FA12 GAl? (JEM) - Shareholders Foundationshareholdersfoundation.com/system/files/complaints/... ·...

Case 2:12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 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.

2U;2JLr!!s 28 OLE

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.

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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 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.

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2:12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 of 36 Page ID #:7

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.

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12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 of 36 Page ID #:8

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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12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 of 36 Page ID #:9

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.

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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.

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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:

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(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

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(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

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Case 2 :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 of 36 Page ID #:11

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

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1 compelling new tablet. Today, I am pleased to announce that we plan

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to bring exclusively designed uDraw Game Tablets to Microsoft Xbox

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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

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investment year as we developed a pipeline of quality products for this

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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

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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

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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

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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

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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

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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

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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


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

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began asking when they could experience it, too - and beginning this

10

fall, they can.... The uDraw offers amazing innovation and opens new

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doors of artistic possibility. There's no console-based artistic tool like

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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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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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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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Case :12-cv-05227-GAF-JEM Document 1 Filed 06/15/12 of 36 Page ID #:20

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


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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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.

-16-


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

-17-


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


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

_19-


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


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

-20-


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.

-21-


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

-22-


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.

-23-


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 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 -


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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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.

-27-

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