Take Two Interactive announced earlier this week that it received grand jury subpoenas issued by the District Attorney of New York city requesting documents which relate to, "…production of documents, covering various periods beginning on October 1, 2001, including those relating to: the knowledge of the Company’s officers and directors regarding the creation, inclusion and programming of hidden scenes (commonly referred to as "hot coffee") in Grand Theft Auto: San Andreas, the submission of Grand Theft Auto: San Andreas to the Entertainment Software Rating Board for a rating, and the Company’s disclosures regarding Hot Coffee."
Take-Two and Rockstar have long maintained their innocence in the “hot coffee” incident in which explicit sexual scenes were depicted in the game. Their explanation for the inclusion of the mini-games was that they were not meant for public viewing and that the hidden scenes were accessed through a non-authorized third party mod. The plea of innocence has evidently fallen on deaf ears as the grand jury tries to determine just how much Rockstar management knew about the controversial game episode and their real intentions in including the “hot coffee” feature.
In related news, the reports of the grand jury,s investigation has caused Wall Street to have doubts about Take-Two. Market analyst, Michael Pachter, of Wedbush Morgan has released his views on the seriousness of the grand jury investigation on Take-Two and Rockstar. He said:
"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.”
While there is no certainty that convictions will result from the investigation, the mere process of being subpoenaed casts yet another shadow over the battle wary company. Wedbush Morgan asked investors to take a “wait and see” attitude as far as investing in Take-Two Interactive by stating, “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.”
