prices and a
17 presumption of reliance applies.
18
NO SAFE HARBOR
19
55. The statutory safe harbor provided for forward-looking statements under
20 certain circumstances does not apply to any of the allegedly false statements pleaded
21
in this complaint. Many of the specific statements pleaded herein were not identified
22 as "forward-looking statements" when made. To the extent there were any forward-
23
looking statements, there were no meaningful cautionary statements identifying
24
important factors that could cause actual results to differ materially from those in the
25 purportedly forward-looking statements. Alternatively, to the extent that the statutory
26 safe harbor does apply to any forward-looking statements pleaded herein, defendants
27 are liable for those false forward-looking statements because at the time each of those
28
forward-looking statements were made, the particular speaker knew that the particular
- 25 -
Case :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 Page 27 of 36 Page ID #:31
I forward-looking statement was false, and/or the forward-looking statement was
authorized and/or approved by an executive officer of THQ who knew that those
1 statements were false when made.
COUNT!
Violation of Section 10(b) of the Exchange Act and Rule 10b-5
Promulgated Thereunder Against All Defendants
56. Plaintiff repeats and realleges each and every allegation contained above
as if fully set forth herein.
57. During the Class Period, defendants disseminated or approved the
materially false and misleading statements specified above, which they knew or
deliberately disregarded were misleading in that they contained misrepresentations
and failed to disclose material facts necessary in order to make the statements made,
in light of the circumstances under which they were made, not misleading.
58. Defendants: (a) employed devices, schemes, and artifices to defraud; (b)
1 made untrue statements of material fact and/or omitted to state material facts
I necessary to make the statements made not misleading; and (c) engaged in acts,
practices, and a course of business which operated as a fraud and deceit upon the
purchasers of the Company's common stock during the Class Period.
59. Plaintiff and the Class have suffered damages in that, in reliance on the
integrity of the market, they paid artificially inflated prices for THQ common stock.
Plaintiff and the Class would not have purchased THQ common stock at the prices
they paid, or at all, if they had been aware that the market prices had been artificially
and falsely inflated by defendants' misleading statements.
60. As a direct and proximate result of defendants' wrongful conduct,
plaintiff and the other members of the Class suffered damages in connection with their
purchases of THQ common stock during the Class Period.
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24
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10
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COUNT II
Violation of Section 20(a) of the Exchange Act Against All Defendants
61. Plaintiff repeats and realleges each and every allegation contained above
as if fully set forth herein.
62. The Individual Defendants acted as controlling persons of THQ within
the meaning of §20(a) of the Exchange Act as alleged herein. By reason of their
positions as officers and/or directors of THQ, and their ownership of THQ stock, the
Individual Defendants had the power and authority to cause THQ to engage in the
wrongful conduct complained of herein. THQ controlled the Individual Defendants
and all of its other employees. By reason of such conduct, defendants are liable
pursuant to §20(a) of the Exchange Act.
PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for relief and judgment, as follows:
A. Determining that this action is a proper class action and certifying
plaintiff as a class representative under Rule 23 of the Federal Rules of Civil
Procedure;
B. Awarding compensatory damages in favor of plaintiff and the other Class
members against all defendants, jointly and severally, for all damages sustained as a
result of defendants' wrongdoing, in an amount to be proven at trial, including interest
thereon;
C. Awarding plaintiff and the Class their reasonable costs and expenses
incurred in this action, including counsel fees and expert fees; and
D. Such equitable/injunctive or other relief as deemed appropriate by the
I Court.
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