Following recent news
of Take-Two Interactive being issued grand jury subpoenas by the District Attorney of the County of New York over the 'Hot Coffee' incident involving a sex-related mini-game within Grand Theft Auto: San Andreas
, Wedbush Morgan stock analyst Michael Pachter today released a report that notes that his firm is maintaining Take-Two's stock rating of “hold”, but is suspending the target price.
Pachter commented that, while he is watching the proceedings closely, his firm expects the jury investigation to take several months, and "if indictments are issued, that final resolution could take as long as two years. The current nature of any possible case against Take-Two or individuals within the company is unknown, but Wedbush Morgan “...believes that it is likely that one or more Take-Two employees may be subject to a potential criminal indictment.”
The report also comments: “It is impossible to speculate what the specific charges may be given the broad scope of the subpoenas, but we think that there is likely “probable cause” for the New York DA’s office to seek such subpoenas. The company has been under intense scrutiny over the past several years, with an SEC investigation commenced in early 2002 and resolved in 2005, and an FTC investigation commenced last year and resolved earlier this year. This time around, the potential charges are criminal rather than civil, and should an indictment be issued, it is possible that a key employee will be distracted from his or her primary responsibilities.”
“Given the company’s experience leading up to its favorable settlement of the SEC investigation and its recent settlement of the FTC investigation,” noted Wedbush, “we think it is more likely than not that it will be in a position to continue to operate its business while it responds to the grand jury. However, we think that the criminal nature of this investigation is likely to scare all but the most risk-tolerant investors, and we believe that many will avoid the company’s shares until the criminal investigation is concluded. We expect continued pressure on the company’s stock price as investors speculate about the potential negative impact of criminal prosecution.”
The firm concedes that is it difficult to determine at this point what the grand jury hopes to find with these proceedings. However, Wedbush notes that it believes “other parties may have also received subpoenas, as it is customary for a criminal investigation to include all parties involved in the alleged criminal activity.”
The report adds: “Although we are in no position to know what the grand jury hopes to accomplish, we think it is likely that current and former Take-Two employees and directors will be asked to testify in the future. We can only wonder whether the impetus for the grand jury subpoenas was former director Barbara Kaczynski, who resigned loudly earlier this year and who suggested (through her criminal defense attorney) defects in Take-Two’s corporate governance practices.”
“The subpoenas leave us baffled,” continues the report, “and raise the specter of quite serious consequences. The potential outcomes range from indictments and convictions of key employees to no indictments issued at all. Should one or more key strategic, operating or creative employee be charged with criminal activity, we believe that at a minimum, the employee charged would be distracted from performing his or her duties for the company, and at a maximum, the employee charged would be convicted and would likely leave the company."
The Wedbush report concludes: “Because of the significant near-term uncertainties raised by the grand jury subpoenas, we are maintaining our HOLD rating, but are suspending our price target. We think that Take-Two will continue to face a challenging retail environment over the next six months. Should the grand jury absolve Take-Two and its employees of any criminal liability, we are prepared to revise our rating and reinstate our price target. As we see no meaningful positive catalysts over the near term, we recommend that investors stay on the sidelines until Take-Two can resolve this new uncertainty and demonstrate that it can return to sustained profitability.” The company's shares are currently down around 17% to $10.68 in mid-market trading.