Electronic Arts, long time videogame darling of the financial sector, is about to be dragged across the coals in front of the Northern California Federal Court, with two key executives accused of purposefully misleading investors for personal gain.
The case, to be fronted by class-action sharks Schiffrin & Barroway, seeks class-action status for anyone who bought shares of EA between January 25, when the company posted fiscal third-quarter results, and March 21, when it warned of a profit shortfall for the financial fourth quarter of 2004.
Damagingly for EA, Chief Executive Larry Probst and Chief Financial Officer Warren Jenson are named as defendants following a conference call on January 25, in which it is claimed the two key executives made misleading projections about the company?s status. Shortly after this call, Probst and Jensen sold around $19 million worth of EA stock.
The suit also claims that other insiders sold almost $20 million of stock during the class period, when the price rose 15%. Then, on March 21, EA warned that its profit for the quarter ending in March would fall below its prior forecast by as much as 25 cents per share, with the firm blaming weak sales and shortages of PlayStation 2 and Xbox hardware. It was the first ever mid-quarter profit warning from the software giant.
The suit claims ??that the Company failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that increased competition from its competitors was eroding EA market share; (2) that hardware shortages were material; (3) that EA continued to suffer from operating margin compression; and (4) that as a result of the above, the Company's statements about its financial performance were lacking in any reasonable basis when made."
EA shares have tumbled by around 20% since the profit warning was issued.
"We cannot offer any specific information about the suit and we do not comment on pending litigation", is the official company line at time of going to press.