The 2006 suit, which was tentatively settled for $20 million, also alleges that company officers earned more than $18 million in insider trading even as the company's stock plummeted.

"As a result of the disclosures of the Company's true financial condition, its stock ratings have been slashed," the suit, initially filed by John Fenninger who purchased Take-Two common stock, states. "Moreover, the Company is exposed to class action lawsuits and regulatory enforcement actions brought by the Attorney Generals of several states. While the public investors lost over one billion dollars in market capitalization, the Individual Defendants pocketed over $18 million in insider trading proceeds."

Hot Coffee, a bit of hidden sex found behind the apartment doors of the game, was discovered in July 2005 after a modder released a hack for the game that unlocked the previously hidden content.

Earlier today, Take-Two announced that they had reached a settlement in the case, with the company and its insurer paying out more than $20 million.

The nut of the allegations contained in the 34-page suit, is that Take-Two was spending more than it was bringing in and couldn't survive until the next Grand Theft Auto. So, the suit alleges, the company pushed Grand Theft Auto: San Andreas out the door knowing that there was pornographic material in the game because delays would have cost the company too much. If the material was known to be in the, the suit continues, major retailers wouldn't have sold it.

The outcome, according to the suit, was inflated stock prices based on bad or uninformed information from the company and a plunge in stock values when the truth came out.

The suit also alleges that Take-Two lied about the included sex scenes, nicknamed Hot Coffee, when they first came to light, with the company the scenes were "the work of a determined group of hackers who have gone to significant trouble to alter scenes.'"

The suit outlines how the value of Take-Two's stock first rose significantly with the release of the game and then began to plummet as the allegations and suits came to light. The suit connects the two, alleging that the company lied during financial statements to try and cover themselves and later key executives profited from inside information while selling company stock.

It's an interesting read and worth some time if you've been following the Hot Coffee allegations and are interested in a document that ties stock values and company statements to the life-cycle of the controversial sex scene in San Andreas. But do keep in mind that just because the suit was settled, that doesn't mean the contents have been proven or disproven.

Class Action

The class action will be dismissed in exchange for an aggregate payment of $20,115,000 into a settlement fund for the benefit of class members, of which $15,200,000 will be paid by Take-Two's insurance carriers, and $4,915,000 will be paid by Take-Two.

Today's settlement is related to a 2006 consolidated securities class action which included both historical stock option granting practices and the inclusion of a hidden sex scene in the game. It's not tied to an earlier 2005 consumer class action.

"We are pleased to have reached this settlement, which represents another important step forward for the Company," said Strauss Zelnick, Chairman of Take-Two.

Hot Coffee, a bit of hidden sex found behind the apartment doors of the game, was discovered July 2005 after a modder released a hack for the game that unlocked the previously hidden content.

In June, 2006 the Federal Trade Commission found that Take-Two Interactive was deceptive in the way it marketed Grand Theft Auto: San Andreas but did not fine the company or order that they return any of their profits from the game.

While the company was not fined, they were placed on notice that if they again violate the ratings, they will be subject to a civil fine of up to $11,000 per a violation.

You may recall that in November of last year, U.S. District Court for the Southern District of New York granted preliminary approval of a settlement of several class action suits against Take-Two. TTWO expected then to pay out up to $2.75 million for the settlement, pending Court approval.

Turns out that few actually filed claims. On July 31, the Court said that "the plaintiffs could no longer meet their burden of showing that the case could proceed on the proposed class basis" according to an SEC filing.

Take-Two opts not to weigh in on whether an appeal is likely in the filing, but when a million bucks is offered and folks don't bite — only $30,000 in claims were filed — we'd have a hard time believing that one is in the cards. The attorneys involved already got their paycheck actually haven't yet been paid, at least on the plaintiff side. Makes me feel that much better about never completing "The Guide To Spending Your 'Hot Coffee' Settlement."

Update: Ted Frank from Overlawyered wrote in to clear some things up for us. He writes: "The plaintiffs' attorneys have not gotten their paycheck. My objection was premised on the grounds that the court should not approve a settlement that paid the attorneys so much more than what the class received; when the court rejected the settlement, it meant there was no court approval for a payment to the plaintiffs' attorneys."

Take-Two must cover over a million dollars in legal fees and has agreed to a hefty charitable donation as part of the settlement, but they'll pay out just $30,000 in resolving claims with consumers. The "benefits" to consumers ranged from $5 to $35 US, with some claimants getting a decaffeinated copy of San Andreas.

Unsurprisingly, another lawyer has poked his nose into the settlement, claiming that the lawsuit has no merit. That claim is partly based on the fact that so few offended parties wanted to experience the "Hot Coffee" healing power of cash.

Adding weight to the argument that the suit has no merit, is that it appears that some of those deposed were clueless about the game's content to begin with. Killing? Well known. But stealing? In Grand Theft Auto? Who knew?!

Anyone out there file a claim? We'd like to know!

Hidden Sex Scenes Draw Ho-Hum, Except From Lawyers [New York Times - thanks, Michael!]

We never anticipated how this thing was going to be blown out of proportion by the mainstream media and the politicians...

I'm still proud of finding and uncovering the [Hot Coffee] scenes - because of all the work and research it took... When I look back at it, I think [Rockstar] should have reacted differently, but I don't hold a grudge at all.

OK, he didn't actually say that last part.

Hot Coffee Rewind: Famed Dutch Modder Talks to EGM [GamePolitics]

• Grand Theft Auto: San Andreas First Edition Disc - Replacement Disc
• Detailed Store Receipt - Cash payment up to $35.00
• General Credit Card Statement or Check - Cash payment up to $17.50
• Disc/Purchase Details - Cash payment up to $10.00
• No Disc/Purchase Details - Cash payment up to $5.00

Gaming Steve noted that the masses are well aware of the settlement opportunities, now that ads are running in magazines like People. Everyone involved has until May 16 to grab their cash. Good luck!

GTA Class Action Settlement [via Gaming Steve]

The lawsuit against Take-Two is still pending, but should the United States District Court for the Southern District of New York agree to the settlement, claims against the company will be dismissed "without any admission of liability or wrongdoing by Take-Two or Rockstar."

The publisher says that it will pay out between $1.025 million and $2.75 million in settlement benefits, which range from an edited copy of GTA: San Andreas to a cash payment up to $35 for those who can provide proof of purchase of the game from before July 20, 2005. There are, of course, stipulations to the proposed settlement, the details of which are in the full press release below.

Take-Two Interactive Software, Inc. Announces Preliminary Settlement of Consumer Class Action

New York, NY - November 8, 2007 - Take-Two Interactive Software, Inc. (NASDAQ:TTWO) today announced the settlement of all consumer class action lawsuits pending in the United States against the Company and its subsidiary Rockstar Games, relating to a third-party program called the "Hot Coffee Modification" that could be used by consumers to alter the content of the Grand Theft Auto: San Andreas video game. If the proposed settlement receives preliminary and final approval from the United States District Court for the Southern District of New York, all claims in these lawsuits will be dismissed without any admission of liability or wrongdoing by Take-Two or Rockstar.

Under the terms of the settlement, class members will be able to claim benefits if they swear that they: (a) bought a copy of Grand Theft Auto: San Andreas before July 20, 2005; (b) were offended and upset by the ability of consumers to modify and alter the game's content using the third-party Hot Coffee modification; (c ) would not have bought the game had they known that consumers could modify and alter the game's content using the third-party Hot Coffee modification; and (d) would have returned the game, upon learning the game could be modified and altered, if they thought this possible. Settlement class members who attest to these facts may apply for benefits that range from an exchange of the game disk for an edited copy of Grand Theft Auto: San Andreas to a cash payment of up to $35 for consumers who submit detailed proofs of purchase.

The actual value of all cash payments under the settlement will depend on the number of class members that apply for benefits. Take-Two has committed to spend at least $1.025 million on settlement benefits, and the settlement generally caps the defendants' out-of-pocket costs at no more than $2.75 million, in addition to the costs of providing notice to class members and paying a fee to plaintiffs' counsel. The Company previously established a reserve sufficient to substantially cover the expected cost of the settlement and related expenses. The full settlement terms will be described in the parties' Settlement Agreement, which the plaintiffs are expected to file with the Court in mid-November when they seek preliminary approval for the settlement.

"If the case had continued, we believe the court would have agreed that Take-Two was not liable for consumers acting independently to modify their games with third-party hardware and software to access normally inaccessible content," said Ben Feder, Chief Executive Officer of Take-Two. "Nonetheless, we believe it is in the best interest of the Company to avoid protracted and costly litigation to prove our case and to finally put this matter behind us."

While the flap over the Forza Motorsport 2 content may still be too young, it raises some interesting questions. Does the ESRB need to extend its warning to consumers beyond the "game experience may change during online play" splash screen? It would be much easier for a gamer to come across content that causes offense in a game like Forza 2 than to witness the unfinished "adults only" Hot Coffee mod material.

I would tend to agree that games that have the ability to see user created content added to the game and its online experience need to be more clearly labeled by the ESRB, at the very least in attempts to better inform consumers and to protect the industry's developers. What do you think about new ratings for games that are more open to user created content?

Call the ESRB! [Curmudgeon Gamer]
Why wouldn't the ESRB act on Forza? [Cathode Tan]

I swear we posted this before, but asking several fellow writers and digging through the site, I've decided I'm actually just losing my mind.

UGO found a Grand Theft Auto IV coffee cup while walking past Rockstar's New York office recently. Very cool, but I hear you have to hack the cup to actually use it, and that Rockstar denies there was ever any Hot Coffee in the cup once you take a sip. Brian Crecente

Attack of the Branding! GTA IV Coffee? [D-Pad]

Even though the title was released in the States back in 2004, Capcom is finally publishing Rockstar's controversial Grand Theft Auto: San Andreas on January 25th. And they've got the launch party to prove it. Just check out after the jump what the festivities held at Shibuya's Club Asia for this 18-years-old-and-up-game:

• Girls with fake Peter Moore-esque fake GTA tattoos.
• A BMX stunt show. How 80's!
• Caution tape and salarymen.
• Hoodies. Yes, hoodies.
• A Japanese hip-hop star (the country's first rapper at that) with shameful sweaty pits. Wear one shirt, dude!
• Blind-folded AND seated basketball dribbling with traditional drum accompaniment.
• Non alcohol drinks with bad pun names like "GTA Coke. And I quote: "The recipe is a 'buzz' and coke cocktail." So clever.

Capcom GTA Event [Watch Impress]

You know, I've done just about every single one of these, minus the Strider hack (news to me!), despite the fact that I had the cart and Altered Beast back in the day. Classic stuff, but I know they're missing something. What is it? Help me remember my classic cheats, Kotaku retro elite readership! Michael McWhertor

Reuters is reporting that a judge has denied Take Two Interactive's motion to have portions of lawsuits filed against them dismissed, which could make it possible for the Grand Theft Auto San Andreas publisher to have a class action lawsuit against them see court. From Reuters:

The lawsuit, filed in July 2005 seeking class-action status, said Take-Two's alleged misconduct violated consumer protection laws in all 50 US states and the District of Columbia. Since then a number of cases making the same claim were consolidated in Manhattan federal court.

Take-Two and its subsidiary, Rockstar Games, had argued in its motion to dismiss parts of the lawsuit that the plaintiffs could only file claims in the states where they resided, not all 50 states.

Should a class action suit go forward, the judge said she would reconsider.

Not sure if you heard, but GTA:SA was modified by users to unlock intentionally hidden scenes of two robotic, polygonal avatars saying things and moving around (in a fashion some people who may not have actually ever had sexual intercourse to say that the characters were behaving) in a sexually explicit manner. Michael McWhertor

Early last month, the FTC announced that they were putting the company on notice that any future misrepresentation of video game ratings or content descriptors would result in a xxx fine. And that the company needed to implement a system to "ensure that all game content is reviewed in connection with submissions to ratings authorities."

While the FTC ruling was announced last month the public, and in particular politicians, had 30 days to comment on the action, or inaction as some naysayers put it, and the FTC could have changed its mind. Now that the 30 day period has passed the decision is set in stone.

Take-Two Interactive also pointed out that the consent order and agreement was unanimously approved by the commission.

Paul Eibeler, President and Chief Executive Officer, stated, "We are extremely pleased that the FTC has concluded its very thorough investigation, and that the matter has been resolved. We recognize the importance of maintaining public confidence in the Entertainment Software Rating Board (ESRB) rating system and helping the ESRB educate parents and consumers about the rating system. We look forward to putting this behind us and focusing on what we do best - creating video games."

It's good to see that politicians weren't able to influence the decision of the FTC following their investigaiton. It even managed to withstand congressional hearings. Hit the jump for the official press release. Brian Crecente

Take-Two Interactive Software, Inc. (NASDAQ: TTWO) announced today that following the 30-day period for public comment, the Federal Trade Commission (FTC) has unanimously approved the Consent Order and Agreement with Take-Two and its wholly-owned publishing label Rockstar Games. All outstanding matters pending before the FTC have been settled and no penalties or fines have been assessed. Among other things, the Consent Order provides that the Company shall not misrepresent a video game's ratings or content descriptors and that the Company shall implement a system to ensure that all game content is reviewed in connection with submissions to ratings authorities.

Paul Eibeler, President and Chief Executive Officer, stated, "We are extremely pleased that the FTC has concluded its very thorough investigation, and that the matter has been resolved. We recognize the importance of maintaining public confidence in the Entertainment Software Rating Board (ESRB) rating system and helping the ESRB educate parents and consumers about the rating system. We look forward to putting this behind us and focusing on what we do best - creating video games."

Today Thompson decided to drop Edward C. Johnson, III, chairman of Fidelity Investments, a friendly note to try and convince the guy to drop the company's Take-Two shares. For those of you who don't follow who owns what out there (and that typically includes me), Fidelity owns more than 20 percent of the game developer.

In his letter, Thompson continues to insist that he "prepared Senator Clinton" for her Grand Theft Auto bashing press conference and goes on to say he knows a lot of secret, company-killing stuff about Take-Two and the SEC investigation.

He never really gets around to spilling the beans in the letter, but does hint that he was partially responsible for the informal SEC investigation and that he's helping out the lawyers involved in what could become a class-action lawsuit against the company.

Thompson claims the key to the SEC investigation can be found in the company's 10-k filing last month. He also tries to rope the company's outside general counsel, Blank Rome, into the whole mess as well as Barbara Kaczynski, Take-Two's former audit chair.

Here's the kicker:

In short, without herein divulging all I know, I'll say this: Somebody at Fidelity needs to talk to me immediately if not sooner. You all owe that to your investors.

I guess Thompson figures if he can't convince politicians or the media that Take-Two is the antichrist, he can at least try to dry up their funds. I tried figuring out the 10-K filed by Take-Two, but I'm an embicile. If you feel like you will fare better, check it out for yourself, just make sure to report back your findings. Hit the jump for Jack's full letter.
Brian Crecente

July 13, 2006

Edward C. Johnson, III
Chairman
Fidelity Investments (FMR)

Re: Take-Two Interactive Software, Inc. (TTWO on NASDAQ)

Dear Mr. Johnson:

As you know, Fidelity reportedly owns more than 20% of the above company's stock. In one year that stock has fallen in value from $28 to $9, primarily because of the "Hot Coffee" scandal which broke because of Senator Hillary Clinton's July 2005 press conference. I prepared Senator Clinton for that news conference, and here is a graphic depiction of the subsequent stock price tumble:

I was on CBS's 60 Minutes twice last year regarding Take-Two, and the August 2005 issue of Reader's Digest reported my efforts against this company. They didn't report a tenth of what I know.

Mr. Johnson, I know some facts about Take-Two that your company apparently does not know. The latest SEC investigation of Take-Two, announced Monday, comes as no surprise to me. It may come as a surprise to you and your analysts, however, that there may be some very significant problems with certain information in Take-Two's 10-K filed with the SEC months ago. I identified those potential problems immediately and shared them with the SEC. I also shared them with the lawyers who are seeking class action status for shareholders suing Take-Two.

One of the potential problems we have here (more accurately, that Fidelity has here, in my opinion) is the fact that the outside general counsel to Take-Two is the Philadelphia law firm of Blank Rome, which is also Take-Two's registered lobbyist on Capitol Hill. What I can tell you about Blank Rome and other aspects of Take-Two's problems might help explain why Take-Two's audit chair, Barbara Kaczynski, quit the Take-Two board, hired a top-notch criminal attorney, and wrote the SEC about Take-Two's alleged cover-up by senior management.

In short, without herein divulging all I know, I'll say this: Somebody at Fidelity needs to talk to me immediately if not sooner. You all owe that to your investors.

Regards, Jack Thompson

Jack Thompson, Attorney

Wedbush Morgan analyst Michael Pachter is waving his hands around to shoo off investors after the subpoenas.

We note that grand jury subpoenas are founded in criminal investigations... As such, we believe that it is likely that one or more Take-Two employees may be subject to a potential criminal indictment.

Intriguing. You'd think that video game publishers couldn't be indicted for failure to subscribe to a voluntary ratings system, but luckily, someone's thinking of the children. Isn't it interesting, though, that employees of a games publisher can face criminal indictment for including hidden scenes in a game that are far tamer than the ones pornographers film and sell with impugnity? And can someone explain to me how a kid walking in and buying a copy of Grand Theft Auto is more corrupting than them walking into a bookstore and buying a volume by everyone's favorite "I punched her in the stomach, then fucked her" novelist, Henry Miller?

No need to answer that rhetorical questions: these punk kids today would never be caught dead reading a book. Florian Eckhardt

Take-Two Could Face Criminal Indictment, Says Analyst [GamesIndustry]

We broke the news yesterday of the Manhattan District Attorney's Office issuing a subpoenea to Take-Two as part of a grand jury investigation into Hot Coffee Gate. Today, investors showed their unhappiness, with the company's stock plummeting nearly 20 percent since yesterday's close.

According to this chart, while the stock opened at a dismal 9.85 a share, it has already rebounded to a still dismal 10.36. There's also a HUGE spike in volume. The three month average is 1.7 million or so, and today's volume has already hit 8.2 million.

Say it with me. Buy, Sell, Buy, Sell! Brian Crecente

Take-Two [Yahoo Finance]

Take-Two Interactive just sent word that last week they received grand jury subpoenas from the District Attorney of the County of New York requesting production of documents surrounding the company's knowledge of the hidden sex scenes in Grand Theft Auto: San Andreas.

From the release:

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) today announced that on June 19, 2006, the Company received grand jury subpoenas issued by the District Attorney of the County of New York requesting 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; disclosures and presentations by the Company of certain events, including acquisitions, partnering arrangements and earnings results; invoices from, payments to, and termination of PricewaterhouseCoopers LLP and retention of Ernst & Young LLP; acquisitions by the Company in 2005; certain compensation and human resources documents with respect to the Company and certain of its current and former officers and directors; and documents concerning the activities of the Company's Board of Directors and Committees thereof.

The Company has not been advised that it or any specific individual is presently a target of the investigation.

The Company is fully cooperating and providing the requested documents.

Update: I just spoke with Take-Two spokesman Jim Ankner who really couldn't shed any more light on the subpoenas. Since it is a grand jury investigation, it is likely that anyone called before them will not be allowed to discuss the case. So far, Ankner says, no people have ben subpoenaed, just documents. It is the Manhattan DA who is handling the investigation. (Well, technically, there grand jury, but you know what I mean.) Brian Crecente

Yesterday, we reported The Daily Show With Jon Stewart covered the video game foofurall. Today, we've got the vid. It's totally great, except for the last bit, which retroactively makes the whole thing a lot less funny. Just turn it off when they do the live, on-the-streets report from San Andreas.

The best line in the whole thing is actually not gaming related at all, but about the failure to raise minimum wage: "The lower strata of society has had a free ride for too long and if you were to give them $7.25 an hour, you just know it would go up their nose and down their hose." And in a mere 36 words, Jon Stewart expertly summarized the plight of the Kotaku blogger. Florian Eckhardt

Previously: Jon Stewart Takes On Congress Player Haters

This week the Entertainment Software Ratings Board announced Commitment to Parents, an effort geared at bolstering consumer confidence in the current rating system for video games.

Granted that's just my take on the initiative. I spoke with ESRB president Patricia Vance earlier this week about the program and she denied it was spurred by the on-going congressional hearings or Hot Coffee.

Either way, what really matters though is that the industry is taking some steps to tweak one of the chinks in their rating system's armor: retail enforcement.

While the program doesn't really have any teeth, it still does a good job of trying to create a culture of compliance, but building a retail "council" that requires members to follow the rules.

In essence what this does is creates a seal of approval for concerned parents. If you're worried about what your kids buy, just make sure they shop at a retailer that's a member of the ESRB Retail Council.

To be a member of the council, retailers have to enforce the ratings, train their sales staff about the rating system, promote the rating system in the store and through circulars and establish a system for consumer complaints about sales violations.

The most important element of the program is the creation of a mystery shopper program, which will track sales policy enforcement through two audits a year.

Vance tells me that they plan to have mystery shoppers hit about 100 stores from each chain during each audit.
While they will report the overall results of the audit, the ESRB won't break it down by retailer. That's unfortunate, because nothing would help compliance more than the thought of a public drubbing in the press or by politicians.

While I think this is a great step forward, I still think the ESRB has to reexamine the way they rate games. I know there's no easy answer for a medium that can contain such branching storylines and content, but letting developers or publishers choose what the raters see is tantamount to letting the fox guard the hen house. Brian Crecente

Game Industry Strengthens Ratings Enforcement [Rocky Mountain News]