Opinion

In Re Take-Two Interactive Securities Litigation

551 F. Supp. 2d 247
2008 U.S. Dist. LEXIS 31463
2008 WL 1757823

Court: District Court, S.D. New York
Filed: Apr 16, 2008
Status: Published
Author: Kram
On the bench: Shirley Wohl Kram
Cited by: 91 cases
Authority: More cited than 90.8%

finding an allegation of a 7.5% drop in share price sufficient, stating that “[o]ther courts have found that similar allegations of significant stock drops in response to announced SEC investigations are sufficient to plead loss causation under the framework established by Dura and its progeny”

How later courts described this case

finding an allegation of a 7.5% drop in share price sufficient, stating that “[o]ther courts have found that similar allegations of significant stock drops in response to announced SEC investigations are sufficient to plead loss causation under the framework established by Dura and its progeny”
finding that two individual defendants’ combined proceeds of $2.8 million from stock sales is insufficient to establish scienter, particularly because plaintiffs fail to plead whether either made any profit from the sales
concluding that lapse of “approximately four months between these substantial sales and the revelation of the alleged falsity, inescapably attenuates any inference of scienter that may be drawn in [plaintiffs’] favor”
holding disclosure of grand jury subpoena from the Manhattan District Attorney’s Office was not sufficient to satisfy Dura revelation of truth requirement because “there is a ... distant relationship between the subject of the Manhattan District Attorney’s announced investigation — Take-Two’s general compensation practices — and the subject of the alleged fraud — Take-Two’s options-granting practices”

Written by the judges who cited it.

The opinion

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OPINION AND ORDER

SHIRLEY WOHL KRAM, District Judge.

TABLE OF CONTENTS

I. BACKGROUND...........................................................254

A. Procedural History....................................................254

B. Parties...............................................................254

C. Factual Allegations....................................................255

1. The GTA:SA Fraud................................................255

2. The Options Backdating Fraud......................................257

D. Legal Claims.................■.........................................258

II. DISCUSSION.............................................................259

A. Claims for Material Misrepresentations Under Section 10(b) and Rule 10b-5 ...................................................... 260

*253

1. The GTASA Fraud................................................260

i. The SAC Adequately Alleges a False Statement and Misleading

Omission in Take-Two’s 2004 and 2005 Forms 10-K..............260

ii. The Alleged Misleading Statement in Take-Two’s 2004 and 2005

Forms 10-K Is Attributable to Defendants Take-Two,

Eibeler, Winters, Emmel, Flug, and Grace......................265

a. The Group Pleading Doctrine Does Not Apply to Brant.........266

b. The Exception for Subsidiary Liability Does Not Apply to

the Roekstar Defendants .................................268

iii. The SAC Fails to Allege Scienter with Respect to All

Defendants .................................................268

a. The SAC Inadequately Pleads Scienter With Respect to

Brant, Houser, and Donovan..............................269

(1) The SAC Insufficiently Alleges That Houser, Donovan,

and Brant Possessed a Motive to Commit Fraud.....269

(2) The SAC Alleges Insufficient Circumstantial Evidence

of Knowledge or Recklessness With Respect to

Brant, Houser, and Donovan...........................270

b. The SAC Inadequately Pleads Eibeler’s Scienter...............273

(1) The SAC Insufficiently Alleges That Eibeler Possessed

a Motive to Commit Fraud............................273

(2) The SAC Alleges Insufficient Circumstantial Evidence

of Eibeler’s Knowledge or Recklessness.................273

c. The SAC Inadequately Pleads Scienter With Respect to

Emmel, Flug, and Grace..................................275

d. The SAC Inadequately Pleads Winters’s Scienter..............277

(1) The SAC Adequately Alleges Winters’s Motive and

Opportunity to Commit Fraud.........................277

(2) The SAC’s Proposed Inference of Scienter Is Not as

Compelling as Competing Noneulpable Explanations.....278

e. The SAC Inadequately Pleads Scienter With Respect to

Take-Two and Roekstar..................................281

2. The Options Backdating Fraud......................................281

i. The SAC Sufficiently Pleads Loss Causation Only as to the July

10 Disclosure of SEC’s Informal Investigation...................282

a. Loss Causation May Not Be Predicated upon the June 26

Disclosure..............................................282

b. Loss Causation May Be Predicated Upon the July 10

Disclosure..............................................286

ii. The SAC Adequately Alleges the Materiality of Defendants’

Misstatements Regarding Options Backdating...................290

iii. The SAC Adequately Pleads Scienter With Respect to Take-

Two, Brant, Eibeler, Emmel, Flug, and Grace...................293

a. The SAC Adequately Alleges Brant’s Scienter.................293

b. The SAC Adequately Alleges Scienter With Respect to

Emmel, Flug, and Grace..................................293

(1) The SAC Adequately Alleges that Emmel, Flug, and

Grace Possessed Motive and Opportunity................294

(2) The Inference That Emmel, Flug, and Grace Acted

With Scienter Is More Compelling Than Competing Noneulpable Explanations for Their Conduct............298

c. The SAC Inadequately Alleges Eibeler’s Scienter ..............301

(1) The SAC Adequately Alleges That Eibeler Possessed

Motive and Opportunity...............................301

(2) The Inference That Eibeler Acted With Scienter Is Not

as Compelling as Competing Noneulpable

Explanations for His Conduct..........................302

d. The SAC Inadequately Alleges Winters’s Scienter..............304

e. The SAC Adequately Alleges Take-Two’s Scienter.............305

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B. Claims for Violations of Section 20(a) of the Exchange Act..................306

1. The GTA:SA Fraud................................................306

2. The Options Backdating Fraud......................................307

C. Claims for Violations of Section 20A(a) of the Exchange Act.................308

D. Leave to Amend the SAC...............................................312

III. CONCLUSION..................... ......................................313

In this putative class action, the New York City Employees’ Retirement System, the New York City Police Pension Fund, and the New York City Fire Department Pension Fund (collectively, “Lead Plaintiffs”) bring various securities fraud claims against Take-Two Interactive Software, Inc. (“Take-Two” or the “Company”); its wholly-owned subsidiary, Rockstar Games, Inc. (“Rockstar”); and several of these companies’ officers and directors (collectively, “Defendants”). Pending before the Court are various motions to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), and the Private Securities Litigation Reform Act of 1995 '(“PSLRA”). For the reasons that follow, the Court grants these motions in part and denies them in part. Additionally, the Court grants Lead Plaintiffs’ request for leave to amend deficient portions of their pleadings.

I. BACKGROUND

A. Procedural History

On February 2, 2006, the first of several putative class actions alleging that Take-Two had committed securities fraud was filed in this District. 06 Cv. 803(SWK), Dkt. No. 1. In an order signed on July 12, 2006, the Court consolidated that action with all related securities cases pending in this District, and appointed Lead Plaintiffs to represent the putative class. 06 Cv. 803(SWK), Dkt. No. 33.

Pursuant to a scheduling order also issued on July 12, 2006,

see

06 Cv. 803(SWK), Dkt. No. 32, Lead Plaintiffs filed the Consolidated Amended Complaint (the “AC”) on September 11, 2006, 06 Cv. 803(SWK), Dkt. No. 34. The AC charged that Defendants made material misrepresentations and omissions in public statements respecting: (1) Take-Two’s compliance with the video game rating requirements of the Entertainment Software Ratings Board (the “ESRB”); and (2) Take-Two’s compliance with its stock-option plans and accounting for stock-option grants to several officers and directors.

In a scheduling order filed on January 3, 2007, the Court halted briefing on motions to dismiss the AC, in contemplation of Take-Two’s anticipated financial restatement, 06 Cv. 803(SWK), Dkt. No. 48, which the Company eventually issued on February 28, 2007. On April 16, 2007, Lead Plaintiffs timely filed the Consolidated Second Amended Complaint (the “SAC”), which reiterated, with the benefit of more recent factual developments, the securities fraud claims set forth in the AC. 06 Cv. 803(SWK), Dkt. No. 51. Thereafter, Defendants filed the motions to dismiss that are the subject of this Opinion.

B. Parties

Lead Plaintiffs “are actuarial pension systems of the City of New York.” (SAC ¶ 37(a).) They are joined by an additional class representative, the State-Boston Retirement System, which “is the actuarial pension system of the City of Boston.” (SAC ¶ 37(b).) These large institutional investors purport to bring this action “on behalf of all persons and entities who purchased or otherwise acquired common stock of Take-Two” between December 17,

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2002, and July 10, 2006 (the “Class Period”). (SAC ¶ 1.)

The SAC names both corporate and individual defendants. The corporate defendants are Take-Two and Rockstar. Take-Two is a public company whose stock is traded on the Nasdaq National Market (“NASDAQ”). Among other things, Take-Two “manufactures and markets video games and video game accessories.” (SAC ¶38.) Rockstar, a wholly-owned subsidiary of Take-Two, develops video games for publication and distribution by its parent corporation. Rockstar is affiliated with another of Take-Two’s wholly-owned subsidiaries, Rockstar North Ltd., the entity that created the popular video game distributed by Take-Two,

Grand Theft Auto: San Andreas

(“GTA:SA”). (SAC ¶ 39.)

The SAC names eight individual defendants, all of whom are former and current officers and directors of Take-Two and Rockstar: Paul Eibeler (“Eibeler”) was the Chief Executive Officer (“CEO”) of Take-Two from January 2005 through March 2007, the President of Take-Two from July 2000 through June 2003 and again from April 2004 through March 2007, and a director of Take-Two from December 2000 through February 2003. (SAC ¶ 40(a).) Karl Winters (“Winters”) was Chief Financial Officer (“CFO”) of Take-Two from February 2002 until April 2007. (SAC ¶ 41(a).) Ryan Brant (“Brant”) founded Take-Two and acted as the Company’s Chairman and CEO until March 2004. From March 2004 through October 2006, Brant was Take-Two’s Vice President of Publishing. (SAC ¶ 42(a).) Sam Houser (“Houser”) is, and at all times relevant to this action was, the President and co-founder of Rockstar. (SAC ¶ 43.) Terry Donovan (“Donovan”) is, and at all times relevant to this action was, the CEO of Rockstar. (SAC ¶ 44.) Robert Flug (“Flug”) was a director of Take-Two from February 1998 through March 2007. Flug was also a member of the compensation committee of Take-Two’s board of directors (the “Compensation Committee”) from 2000 through December 2006, and the Chairman of that committee between 2004 and December 2006. (SAC ¶45.) Oliver Grace, Jr. (“Grace”) was a director of Take-Two from April 1997 through March 2007, and a member of the Compensation Committee from 2000 until December 2006. (SAC ¶ 46.) Todd Emmel (“Emmel”) was a member of Take-Two’s board of directors from February 2002 through March 2007, and a member of the Compensation Committee between 2002 and 2003. (SAC ¶ 47.)

C. Factual Allegations

The SAC avers that Defendants made material misrepresentations and omissions concerning: (1) Take-Two’s compliance with the ESRB’s rules in the rating of

GTA:SA

(the

“GTA:SA

Fraud”); and (2) Take-Two’s compliance with its stock-option plans and accounting for stock-option grants to several officers and directors (the “Options Backdating Fraud”). The following sections outline the SAC’s factual allegations with respect to these two largely distinct frauds.

1. The

GTA:SA

Fraud

Take-Two publishes video games widely known for their adult themes. (SAC ¶¶ 117-18.) Take-Two’s most successful product is the

Grand Theft Auto

video game series, which accounted for thirty-four to forty percent of Take-Two’s annual revenues from 2002 through 2005. (SAC ¶ 121.) Since its initial release in 1998 (SAC ¶ 21), the

Grand Theft Auto

series has featured violence, profanity, and illegal behavior

(see

SAC ¶ 23).

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On March 1, 2004, Take-Two announced the release of the next installment in the

Grand Theft Auto

series,

GTA:SA

(SAC ¶ 122.) Throughout the summer of 2004, several Rockstar employees, including defendants Houser and Donovan, discussed the inclusion of explicit sexual content in

GTA:SA

(SAC ¶¶ 123, 125.) Among the sexual scenes considered for inclusion in

GTA:SA

was a highly-developed, participatory minigame that allowed players to control one of the video game’s characters as he performed sexual acts (the “Sex Minigame”). (SAC ¶ 23.) After substantial deliberation involving Rockstar employees, including defendants Houser and Donovan, as well as one Take-Two employee, defendant Brant (SAC ¶¶ 125, 133— 40), the decision was made to exclude the Sex Minigame from available game play in the final version of

GTA:SA

(SAC ¶ 140).

This decision was based at least in part on concerns, raised by defendants Houser and Donovan, regarding the rating that the ESRB would bestow upon

GTA:SA.

(SAC ¶ 133.) The ESRB is a self-regulatory organization established to provide guidance for retailers and consumers in stocking and purchasing video games. (SAC ¶ 128.) The ESRB assigns rating categories to each game it evaluates, ranging from the least restrictive, “Early Childhood,” to the most restrictive, “Adults Only” (“AO”). (SAC ¶ 129.) If a game is rated “AO,” large retailers such as Wal-Mart, Circuit City, and Best Buy will not sell it (SAC ¶ 130), thereby closing important distribution channels to the game’s vendor (SAC ¶¶ 130, 134). Various Rockstar employees, including defendants Houser and Donovan, expressed concern in the months leading up to the release of

GTA:SA

that the Sex Minigame, as well as other graphic sexual content, would cause the ESRB to assign

GTA:SA

an “AO” rating. (SAC ¶¶ 134, 135, 137.) The Sex Minigame was thus excluded from normal game play in the final version of

GTA:SA.

(SAC-¶¶ 133,140.)

Completely eliminating the Sex Mini-game from

GTA:SA’s

code would have been costly. The deletion of code from a video game is a time-consuming and potentially expensive process. (SAC ¶¶ 25-26, 140^41.) Indeed, because various sections of a game’s code often interact, the deletion of one section of code may have undesired consequences for other sections. (SAC ¶ 141.) In order to obviate the potential shortcomings of deletion, the code for the Sex Minigame was rendered inaccessible through an alternative process known as “wrapping.” (SAC ¶¶ 140-41.) Unlike deleted code, “wrapped” video game code remains on the game disc. (SAC ¶ 140.) Nonetheless, a video game user cannot access wrapped code without deliberately modifying the game’s code. (SAC ¶¶ 140,145.)

Notwithstanding the presence of the wrapped Sex Minigame in GTA:SA’s code, Take-Two did not disclose the content of the Sex Minigame to the ESRB when it submitted

GTA:SA

for rating. (SAC ¶ 143.) In September 2004, the ESRB assigned the Playstation 2 (“PS2”) version of

GTA:SA

a rating of “Mature 17+” (“M”), which is one rating level below the undesired “AO.” (SAC ¶¶ 143, 130.) The PS2 version of

GTA:SA,

which was released on October 25, 2004, also sold under the rating “M” (SAC ¶ 168), as did the personal computer (“PC”) version of

GTA.SA

which was released on June 7, 2005 (SAC ¶ 169).

On June 9, 2005, a modification (“mod”) that unlocked the Sex Minigame became available on the PC version of

GTA:SA.

(SAC ¶¶ 30, 169.) Apparently, the mod was also made available on the PS2 and X-Box versions of

GTA:SA

some time shortly thereafter. (SAC ¶¶ 163-65; 172.) The

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mod was referred to as “Hot Coffee” because the Sex Minigame commenced with the game’s protagonist accepting a woman’s invitation into her home for coffee. (SAC ¶ 30.) “Hot Coffee” had circulated widely by late June 2005, prompting the initiation in early July of an ESRB investigation into the re-rating of

GTA:SA.

(SAC ¶¶ 170-71.) On July 20, 2005, the ESRB announced that it had re-rated

GTA:SA

as “AO” in light of the “Hot Coffee” mod. (SAC ¶ 175.) Immediately thereafter, retailers such as Best Buy, Circuit City, and Wal-Mart pulled

GTA:SA

from their shelves, and Take-Two dramatically reduced its revenue and earnings projections for the remainder of the 2005 fiscal year. (SAC ¶ 32.) On July 21, 2005, one day following the re-rating of

GTA:SA,

Take-Two’s stock dropped 4.9% on trading volume that was five times the average. (SAC ¶ 177.) Various local, state, federal, and foreign governmental entities announced investigations into the rating and sale of

GTA:SA

in the weeks and months that followed. (SAC ¶¶ 178-83.) The price of Take-Two stock dropped precipitously shortly after the announcements of two of these investigations. (SAC ¶¶ 323-24.)

Throughout the Class Period, Take-Two issued various public statements asserting that it complied with the ESRB’s rating rules and requirements. (SAC ¶¶ 185, 222, 227, 232, 233.) Lead Plaintiffs assert that these public statements were false and misleading because Take-Two had violated the ESRB’s rules by failing to divulge the presence of the wrapped Sex Minigame in GTA:SA’s code. (SAC ¶¶ 235, 261, 273.) Lead Plaintiffs also aver that Defendants knew these statements to be false (SAC ¶¶ 235, 261, 273), in part because of the allegedly clear requirements of the ESRB submission process, but also because of certain facts about the market for Take-Two’s products. In particular, the fan base for the

Grand Theft Auto

video game series includes knowledgeable computer programmers who routinely engage in the development of mods. (SAC ¶ 145.) Moreover, Rockstar’s official webpage for

GTA:SA

lists a number of websites that prominently feature mods and expressly refers to such sites as sources of mods. (SAC ¶ 148.) Accordingly, Lead Plaintiffs aver that Defendants knew and intended that the Sex Minigame would become widely accessible, despite its wrapping. (SAC ¶¶ 144, 166;

see also

SAC ¶ 159.)

2. The Options Backdating Fraud

From 1997 through 2005, Take-Two issued stock options to certain of it officers and directors. (SAC ¶ 70.) The Company made these stock-option grants pursuant to two Stock Option Plans, which each provided that the exercise price at which shares of Take-Two common stock could be purchased would not be less than 100% of the fair market value of Take-Two shares on the grant date. (SAC ¶¶ 62-64.) In its annual reports to the Securities and Exchange Commission (the “SEC”) during the Class Period, Take-Two stated that it accounted for these stock-option grants in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”). (SAC ¶ 66.) That Opinion requires a company to record a compensation cost when an option is accorded an exercise price below the market value of the shares on the grant date. (SAC ¶ 108.)

Despite these public representations, during the Class Period “the dates of stock option grants to insiders at Take-Two were routinely manipulated to fall on days with the lowest stock prices.” (SAC ¶ 71.) A special committee of Take-Two’s board of directors (the “SC”) concluded in a report published on January 22, 2007, that defendant Brant had controlled the company’s options-granting process and had en

*258

gaged in a pattern of options backdating between April 1997 and August 2003. (SAC ¶ 84.) On February 14, 2007, the Manhattan District Attorney’s Office announced that Brant had pleaded guilty to falsifying Take-Two’s business records in furtherance of widespread options backdating. (SAC ¶ 85.) On that same date, the SEC announced that it had filed and settled civil charges against Brant for granting undisclosed, “in the money”

stock options to himself and to other Take-Two officers and employees. (SAC ¶ 88.)

The beneficiaries of Take-Two’s pattern of options backdating included not only Brant, but also defendants Eibeler, Flug, Grace, and Emmel. (SAC ¶¶ 77, 80.) On February 23, 2007, Take-Two announced that certain options issued to defendants Flug, Grace, and Emmel had been improperly dated, and that these individuals had entered into an agreement to repay improper stock-option compensation. (SAC ¶¶ 92, 95.) On February 28, 2007, Take-Two issued its Form 10-K for fiscal year 2006, which reported that although Brant was primarily responsible for Take-Two’s options backdating, certain past employees and past members of management had assisted him. (SAC ¶¶ 96-97.) The 2006 Form 10-K also stated that the Compensation Committee, which included defendants Flug, Grace, and Emmel, had abdicated its responsibilities in the options-granting process. (SAC ¶ 98.)

According to Lead Plaintiffs, the existence of widespread options backdating at Take-Two rendered false and misleading various material statements made in Take-Two’s public disclosures during the Class Period. First, contrary to its public statements, Take-Two “did not grant employee stock options at 100% of the fair market value on the date of grant.” (SAC ¶¶ 192(a), 210(a), 234(a), 260(a), 272(a).) Second, Take-Two “did not account for employee stock options in compliance with APB 25” (SAC ¶¶ 192(b), 210(b), 234(b), 260(b), 272(b)) because it did not take compensation expenses for “in the money” options grants.

(See

SAC ¶¶ 108-10.) Third, “by reason of its improper accounting for employee stock options, [Take-Two] materially understated compensation expenses and materially overstated net income.” (SAC ¶¶ 192(c), 210(c), 234(c), 260(c), 272(c).) In fact, Take-Two’s earnings were overstated by 20% in fiscal year 2002, 11% in fiscal year 2003, and 5-6% in fiscal years 2004 and 2005. (SAC ¶ 99.)

D. Legal Claims

The SAC recites four counts of securities fraud:

Count I of the SAC alleges that Defendants made materially misleading statements and omissions throughout the Class Period, thereby deceiving the investing public into purchasing shares of Take-Two common stock at inflated prices, in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder. (SAC ¶ 330-31.) Count I is premised upon the alleged misleading statements that underlie both the

GTA:SA

Fraud and the Options Backdating Fraud, as described in the preceding sections.

(See

SAC ¶¶ 336-42.)

Count II asserts claims against defendants Brant, Eibeler, and Winters for control-person liability under Section 20(a) of the Exchange Act. (SAC ¶ 348.) According to Count II, these defendants influenced and controlled Take-Two in its perpetration of the

GTA:SA

Fraud and

*259

the Options Backdating Fraud. (SAC ¶ 349.)

Count III advances control-person claims under Section 20(a) of the Exchange Act against defendants Take-Two, Donovan, and Houser. (SAC ¶ 353.) Count III alleges that these defendants influenced and controlled Rockstar in its involvement in the

GTA:SA

Fraud. (SAC ¶ 354.)

Count IV avers that defendants Winters, Flug, and Grace violated Section 20A(a) of the Exchange Act by selling Take-Two common stock while in possession of material, adverse, non-public information regarding the

GTA:SA

Fraud. (SAC ¶¶ 358-60.)

Defendants have moved, under Federal Rules of Civil Procedure 12(b)(6) and 9(b), and under the PSLRA, to dismiss all four counts of the SAC for failure to state a claim upon which relief can be granted.

II. DISCUSSION

In ruling upon a motion to dismiss an action for securities fraud, courts must accept the complaint’s allegations as true,

Tellabs, Inc. v. Makor Issues & Rights, Ltd.

— U.S.-, -, 127 S.Ct. 2499, 2509 , 168 L.Ed.2d 179 (2007), and draw all reasonable inferences in the plaintiffs favor,

Caiola v. Citibank, N.A.,

295 F.3d 312, 321 (2d Cir.2002). In addition to the complaint and reasonable inferences drawn therefrom, courts “may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.”

ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,

493 F.3d 87, 98 (2d Cir.2007). Courts may also consider matters subject to judicial notice.

Tellabs,

127 S.Ct. at 2509 (citation omitted).

Under Rule 12(b)(6), the touchstone for adequate pleading is plausibility.

Bell Atl. Corp. v. Twombly,

— U.S.-,-, 127 S.Ct. 1955, 1974 , 167 L.Ed.2d 929 (2007);

see also

15 U.S.C. § 78u-4(b)(2) (setting forth PSLRA’s “strong inference” requirement). An inference of scienter may be predicated upon “facts (1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness.”

ATSI Commc’ns,

493 F.3d at 99 (citing

Ganino v. Citizens Utils. Co.,

228 F.3d 154 , 168-69 (2d Cir. 2000)). That inference is “strong,” however, only if it is cogent and at least as plausible as nonculpable explanations for the defendant’s conduct.

Tellabs,

127 S.Ct. at 2510 . For the reasons that follow, the Court finds that the SAC fails to allege sufficient facts giving rise to an inference of scienter with respect to any defendant other than Winters. Moreover, with regard to defendant Winters, whatever inference of scienter may be drawn in Lead Plaintiffs’ favor is not “strong,” within the meaning of the PSLRA. Thus, the Court holds that Lead Plaintiffs have not adequately pleaded that any defendant acted with the requisite scienter.

a. The SAC Inadequately Pleads Scienter With Respect to Brant, Houser, and Donovan

Although the Court has already determined that the misstatements in Take-Two’s 2004 and 2005 Forms 10-K are not attributable to defendants Brant, Houser, and Donovan,

see supra

Part II.A.1.Ü, it nonetheless addresses the scienter allegations made against these defendants in order to inform the parties’ arguments concerning Lead Plaintiffs’ anticipated motion to amend the SAC. Lead Plaintiffs claim that they have pleaded scienter with respect to Brant, Houser, and Donovan by way of adequate “motive and opportunity” allegations, or, alternatively, through sufficient averments constituting strong circumstantial evidence of conscious misbehavior or recklessness. (Pis.’ Opp’n 65-70, 72-76.) Upon close inspection, however, Lead Plaintiffs’ allegations are far too general to give rise to an inference of scienter under either theory.

(1) The SAC Insufficiently Alleges That Houser, Donovan, and Brant Possessed a Motive to Commit Fraud

To allege motive, a complaint must identify “concrete benefits that could be realized by one or more of the false statements and wrongful disclosures alleged.”

Shields v. Citytrust Bancorp, Inc.,

25 F.3d 1124, 1130 (2d Cir.1994);

see also

SAC ¶ 313.) Furthermore, Flug made similar sales of Take-Two stock in June 2003,

(see

Flug SEC Forms 4, July 3, 2003), and Emmel made larger sales of Take-Two stock in September 2003,

see

Emmel SEC Form 4, Sept. 5, 2003, long before the alleged publication of misstatements regarding

GTA:SA.

The SAC makes no attempt to demonstrate that the pertinent sales by Flug and Emmel were unusual, given them relatively small size, and the occurrence of similar sales during seemingly innocuous periods of time.

Under these circumstances, and given Lead Plaintiffs’ failure to allege facts demonstrating that the sale of stock by Em-mel, Flug, and Grace was in any way “unusual,” the Court finds that Lead Plaintiffs have failed to plead motive with respect to these defendants.

See, e.g., Ma-lin,

499 F.Supp.2d at 153 (holding that sales of 6.83%, 14.42%, and 30.84% of total stockholdings were not unusual);

In re eSpeed,

457 F.Supp.2d at 291 (holding that sales of 10.9% and 17.4% of holdings were not unusual);

In re Keyspan Corp. Sec. Litig.,

383 F.Supp.2d 358, 382-83 (E.D.N.Y.2003) (holding that sales of less than 20% of total stockholdings were not unusual).

Therefore, Lead Plaintiffs

*277

have failed to allege facts giving rise to an inference that Emmel, Flug, and Grace acted with scienter.

d. The SAC Inadequately Pleads Winters’s Scienter

Lead Plaintiffs also rely upon CFO Winters’s alleged insider stock sales in order to demonstrate that he possessed the “motive and opportunity” to commit fraud. For the reasons that follow, Lead Plaintiffs have minimally alleged sufficient motive and opportunity allegations to support an inference that Winters acted with scienter. Nevertheless, the Court holds that this inference is not “strong,” within the meaning of the PSLRA, because it is not as compelling as competing, nonculpable explanations for Winters’s conduct.

(1) The SAC Adequately Alleges Winters’s Motive and Opportunity to Commit Fraud

As an initial matter, the Court notes, and Winters apparently concedes, that he possessed the opportunity to commit fraud through the exercise of his powers as Take-Two’s CFO during the relevant time period.

See, e.g., In re Geopharma, Inc. Sec. Litig.,

411 F.Supp.2d 434, 441 (S.D.N.Y.2006) (presuming that corporate officers possess opportunity to commit fraud). With respect to Winters’s motive, the SAC avers that he sold 112,000 shares of Take-Two stock on March 12, 2005, for proceeds of $4,459,439, and 50,000 shares of Take-Two stock on June 14, 2005, for proceeds of $1,438,500. (SAC ¶ 311.) The SAC also alleges that these sales represented 85% of Winters’s holdings during the Class Period. (SAC ¶ 312.) Lead Plaintiffs aver that these allegations give rise to a strong inference of scienter. (SAC ¶ 314.)

Lead Plaintiffs’ allegations respecting Winters’s motive suffer from some of the same deficiencies that characterize their allegations with respect to Emmel, Flug, and Grace. In particular, the SAC fails to specify the actual profits, as opposed to total proceeds, of Winters’s sales. Moreover, the SAC neglects to contrast Winters’s stock sales during the Class Period with sales he made during other comparable periods of time. These deficiencies notwithstanding, Lead Plaintiffs’ motive allegation with respect to Winters are minimally sufficient to give rise to an inference of scienter. In reaching this conclusion, the Court relies upon two principal considerations that separate Winters on the one hand from Emmel, Flug, and Grace on the other. First, the Court’s review of Take-Two’s SEC filings reveals that Winters, unlike Emmel, Flug, and Grace, sold far more shares during the Class Period than he sold during previous time periods,

see, e.g.,

Winters SEC Form 4, Sept. 5, 2003 (reporting sale of 10,000 shares); Winters SEC Form 4, Oct. 12, 2004 (reporting sale of 5,000 shares). Second, and most significantly, the SAC alleges that Winters sold 85% of his holdings during the Class Period (SAC ¶ 312), but makes no similar allegation with respect to Emmel, Flug, and Grace. Under these circumstances, and although the SAC’s motive allegations with respect to Winters are not without their shortcomings, Lead Plaintiffs have advanced sufficient factual allegations to establish Winters’s motive to commit fraud.

See, e.g., In re Scholastic,

252 F.3d at 75

*278

(holding that plaintiffs adequately pleaded scienter through allegations that defendant sold over 80% of his holdings during few-day period, after long period without any sales whatsoever). Therefore, Lead Plaintiffs’ factual allegations give rise to an inference that Winters possessed the requisite scienter to commit securities fraud.

(2) The SAC’s Proposed Inference of Scienter Is Not as Compelling as Competing Nonculpable Explanations

Although Lead Plaintiffs have pleaded facts giving rise to an inference of scienter, the Court must nonetheless determine whether that inference is “strong,” in light of competing, nonculpable explanations for Winters’s conduct.

Tellabs,

127 S.Ct. at 2510 . Here, Winters contends that the most compelling inference arising from the facts alleged is that he did not know of the Sex Minigame or that its inclusion in

GTA:SA’s

code violated the ESRB’s rules, and sold his stock for reasons having nothing to do with the “Hot Coffee” mod. (Winters Reply 7-8.) As explained in greater detail below, the Court agrees largely with Winters’s position. Even assuming

arguendo

that Winters may be charged, under a “core business” theory, with knowledge of the existence of the Sex Minigame,

see In re Atlas,

324 F.Supp.2d at 489 , Lead Plaintiffs’ proposed culpable inference is less compelling than the inference that Winters was unaware of Take-Two’s alleged noncompliance with the ESRB’s rules.

Lead Plaintiffs’ allegations of Winters’s motive are significantly attenuated. First, Lead Plaintiffs do not allege the amount of profit garnered by Winters through the stock sales in question, nor do they contrast the volume of Winters’s sales during the Class Period with his sales during other comparable periods of time. Even if such allegations are not strictly necessary, their omission weakens Lead Plaintiffs’ “strong inference” claim.

Second, the alleged conduct of other defendants to this action undercuts Lead Plaintiffs’ motive allegations. For instance, Take-Two’s CEO, defendant Eibeler, actually acquired 50,000 shares of Take-Two stock,

see

Eibeler SEC Form 4, June 16, 2005, at nearly the same time that Winters allegedly engaged in insider sales (SAC ¶ 312). Furthermore, as the Court determined

supra,

Part II.A.l.iii.c, defendants Emmel, Grace, and Flug did not engage in unusual insider sales during the Class Period. Likewise, Lead Plaintiffs have failed to allege that the defendants most intimately involved in the development of

GTA:SA, ie.,

defendants Brant, Houser, and Donovan

(see, e.g.,

SAC ¶¶ 133-41), owned or sold any shares of Take-Two stock during the Class Period.

These considerations, taken in the aggregate, cast doubt upon Lead Plaintiffs’ aver-ments concerning Winters’s alleged motive to commit fraud.

See, e.g., San Leandro Em. Med. Grp. Profit Sharing Plan v. Philip Morris Cos.,

75 F.3d 801, 814 (2d Cir.1996) (“[T]he fact that other defen

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dants did not sell their shares during the relevant class period sufficiently undermines plaintiffs’ claim regarding motive.”);

Malin,

499 F.Supp.2d at 153 (holding that defendant CEO’s sale of only 6.83% of his shares during relevant period undermined inference of scienter with respect to other defendants);

In re eSpeed,

457 F.Supp.2d at 291 (holding that complete absence of sales by two of four defendants during relevant period undercut inference of scienter with respect to two defendants who sold shares);

In re Keyspan,

383 F.Supp.2d at 383-84 (holding that CEO’s failure to make stock sales during one of two alleged “sell-off’ periods attenuated inference of scienter as to other defendants).

Third, the timing of Winters’s stock sales weakens Lead Plaintiffs’ showing of motive. The alleged false statement upon which Lead Plaintiffs attempt to predicate Winters’s liability was first made in Take-Two’s Form 10-K (SAC ¶ 232), which was filed with the SEC on December 22, 2004 (SAC ¶ 229). The falsity of that statement was allegedly publicized on July 20, 2005, when Take-Two announced that the ESRB had concluded its investigation and had decided to change

GTA:SA’s

rating from “M” to “AO.” (SAC ¶¶314, 320.) Nevertheless, the bulk of Winters’s sales during the intervening period of time occurred on March 11, 2005, when he sold 112,000 shares of Take-Two stock, for net proceeds of approximately $4.5 million. (SAC ¶ 311.) These figures represent nearly 70% of the total shares that Winters sold during the relevant time period, and more than 75% of the total proceeds received from those sales. (SAC ¶ 311.) The lapsing of nearly three months between Take-Two’s issuance of the alleged false statement and the lion’s share of Winters’s stock sales, and of approximately four months between these substantial sales and the revelation of the alleged falsity, inescapably attenuates any inference of scienter that may be drawn in Lead Plaintiffs’ favor.

See In re Axis,

456 F.Supp.2d at 595-96 ;

Frazier v. Vital-Works, Inc.,

341 F.Supp.2d 142, 161-62 (D.Conn.2004) (holding that insider trading was not so suspicious as to give rise to inference of scienter because most trading took place in spring, at time far removed from October revelation of falsehoods);

In re Keyspan,

383 F.Supp.2d at 385 (ruling,

inter alia,

that passage of four to six weeks between alleged false statement and sales negated inference that defendants were attempting to “reap the immediate benefit of’ false statement) (citation omitted);

Ressler,

75 F.Supp.2d at 60 (holding that six-month gap between issuance of majority of false statements and insider trading undercut-inference of scienter).

Winters’s other stock sales during the relevant time period occurred on June 14, 2005, nearly six months after the alleged false statement appeared in Take-Two’s 2004 Form 10-K, and over one month before the alleged falsity of that statement was revealed to the market. Although these sales transpired closer in time to the announcement of

GTASA’s

re-rating than did the March 11 sales, they were much smaller in number of shares sold and proceeds received, thereby undermining their relevance to the motive analysis.

See Frazier,

341 F.Supp.2d at 161-62 (holding that insider sales were not unusual where bulk of sales occurred at time several months before revelation of falsity, and only comparatively smaller sales occurred at time closer to revelation). Moreover, Lead Plaintiffs’ attempts to explain why Winters would have been motivated to sell on June 14, 2005, more than a month before the alleged falsity in Take-Two’s 2004 10-K came to light, are unpersuasive. Specifically, Lead Plaintiffs refer to an email received by defendant Donovan on

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June 10, 2005, which reported discussion of the “Hot Coffee” mod on a modder website. (SAC ¶ 314.) Nevertheless, Lead Plaintiffs fail to allege that this e-mail, or its contents, ever reached any Take-Two employee, let alone Winters. Nor do Lead Plaintiffs explain why knowledge of an email received by an officer of Rockstar should be imputed to an officer of that company’s parent, Take-Two. The same may be said for the e-mail written by Houser on June 14, 2005, which concerns the wrapping of the Sex Minigame. (SAC ¶ 141.)

Furthermore, the long passage of time between the issuance of Take-Two’s 2004 Form 10-K and Winters’s June 14 sales undermines the cogency of Lead Plaintiffs’ scienter allegations. Insider sales are relevant to the motive analysis because they may show that the defendant had reason to make a false statement,

i.e.,

that the defendant made a false statement in order to inflate stock prices so that he could profit from stock sales.

See In re Scholastic,

252 F.3d at 74 . Although Winters’s stock sales in June 2005 may be probative of what he knew or believed about Take-Two at that time, they reveal comparatively little about Winters’s state of mind six months earlier, when he allegedly issued a false statement in Take-Two’s Form 10-K.

See In re Keyspan,

383 F.Supp.2d at 385 ;

Ressler,

75 F.Supp.2d at 60 .

Given the holes in Lead Plaintiffs’ motive allegations, the alleged conduct of other defendants to this action, and the timing of Winters’s stock sales, Lead Plaintiffs have put forward only an attenuated case for Winters’s motive. As such, the inference of scienter Lead Plaintiffs ask the Court to draw therefrom is correspondingly attenuated as well.

Against Lead Plaintiffs’ tenuous showing of Winters’s scienter, the Court must weigh nonculpable explanations for his conduct. As previously discussed,

see supra

Part II.A.l.iii.a, the ESRB’s rules regarding the submission of wrapped conduct were significantly ambiguous. This ambiguity counsels against a culpable reading of Winters’s — or any other defendant’s — actions. That is, Take-Two’s representation that it complied with the ESRB’s rules is most plausibly understood as a reasonable, though perhaps ultimately mistaken, interpretation of ambiguous rules.

Indeed, Lead Plaintiffs’ allegations undermine any sinister reading of Winters’s conduct. In particular, the SAC avers that Defendants wrapped the Sex Mini-game in order to prevent

GTA.SA

from receiving an “AO” rating, while also avoiding delay and additional costs. (SAC ¶¶ 133-36; 139-40.) The SAC also clarifies that “wrapping” makes relevant code “inaccessible” during regular game play. (SAC ¶ 140.) Absent an averment that wrapping is anything but an ordinary programming technique, or an averment that modders previously had unlocked wrapped content in other video games, Lead Plaintiffs’ allegations suggest only that the Sex Minigame was wrapped primarily for legitimate business motives, and in an effort to ensure compliance with the ESRB’s rules. On this more plausible theory, Winters represented in Take-Two’s Forms 10-K that the company had complied with the ESRB’s rules because reasonable steps had been taken to ensure that Take-Two did so comply.

Therefore, the most compelling interpretation of the facts alleged is that Winters represented that Take-Two had complied with the ESRB’s rules because that was either the literal truth, or an eminently reasonable interpretation of the events that had occurred. As such, Lead Plaintiffs have failed to plead facts giving rise to

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a strong inference that Winters acted with scienter.

e. The SAC Inadequately Pleads Scienter With Respect to Take-Two and Rockstar

A corporation’s scienter necessarily derives from the state of mind of its employees.

See In re Marsh & Mclennan,

501 F.Supp.2d at 481 (citing

Suez Equity Investors, L.P. v. Toronto-Dominion Bank,

250 F.3d 87, 101 (2d Cir.2001)). Nevertheless, “[t]o carry their burden of showing that a corporate defendant acted with scienter, plaintiffs in securities fraud cases need not prove that any one individual employee of a corporate defendant also acted with scienter. Proof of a corporation’s collective knowledge and intent is sufficient.”

In re WorldCom, Inc. Sec. Litig.,

352 F.Supp.2d 472, 497 (S.D.N.Y. 2005). Here, Lead Plaintiffs have not adequately alleged scienter with respect to any of the individual defendants.

See supra

Part ILAl.iii.a-d. Although this failure is not dispositive of Take-Two’s or Roekstar’s scienter, Lead Plaintiffs have nonetheless failed to plead scienter with respect to the corporate defendants for many of the same reasons that they have failed to plead the individual defendants’ scienter.

Most importantly, Lead Plaintiffs’ allegations fail to give rise to an inference that Take-Two and Rockstar employees, individually or collectively, were aware that wrapped content was subject to mandatory disclosure, or were reckless with respect to that alleged fact. Although the fiction of “collective knowledge” permits the conclusion that Take-Two and Rockstar knew of the wrapped Sex Minigame in

GTA:SA’s

code, that knowledge did not contradict— or even undermine — Take-Two’s statement that it had complied with the ESRB’s rating requirements. Indeed, Lead Plaintiffs have failed to allege that any of the contemporaneous information available to Take-Two and Rockstar employees, including the ESRB’s rules themselves, contradicted Take-Two’s statement that it had complied with the ESRB’s rules. On the pleadings before the Court, Take-Two’s statement that it complied with the ESRB’s rules is most naturally interpreted as a reasonable resolution of ambiguous regulatory language, not as a reckless or knowing falsehood. This is especially true because Take-Two and Rockstar stood to gain very little from the fraud alleged by Lead Plaintiffs, other than the postponement of “an inevitable day of reckoning” when the Sex Minigame became public.

Shields,

25 F.3d at 1130 ;

see also

SAC ¶ 324.) Second, on July 10, 2006, Take-Two revealed that it had received notice that the SEC was “conducting an informal non-public investigation into certain stock option grants made by the Company from January 1997 to the present” (the “July 10 Disclosure”). (Pis.’ Opp’n 27-28;

see also

SAC ¶ 325.) Lead Plaintiffs have adequately linked the July 10 Disclosure to a significant diminution in the price of Take-Two common stock, but have failed to do so with respect to the June 26 Disclosure. Thus, the Court finds that Lead Plaintiffs have pleaded loss causation only in relation to the July 10 Disclosure.

a. Loss Causation May Not Be Predicated upon the June 26 Disclosure

In order to form an adequate basis for loss causation, a given disclosure

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need not emanate from a particular source, “take a particular form[,] or be of a particular quality.”

In re Winstar Commc’ns,

01 Cv. 3014, 01 Cv. 11522(GBD), 2006 WL 473885 , at *14 (S.D.N.Y. Feb. 27, 2006). Thus, loss causation may be predicated upon brief, publicly-disclosed, third-party analyses of a company’s financials, which contradict representations made by defendants.

Id.

at *15. Loss causation may also be grounded in disclosures couched as opinions, or in other statements that are not “verifiably truthful” at the time they are made.

Id.

Furthermore, loss causation may be premised on partial revelations that do not uncover the complete extent of the falsity of specific prior statements.

See In re Motorola Sec. Litig.,

505 F.Supp.2d 501, 533 (N.D.Ill.2007).

Nevertheless, a particular disclosure constitutes a sufficient foundation for loss causation allegations only if it somehow reveals to the market that a defendant’s prior statements were not entirely true or accurate.

See, e.g., In re eSpeed,

457 F.Supp.2d at 297

(“Dura

imposed no requirement that corrective disclosures emanate from the company itself, so

long as the truth is disclosed in some fashion.”)

(emphasis added);

In re Worldcom, Inc. Sec. Litig.,

02 Cv. 3288(DLC), 2005 WL 375314 , at *6 (S.D.N.Y. Feb. 17, 2005) (“A concealed fact cannot cause a decrease in the value of a stock before the concealment is made public.”). That is, the disclosure must possess a sufficient nexus to a prior misstatement such that it reveals at least part of the falsity of that misstatement.

See, e.g., In re AOL Time Warner,

503 F.Supp.2d at 679 (“Without providing a nexus between the alleged fraud and their losses, either by demonstrating the materialization of a concealed risk or the existence of a corrective disclosure, the plaintiffs fail to plead loss causation ----”);

cf. Dura,

544 U.S. at 347 , 125 S.Ct. 1627 (a complaint must provide “some indication of the loss and the

causal connection

that the plaintiff has in mind”) (emphasis added). Here, because the June 26 Disclosure was insufficiently linked to Take-Two’s earlier misrepresentations regarding its options-granting process, that disclosure cannot form an adequate basis for Lead Plaintiffs’ loss causation allegations.

On June 26, 2006, Take-Two announced that it had received grand jury subpoenas from the Manhattan District Attorney’s Office requesting the production of documents that pertained 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

[GTA:SA

], the submission of

[GTA:SA

] to the [ESRB] 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.

(Wohl Deck Ex. 5.)

The only references in this announcement that arguably relate to Take-Two’s prior statements regarding

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its options-granting process are those made to “certain compensation and human resources documents” and to “documents concerning the activities of the Company’s Board of Directors and Committees thereof.” The announcement makes no mention of options, options backdating, or the manner in which Take-Two accounted for its options grants. Therefore, on its face the June 26 Disclosure did not cure or undermine Defendants’ past misrepresentations concerning Take-Two’s options grants. That is, the language of the June 26 Disclosure did not provide investors with enough information to conclude even that the Manhattan District Attorney’s Office would be investigating Take-Two’s options-granting process, let alone that the company’s prior statements regarding that process were in some way false.

See Payne v. DeLuca,

433 F.Supp.2d 547, 609 (W.D.Pa.2006) (holding that plaintiffs inadequately pleaded loss causation because “the content of the press release would not [have] alerted investors that the Company had been perpetrating a fraudulent scheme”).

In this regard, the present case is distinguishable from the principal case upon which Lead Plaintiffs rely,

In re Bradley Pharmaceuticals.

In that case, the plaintiffs alleged that the defendant corporation had entered into a “sham” sale of Deeona-mine Syrup in order to boost its revenues.

In re Bradley Pharms., Inc. Sec. Litig.,

421 F. Supp 2d 822, 824 (D.N.J.2006). Several months after the alleged sale, the corporation announced that the SEC had requested certain revenue recognition documents in furtherance of an informal investigation of violations of the federal securities laws.

Id.

at 824-25. The court held that the plaintiffs’ allegation that the defendant corporation’s share price dropped 26% after this announcement was sufficient to plead loss causation.

Id.

at 828.

The SEC’s announced investigation in

In re Bradley Pharmaceuticals

dealt with the same subject matter- — -albeit, more generally — as did the alleged fraud, i.e., the defendant corporation’s revenue recognition.

See In re Motorola,

505 F.Supp.2d at 548 (discussing

In re Bradley Pharmaceuticals

). Here, there is a more distant relationship between the subject of the Manhattan District Attorney’s announced investigation — Take-Two’s general compensation practices — and the subject of the alleged fraud — Take-Two’s options-granting practices. Moreover, the SEC’s announced investigation in

In re Bradley Pharmaceuticals

expressly involved violations of the federal securities laws, which obviously called into question the defendants’ prior representations. 421 F.Supp.2d at 824-25. The announced investigation in the instant case, however, made no mention of securities law violations, nor does an investigation by the Manhattan District Attorney’s Office invariably involve prior public misrepresentations. Thus, the nexus between the disclosure and alleged fraud in this case is more tenuous than that in

In re Bradley Pharmaceuticals.

Lead Plaintiffs attempt to bolster their loss-causation allegations by noting one analyst’s observation, shortly after the Manhattan District Attorney’s Office made its document request, that the “request could be a look at the Company’s stock option activities.” (Wohl Decl. Ex. 6.)

That

*285

same analyst, however, stated that “[i]t’s unclear what the District Attorney is looking for exactly considering the wide ranging variety of the requested documentation. ...” (Wohl Deck Ex. 6.) Moreover, Lead Plaintiffs have not alleged that any other analysts or investors expressly drew a connection between the Manhattan District Attorney’s investigation and Take-Two’s options practices. Given the guarded terms of this analyst’s solitary conjecture concerning the possible subject of the Manhattan District Attorney’s investigation, Lead Plaintiffs have not plausibly alleged that the June 26 Disclosure revealed to the market any part of the falsity of Take-Two’s prior representations regarding its options grants.

Cf. Dura,

544 U.S. at 346-347 , 125 S.Ct. 1627 (finding complaint’s loss causation allegations inadequate because they failed to identify significant drop in share price “after the truth became known”).

For the same reason, the Court finds unpersuasive Lead Plaintiffs’ contention that it is irrelevant how investors understood the June 26 Disclosure at the time of its issuance, because it is undisputed that the Grand Jury investigation announced therein came to focus exclusively upon options backdating (Pis.’ Opp’n 31). The relevant inquiry for loss causation purposes is whether the disclosure in question made some part of a previously undisclosed truth known.

Dura,

544 U.S. at 346-47 , 125 S.Ct. 1627 ;

Lentell,

396 F.3d at 173 (to establish loss causation, plaintiffs must allege “that the misstatement or omission concealed something from the market that,

when disclosed,

negatively affected the value of the security”) (emphasis added). Thus, the pertinent inquiry trains on the most plausible understanding of a given disclosure at the time it was made. That the Manhattan District Attorney’s investigation came to focus on Take-Two’s options backdating has little bearing on whether the June 26 Disclosure revealed undisclosed information concerning the Company’s options-granting practices.

In light of the foregoing considerations, investors could not plausibly have understood the June 26 Disclosure to reveal any part of the falsity of Defendants’ alleged misrepresentations concerning Take-Two’s option-granting practices. Indeed, the primary thrust of the June 26 Disclosure centers on the Manhattan District Attorney’s request for documents related to the

GTA:SA

Fraud, not the Options Backdating Fraud.

Cf. Weiss v. Amkor Tech., Inc., 521

F.Supp.2d 938, 947 (D.Ariz.2007) (holding that plaintiff did not adequately plead loss causation in part because primary focus of pertinent disclosure was topic other than alleged fraud). Therefore, although Take-Two’s share price dropped 15% following the June 26 Disclosure (SAC ¶ 324), Lead Plaintiffs have not adequately alleged that any of this precipitous decline is attributable to the Options Backdating Fraud. To be sure, a plaintiff may plead loss causation without alleging a disclosure that precisely mirrors the substance of a prior undisclosed fraud.

See, e.g., In re Bristol-Myers Squibb Sec. Litig.,

00 Cv.1990(SRC), 2005 WL 2007004 , at * 20 (D.N.J. Aug. 17, 2005)

(“Lentell

cannot ... stand for the general proposition that an alleged corrective disclosure must be the linguistic mirror image of the alleged fraud....”). Nevertheless, if a plaintiff relies upon a particular disclosure as the basis for his loss causation allegations, that disclosure must somehow reveal to the market some part of the truth regarding the alleged fraud. On the facts

*286

alleged here, the nexus between the June 26 Disclosure and the Options Backdating Fraud is far too tenuous to permit the inference that the former unveiled some part of the fraudulent nature of the latter.

b. Loss Causation May Be Predicated Upon the July 10 Disclosure

In the July 10 Disclosure, Take-Two announced that the SEC was “conducting an informal non-public investigation into certain stock option grants made by the

*287

Company from January 1997 to the present.” (Wohl Decl. Ex. 8.)

The July Disclosure also revealed that Take-Two had commenced an internal investigation of its past options grants. (Wohl Decl. Ex. 8.) Therefore, the July 10 disclosure clearly revealed that Take-Two’s options-granting practices were the subject of an investigation carried out by a governmental entity charged with ensuring compliance with the federal securities laws. Lead Plaintiffs also aver that Take-Two’s share price dropped by 7.5% in response to the July 10 Disclosure. (SAC ¶ 325.) Other courts have found that similar allegations of significant stock drops in response to announced SEC investigations are sufficient to plead loss causation under the framework established by

Dura

and its progeny.

See, e.g., In re Openwave Sys. Sec. Litig.,

528 F.Supp.2d 236, 252-53 (S.D.N.Y.2007) (holding,

inter alia,

that 4.5% drop in market price of shares in response to announcement of SEC investigation into options backdating was sufficient to allege loss causation);

In re Immucor Inc. Sec. Litig.,

05 Cv. 2276(WSD), 2006 WL 3000133 , at *20 (N.D.Ga. Oct. 4, 2006);

Lapin v. Goldman Sachs Grp., Inc.,

506 F.Supp.2d 221, 231, 243 (S.D.N.Y.2006);

In re StockerYale Sec. Litig.,

453 F.Supp.2d 345, 359 (D.N.H.2006);

In re Bradley Pharms.,

421 F.Supp.2d at 829;

Brumbaugh v. Wave Sys. Corp.,

416 F.Supp.2d 239, 255-56 (D.Mass.2006).

Nonetheless, Defendants contend that the July 10 Disclosure cannot form an adequate basis for Lead Plaintiffs’ loss causation allegations because it did not reveal any part of the falsity of Take-Two’s prior representations concerning its options grants. In support of their contention, Defendants cite

In re Avista Corporation Securities Litigation,

in which the court held that the plaintiffs insufficiently pleaded loss causation where they alleged only that the defendant corporation’s share price had dropped dramatically in response to the announcement of a formal investigation by the Federal Energy Regulatory Commission (the “FERC”) into the defendant corporation’s electricity trades, 415 F.Supp.2d 1214, 1220-21 (E.D.Wash.2005). The court reasoned that the announcement of the FERC’s investigation did not reveal to the investing public any part of the defendant corporation’s alleged fraudulent activities, but rather, signaled at most that such activities were under investigation.

Id.

Significantly, the court stated,

the announcement by a regulatory agency that it intends to investigate is insufficient, on its own, to plead loss causation. Since the orders did not reveal any factual information showing Avista illegally manipulated the energy market or made factual misrepresentations, the FERC Orders do not provide a basis for asserting a causal relationship between Avista’s alleged failure to disclose it manipulated the energy markets and Plaintiffs’ alleged economic loss.

Id.

at 1221 .

As an initial matter, the facts of

In re Avista

are distinguishable from those of the instant case. Specifically,

In re Avista

involved an investigation carried out by the FERC, an independent federal regulatory agency charged primarily with regulating certain transactions in natural gas, oil, and electricity, and licensing certain projects involving these energy sources.

See

42 U.S.C. § 7172 (a). Although the FERC investigates claims of market manipulation,

see, e.g.

18 C.F.R. §§ lc.l, lc.2

*288

(2006); Prohibition of Energy Market Manipulation, 71 Fed.Reg. 4244-03, 4553-54 (Jan. 19, 2006) (indicating that FERC will be guided in its interpretation of energy-market manipulation rules by SEC’s Rule 10b-5 jurisprudence), the announcement of a FERC investigation does not immediately call into question a company’s prior representations and securities sales in the same manner as does an investigation carried out by the SEC. Moreover, the FERC’s announced investigation in

In re Avista

did not make any mention of two of the three alleged fraudulent representations in that case. 415 F.Supp.2d at 1220-21 (indicating that FERC’s announced orders did not mention defendant’s alleged change in business focus and ineffective risk management policy). With respect to these two fraudulent representations, therefore, the facts of

In re Avista

are more analogous to those pertaining to the June 26 Disclosure, which did not mention Take-Two’s alleged fraudulent options grants.

See supra

Part II.A.2.i.a.

Furthermore, insofar as

In re Avista

stands for the general proposition that “the announcement by a regulatory agency that it intends to investigate is insufficient, on its own, to plead loss causation,” 415 F.Supp.2d at 1221 , the Court is not persuaded by that holding. Loss causation may be pleaded on the theory that the truth slowly emerged through a series of partial disclosures.

See, e.g., In re Bradley Pharms.,

421 F.Supp.2d at 828-29 (citation omitted). As indicated above, various courts have found that the announcement of an SEC investigation into alleged fraudulent conduct may, for pleading purposes, constitute at least a partial disclosure of such fraudulent conduct.

See, e.g., In re Openwave Sys.,

528 F.Supp.2d at 252-53 ;

In re Immucor,

2006 WL 3000133 , at *20;

Lapin,

506 F.Supp.2d at 243 ;

In re StockerYale,

453 F.Supp.2d at 359 ;

In re Bradley Pharms.,

421 F.Supp.2d at 829;

Brumbaugh,

416 F.Supp.2d at 255-56 . Indeed, the Court has found little support for a per se rule holding that the announcement of an SEC investigation cannot alone form the basis of loss causation allegations. For instance, in

Weiss ,

the court found that loss causation was not adequately pleaded, but that case involved the announcement of an internal investigation of options grants rather than the announcement an SEC investigation. 527 F.Supp.2d at 947-48. Although Lead Plaintiffs might have bolstered their loss causation allegations—

e.g.,

by giving some indication of the percentage of announced SEC investigations that lead to a finding of fault, or preferably, by citing to particular characteristics of the instant case that made the public more aware that a negative finding was likely to result from the SEC’s inquiry— these allegations meet the bare minimum requirements established by the relevant jurisprudence.

Defendants further challenge Lead Plaintiffs’ loss causation allegations with respect to the July 10 Disclosure on the basis of the movement of Take-Two’s share price on other potentially relevant dates.

In particular, Defendants note that: (1) Take-Two’s share price dropped only 2.2% in response to a preliminary report by the SC, which found improprieties in Take-Two’s options-granting process and cautioned investors not to rely on Take-Two’s previous financial statements (Take-Two Options Mot. Dismiss 5); (2) Take-Two’s share price actually increased by 3.5% in response to its announcement that the SC had completed its investigation

*289

and had determined that the company failed in many cases to issue options in accord with its stock-option plans (Take-Two Options Mot. Dismiss 5-6); (3) Take-Two’s share price increased by 8.32% in response to the announcement by the Manhattan District Attorney’s Office that defendant Brant had pleaded guilty to falsifying business records in connection with options backdating at Take-Two (Take-Two Options Mot. Dismiss 6); (4) Take-Two’s share price decreased by only 4.2% in response to the filing of Take-Two’s 2006 Form 10-K, which disclosed the results of the SC’s investigation and restated financial data for the fiscal years ending October 31, 2002, 2003, 2004, and 2005 (Take-Two Options Mot. Dismiss 6); and (5) Take-Two’s share price quickly recovered from any of the declines that could be attributed to the announcement of negative news concerning the Options Backdating Fraud (Take-Two Mot. Dismiss 5-6).

The reaction or non-reaction of Take-Two’s share price to significant disclosure events other than those identified by the SAC may bear upon the plausibility of Lead Plaintiffs’ loss causation allegations.

See Weiss,

527 F.Supp.2d at 947-48. Under the leaking-disclosure theory advanced by Lead Plaintiffs, one might have expected Take-Two’s share price to decline after the announcement of the SC’s final report and to Brant’s guilty plea, each of which presumably disclosed some part of the Options Backdating Fraud. The contrary response of Take-Two’s share price to these significant events tends to undermine the plausibility of Lead Plaintiffs’ loss causation allegations, inasmuch as that contrary response is inconsistent with the SAC’s leaking-disclosure theory. Despite this tendency, the Court nonetheless finds that Lead Plaintiffs have pleaded a plausible theory of loss causation with respect to the July 10 Disclosure, at least at this early stage of the proceedings.

In particular, it is plausible that Take-Two’s share price reacted negatively to the July 10 Disclosure of the SEC’s investigation, which called into question Defendants’ statements concerning Take-Two’s prior options grants. (SAC ¶ 325.) According to the record before the Court, Take-Two’s share price dropped again, though less markedly, on December 11, 2006, when Take-Two announced the SC’s preliminary finding that there were improprieties in the company’s options grants. (SAC ¶ 82.)

This drop is consistent with Lead Plaintiffs’ leaking-disclosure theory. Given that Take-Two informed the investing public of the SC’s preliminary finding on December 11, 2006, it is plausible to infer that Take-Two’s share price did not react negatively to the subsequent announcements that the SC had completed its investigation on January 22, 2007, and that Brant had pleaded guilty on February 14, 2007, because the market already had taken account of such information.

See In re Bradley Pharms.,

421 F.Supp.2d at 829 (the evolution of share price suggested that “the market corrected the price of Bradley’s stock price when the truth began to leak out on February 28, 2005 and that by the time Bradley announced its restatement of earnings in April 2005, the market had already incorporated that the previously released financial statements could not be relied upon”). Indeed, the increase in Take-Two’s share price on those dates could reflect a positive evaluation of the self-corrective measures employed by Take-Two and of the appearance that the Options Backdating Fraud was behind the company after Brant’s guilty plea. Furthermore, because the rapid recovery of

*290

Take-Two’s share price from declines that it suffered may have resulted from factors unrelated to the company’s options backdating, it is premature to preclude a showing of loss causation on that ground.

Cf. In re Electronic Arts Inc. Sec. Litig.,

05 Cv. 1219(MMC), 2006 WL 27201 , at *2 (N.D.Cal. Jan. 5, 2006).

Defendants also challenge Lead Plaintiffs’ loss causation allegations on the ground that the options-backdating scheme was fully disclosed to the market well before the July 10 Disclosure, by way of an article published in the New York Times on June 18, 2006 (the “June 18 Times Article”).

If the truth concerning Take-Two’s fraudulent options backdating had been disclosed completely prior to the July 10 Disclosure, that truth presumably would have been reflected in Take-Two’s share price prior to the July 10 Disclosure, and share-price movement in response to the July 10 Disclosure would not be attributable to the revelation of the Options Backdating Fraud.

See, e.g., Teachers’ Ret. Sys. of La. v. Hunter,

477 F.3d 162, 187 (4th Cir.2007) (holding that plaintiffs inadequately pleaded loss causation stemming from allegation in third party’s civil complaint because,

inter alia,

facts alleged in complaint had already been disclosed in prior public filings). Nevertheless, speculation in the June 18 Times Article concerning possible options backdating does not necessarily constitute complete disclosure of the relevant truth regarding the Options Backdating Fraud. It is plausible at this stage of the proceedings to infer that the July 10 Disclosure, which announced an SEC investigation, conveyed information to the investing public concerning the extent and likelihood of options backdating at Take-Two, which was not present in the June 18 Times Article.

Cf. In re Openwave,

528 F.Supp.2d at 258 .

In light of the foregoing, the Court finds that the SAC adequately alleges loss causation with respect to the July 10 Disclosure. In particular, it is plausible to infer that the July 10 Disclosure revealed to the market some part of the relevant truth concerning the Options Backdating Fraud, thereby causing a decline in Take-Two’s share price. Nevertheless, for the reasons set forth above, the SAC’s allegations insufficiently link the June 26 Disclosure to the Options Backdating Fraud. Because it is implausible to infer that the June 26 Disclosure revealed any truth to the market about the Options Backdating Fraud, Lead Plaintiffs have not adequately alleged loss causation with respect to the June 26 Disclosure.

ii. The SAC Adequately Alleges the Materiality of Defendants’ Misstatements Regarding Options Backdating

“At the pleading stage, a plaintiff satisfies the materiality requirement of

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Rule 10b-5 by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions.”

Ganino,

228 F.3d at 161 (citations omitted). A complaint may be dismissed for failure to allege materiality only if the alleged misstatements “are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.”

Id.

at 162 (internal quotation marks and citation omitted). Here, Lead Plaintiffs aver that the Options Backdating Fraud caused Take-Two to overstate its earnings by “20% in fiscal year 2002, 11% in fiscal year 2008, and 5-6% in fiscal years 2004 and 2005,” as reflected in the restatement that appeared in Take-Two’s 2006 Form 10-K. (SAC ¶ 99.) Lead Plaintiffs assert that these overstatements were material because their disclosure “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

Basic,

485 U.S. at 231-32, 108 S.Ct. 978 (citing

TSC Indus., Inc. v. Northway, Inc.,

426 U.S. 438, 449 , 96 S.Ct. 2126 , 48 L.Ed.2d 757 (1976)).

The significant overstatement of a company’s earnings may constitute a “material” misrepresentation, depending on the particular facts of the case at hand.

See, e.g., Ganino,

228 F.3d at 166;

Sec. & Exch. Comm. v. Penthouse Int'l, Inc.,

390 F.Supp.2d 344, 354 (S.D.N.Y.2005);

In re Kidder Peabody,

10 F.Supp.2d at 409-12 . Although the Second Circuit has counseled against the establishment of numerical benchmarks for materiality,

see Ganino,

228 F.3d at 162, the 20%, 11%, and 5-6% overstatements of earnings alleged by Lead Plaintiffs fall within the range of overstatement that other courts have found material,

see id.

at 166;

In re Kidder Peabody,

10 F.Supp.2d at 410 (finding statements that affected profits by 2.54% to be material). Moreover, Lead Plaintiffs allege that Take-Two’s earnings reports were especially significant because: (1) “investors viewed Take-Two as a growth company, and analyzed growth trends closely” (SAC ¶ 112); (2) “the market was highly sensitive to the Company’s ability to meet analysts’ expectations, and any variance in revenue or earnings could have a major impact on share price if such variance caused the Company’s results to fall below analysts’ targets” (SAC ¶ 113); and (3) “misstatements that benefit senior management by increasing its compensation are regarded as more material because they can undermine a company’s credibility in the market and present a conflict of interest” (SAC ¶ 114). These allegations, in conjunction with the sheer magnitude of the overstatement alleged in the SAC, counsel strongly in favor of a finding of materiality.

Cf. Ganino,

228 F.3d at 163 (observing that misstatements in financial disclosures may be of heightened materiality when “ ‘the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise’ ”) (quoting SEC Staff Accounting Bulleting No. 99, 64 Fed.Reg. 45150, 45152 (1999), 64 C.F.R. 45150, 45152 (1999)).

Defendants nonetheless argue that Lead Plaintiffs have failed to plead materiality. They cite precedence from the Third Circuit for the proposition that materiality should be evaluated “post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm’s stock,”

Oran v. Stafford,

226 F.3d 275, 282 (3d Cir.2000), and they conclude that the movement of Take-Two’s share price after relevant disclosures undermines Lead Plaintiffs’ claim of materiality. (Take-Two Options Mot. Dismiss 10, 13.) The vitality of the Third Circuit’s “special rule for measuring materiality in the context of an efficient securities market,”

Oran,

226 F.3d at 282 , is a matter of

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significant doubt in this Circuit,

see Penthouse Int’l,

390 F.Supp.2d at 353 (“There is no requirement that stock prices fluctuate as a result of a defendant’s misstatements or omissions in order for them to be material.”) (internal quotation marks and citations omitted). Indeed, the Third Circuit’s rule seems to contradict the Second Circuit’s rejection of a “rigid formula” for evaluating materiality.

Id.

(citing

Ganino,

228 F.3d at 162-63);

see also No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp.,

320 F.3d 920, 934 (9th Cir.2003) (rejecting

Oran’s

bright-line rule for materiality as contrary to Supreme Court’s holding in

Basie

Assuming,

arguendo,

that the Third Circuit’s materiality jurisprudence were applicable in the instant case, Lead Plaintiffs have satisfied its dictates. In particular, as set forth in greater detail in the Court’s discussion of loss causation, the SAC adequately alleges that Take-Two’s share price reacted negatively to the July 10 Disclosure.

See supra

Part II.A.2.i.b. Moreover, because other factors may have caused the rapid recovery of Take-Two’s share price after that initial negative reaction, Lead Plaintiffs have established a sufficient linkage between the partial revelation of the Options Backdating Fraud through the July 10 Disclosure and the stock drop on that date.

Defendants also challenge the materiality of Take-Two’s overstatements of earnings on the grounds that materiality should be evaluated at the time that the falsity of these overstatements came to light, which, according to Defendants, occurred no earlier than December 11, 2006, when the company announced the need to carry out historical restatements. (Take-Two Reply 20-21.) As an initial matter, the Court is not persuaded that materiality should be evaluated from the time that Take-Two revealed to the market that it had overstated historical revenues. The language of the Supreme Court’s opinion in

Basic ,

which defines materiality as that term is used in Section 10(b) and Rule 10b-5, suggests that materiality should be analyzed at the time that the alleged misleading statement entered the market, not when its falsity was revealed, 485 U.S. at 231-32 , 108 S.Ct. 978 (holding that omitted fact is material if “there [is] a substantial likelihood that [its] disclosure ... would have been viewed by the reasonable investor as having significantly altered the total mix of information made available”) (internal quotation marks and citation omitted). The Court’s use of the perfect conditional tense (“would have been viewed”), rather than the conditional tense (“would be viewed”), focuses attention upon the time the disclosure should have been made,

i.e.,

the time that the misleading statement was issued, rather than on the later time when disclosure was actually made. In other words, the

Basic

test proposes a counterfactual inquiry into how the market would have viewed a statement if it had been disclosed at the proper time. For this reason, the Second Circuit has concluded that “[m]ateriality is determined in light of the circumstances existing

at the time the alleged misstatement occurred.” Ganino,

228 F.3d at 165 (emphasis added) (citations omitted).

In any event, even if materiality were properly measured at the time that disclosure was finally made,

i.e.,

in late 2006, the

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SAC adequately alleges a material misstatement. It is eminently plausible that a reasonable investor would have found it significant in late 2006 that Take-Two had overstated its earnings in each of the previous four years by 20%, 11%, 5%, and 6%, just as it is logical to infer that a reasonable investor would have found it significant in 2002, 2003, 2004, and 2005, as Take-Two’s Forms 10-K were issued, that those financial statements .overstated Take-Two’s earnings by 20%, 11%, 5%, and 6%. Therefore, Lead Plaintiffs have satisfied the materiality requirement with respect to the Options Backdating Fraud.

iii. The SAC Adequately Pleads Scienter with Respect to Take-Two, Brant, Eibeler, Emmel, Flug, and Grace

As the Court has noted, a complaint advancing claims pursuant to Section 10(b) and Rule 10b-5 must aver particular facts giving rise to a strong inference that the defendant acted with “an intent to deceive, manipulate or defraud.”

Kalnit,

264 F.3d at 138 (internal quotation marks and citation omitted). An inference of scienter may be predicated upon “facts (1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness.”

ATSI Commc’ns,

493 F.3d at 99 (quoting

Ganino,

228 F.3d at 168-69). Nevertheless, such an inference is “strong” only if it is at least as plausible as competing, non-culpable explanations for the defendant’s conduct.

Tellabs,

127 S.Ct. at 2510 .

Here, Lead Plaintiffs have alleged sufficient facts to support an inference that Brant, Emmel, Flug, Grace, and Take-Two acted with the requisite scienter in the perpetration of the Options Backdating Fraud. With respect to the other defendants to this action, however, the SAC fails to plead scienter.

a. The SAC Adequately Alleges Brant’s Scienter

Defendant Brant does not contest the sufficiency of the SAC’s allegations with respect to his scienter. The SAC alleges that Brant pleaded guilty in New York state court to falsifying business records and, in connection therewith, admitted “that he had caused Take-Two’s Form 10-K for fiscal year 2002 to contain false financial statements.” (SAC ¶ 42.) In light of this allegation, as well as admissions contained in Brant’s plea agreement with the Manhattan District Attorney’s Office (Wohl Decl. Ex. I),

Lead Plaintiffs have alleged sufficient facts to give rise to a inference that Brant intentionally made false public statements concerning the Options Backdating Fraud. Moreover, this inference is far more plausible than any other competing explanation for Brant’s conduct.

b. The SAC Adequately Alleges Scienter With Respect to Emmel, Flug, and Grace

Lead Plaintiffs rely principally upon the “motive and opportunity” test to plead the scienter of defendants Emmel, Flug, and Grace. (Pis.’ Opp’n 41-43.) For the reasons that follow, the SAC contains sufficient factual allegations showing that Em-mel, Flug, and Grace possessed both the motive and opportunity to perpetrate the Options Backdating Fraud. Moreover, the inference of scienter arising from Lead

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Plaintiffs’ “motive and opportunity” allegations is at least as plausible as competing nonculpable explanations of the conduct of Emmel, Flug, and Grace. Thus, the Court holds that Lead Plaintiffs have adequately pleaded scienter with respect to these defendants.

(1) The SAC Adequately Alleges that Emmel, Flug, and Grace Possessed Motive and Opportunity

In order to plead motive, a plaintiff “must assert a concrete and personal benefit to the individual defendants resulting from the fraud.”

Kalnit,

264 F.3d at 139 (citing

Novak,

216 F.3d at 307-08 ). Here, Lead Plaintiffs allege that defendants Emmel, Flug, and Grace personally received backdated options. (SAC ¶ 92.) In support of this allegation, the SAC notes that these defendants entered into an agreement with Take-Two to “repay” compensation they had received as a result of improperly dated options. (SAC ¶¶ 92-94.) On the record properly before the Court, defendant Emmel forfeited $171,494 through such “repayment,” while defendants Flug and Grace relinquished $305,720 and $249,937, respectively.

(Pis.’ Opp’n 9; Foldenauer Decl. Ex. B.)

Lead Plaintiffs assert that these defendants’ receipt of backdated options, which hid hundreds of thousands of dollars in improper compensation, provided them with ample motive to commit fraud. (Pis.’ Opp’n 43.) Although the Court ultimately agrees with this conclusion, it nonetheless parses Lead Plaintiffs’ analysis in order to shed light upon the proper focus of the motive inquiry.

Under the facts alleged, defendants Em-mel, Flug, and Grace undoubtedly had a significant pecuniary motive to backdate options. Lead Plaintiffs apparently argue that this “motive to backdate” gives rise to an inference of scienter pursuant to Section 10(b) and Rule 10b-5.

(See

Pis.’ Opp’n 46.) Nevertheless, the relevant “fraud” in this case is not the backdating of options, but rather, the alleged misrepresentation of Take-Two’s compliance with its options plans and the resulting overstatement of Take-Two’s earnings. (SAC ¶¶ 192, 210, 234, 260, 272.) As such, the pertinent question is whether Emmel, Flug, and Grace had a motive to misrepresent Take-Two’s compliance with its options plans and overstate Take-Two’s revenues, not whether Emmel, Flug, and Grace had a motive to backdate options. Lead Plaintiffs largely elide this distinction.

When the inquiry is properly refocused upon the alleged

securities

fraud in this case, Lead Plaintiffs’ allegations nonetheless support a finding of motive. Emmel, Flug, and Grace arguably could not have obtained backdated options in the absence of fraudulent statements concerning compliance with Take-Two’s options plans and, especially, overstatements of Take-Two’s earnings. If Take-Two had accurately re

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ported its earnings during the years from 2002 through 2005 to include backdated options as compensation expenses, questions naturally would have arisen regarding Take-Two’s compliance with its options plans, thereby potentially upsetting the entire options-backdating scheme. In other words, because the fraudulent statements underlying Lead Plaintiffs’ securities claims were an integral part of the alleged options-backdating scheme in which Emmel, Flug, and Grace had a significant motive to participate, these defendants also possessed a significant motive to make those fraudulent statements.

See In re Openwave,

528 F.Supp.2d at 249-50 (ruling that defendants who received backdated options had motive to perpetrate securities fraud).

Defendants Emmel, Flug, and Grace contend, nevertheless, that Lead Plaintiffs’ motive allegations are inadequate because their desire for increased compensation is a generalized motive that does not support an inference of scienter. (Emmel Mot. Dismiss 12; Flug & Grace Mot. Dismiss 15-16.) As this Court has stated, “generalized allegations of greed and a desire for increased ... compensation” do not establish motive.

In re AOL Time Warner, Inc. Sec. & “ERISA” Litig.,

381 F.Supp.2d 192, 218 (S.D.N.Y.2004). Indeed, incentive compensation predicated upon a corporation’s share price or financial performance, standing alone, does not provide an adequate basis for motive allegations.

Acito,

47 F.3d at 54 (company’s share price);

In re Mercator,

161 F.Supp.2d at 148-49 (company’s economic performance)

Ferber,

785 F.Supp. at 1107 (company’s financial performance). In the present case, however, Lead Plaintiffs’ motive allegations do not concern the receipt of incentive compensation contingent upon Take-Two’s financial performance. Lead Plaintiffs do not allege that defendants Emmel, Flug, or Grace received more or better options because they inflated Take-Two’s earnings. Instead, Lead Plaintiffs allege that these defendants misstated Take-Two’s compliance with its options plans and inflated the company’s earnings in order to conceal their options-backdating scheme. Although the desire to improve a company’s earnings in order to bolster one’s income or bonus prospects may be a “generalized” desire common to most high-level corporate employees, the desire to inflate a company’s earnings in order to hide options backdating is a much more particularized desire specific to participants in the backdating scheme. Thus, Lead Plaintiffs have sufficiently alleged a concrete and particularized benefit to defendants Emmel, Flug, and Grace, insofar as they allege that these defendants misstated Take-Two’s compliance with its options plans in order to protect compensation they had already received, and secure further compensation, through options backdating.

Defendants Flug and Grace further challenge Lead Plaintiffs’ motive allegations on the basis that the “proper” exercise price for certain options grants made to them was actually more favorable than the “improper” exercise price originally placed upon such grants. (Flug & Grace Mot. Dismiss 14-15.) An attachment to Take-Two’s Form 8-K, filed with the SEC on February 23, 2007, indicates that 17,921 of Flug’s options bearing the grant date of September 17, 2002, carried an original exercise price of $17.33, instead of the proper and more favorable exercise price of $17.17. (Foldenauer Decl Ex. B.) Although these “unfavorably” backdated options tend to undermine Lead Plaintiffs’ motive allegations with respect to Flug, they are insufficient at this stage to defeat Lead Plaintiffs’ showing of motive. Take-Two’s Form 8-K of February 23, 2007, states that the company canceled 43,079

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options grants made to Flug and re-priced 19,500 others, on the grounds that these grants were “favorably” backdated. (Fol-denauer Decl. Ex. B.) Flug’s failure to maximize the profit he could have garnered from options backdating during the relevant time period is not fatal to Lead Plaintiffs’ motive allegations, especially given the large number of “favorably” backdated options Flug apparently received.

See In re Openwave,

528 F.Supp.2d at 250 (“That the options may have been backdated to dates ‘nowhere near the monthly lows for Openwave stock,’ as defendants contend, is irrelevant.”). Furthermore, because there is no evidence on the record suggesting that Grace or Emmel received “unfavorably” backdated options, Lead Plaintiffs’ motive allegations are not significantly attenuated with respect to these defendants. In short, Flug’s receipt of some “unfavorably” backdated options does not alter the Court’s finding of motive.

Defendants Flug and Grace also fault Lead Plaintiffs for omitting these defendants’ names from charts purporting to show that certain Take-Two employees received options grants on dates that were likely manipulated.

(Flug & Grace Mot. Dismiss 16.) The Court is not persuaded. The evident purpose of the charts in question is to demonstrate that certain Take-Two officers repeatedly received options on dates that represented actual or near-monthly lows, thereby giving rise to a high probability that such options were backdated. Such probabilistic inference-drawing is unnecessary with respect to Flug and Grace, however, because Take-Two’s Form 8-K of February 23, 2007, and the agreement entered into by Flug and Grace, clearly indicate that these defendants received improperly dated options. Under these circumstances, the omission of Flug and Grace from the charts at issue has no bearing on the plausibility of Lead Plaintiffs’ motive allegations.

Defendant Emmel further attacks Lead Plaintiffs’ motive allegations on the basis that he received such little income from options backdating that “it makes no sense that [he] would be motivated to assist management in a fraud.... ” (Emmel Reply 6.) Emmel claims that he received approximately $340,000 in direct compensation, in addition to approximately 68,500 options grants, during his tenure as an outside director on Take-Two’s board of directors.

(Emmel Reply 2 n. 2.) Emmel notes that his agreement with Take-Two required only that he repay $59,535.51, through the cancellation of 7,341 of the improperly dated options he received. (Emmel Reply 6.) In fact, however, Em-mel’s calculation omits reference to more than 35,000 options, which were re-priced at losses to Emmel of approximately $112,000. (Emmel Mot. Dismiss, Declaration of Corey E. Delaney (“Delaney Deel.”) Ex. 6.)

Given that over half of Emmel’s

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approximately 70,000 options grants were either canceled (7,341) or re-priced (35,-079), and because Emmel received over $170,000 in improper compensation as a result, Emmel had ample motive to covertly engage in options backdating, even if he received $340,000 in direct compensation.

In summary, the Court finds that Lead Plaintiffs have adequately alleged that defendants Emmel, Flug, and Grace had motive to misstate Take-Two’s compliance with its options plans and misrepresent the accounting consequences of options backdating.

The opportunity prong of the “motive and opportunity” test generally receives less scrutiny than its motive counterpart.

See In re GlaxoSmithkline PLC,

05 Cv. 375KLAP), 2006 WL 2871968 , at *6 (S.D.N.Y. Oct. 6, 2006) (“Where a plaintiff alleges securities fraud against a public company and its officers and directors, it is motive rather than opportunity that is at issue.”). Indeed, courts in this District “often assume that ... corporate directors would have the opportunity to commit fraud if they so desired.”

Pension Comm. of the Univ. of Montreal Pension Plan,

446 F.Supp.2d at 181 . In order to plead opportunity, a plaintiff must show that the individual defendants possessed “the means and likely prospect of achieving concrete benefits by the means alleged.”

Shields,

25 F.3d at 1130 . Here, Lead Plaintiffs have alleged that defendants Flug and Grace served on Take-Two’s Compensation Committee from 2000 through 2006, while defendant Emmel served on that committee from 2002 through 2003. (SAC ¶¶ 45-47.) Lead Plaintiffs have also alleged that the Compensation Committee was charged with determining the exercise price of Take-Two’s stock-option grants. (SAC ¶¶ 62, 64, 67;

see also

SAC ¶ 84.) As such, Lead Plaintiffs assert that defendants Emmel, Flug, and Grace had abundant “opportunity to benefit themselves by manipulating the options they granted themselves.” (Pis.’ Opp’n 42.) Although the Court ultimately agrees with Lead Plaintiffs’ conclusion as to these defendants’ opportunity to perpetrate fraud, a closer analysis of their allegations is in order.

Lead Plaintiffs’ allegations undoubtedly establish that defendants Emmel, Flug, and Grace had the opportunity to backdate options through their service on the Compensation Committee. Nevertheless, the relevant fraud in this case concerns not the backdating of options per se, but rather, alleged misstatements concerning Take-Two’s compliance with its options plans and Take-Two’s accounting for options grants. Therefore, the pertinent question is whether defendants Emmel, Flug, and Grace had the opportunity to misstate Take-Two’s compliance with its options plans and to account improperly for options grants. In this respect, Lead Plaintiffs miss the mark when they assert that

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these defendants’ purported lack of control over Take-Two’s public disclosures regarding its options grants is irrelevant (Pis.’ Opp’n 42.) In fact, the ability of Emmel, Flug, and Grace to influence the drafting and preparation of Take-Two’s public disclosures is of substantial relevance to the opportunity analysis.

After refocusing the opportunity inquiry upon the

securities

fraud alleged in this case, the Court nonetheless finds that Lead Plaintiffs’ allegations are sufficient. Defendants Emmel, Flug, and Grace, among others, signed the Forms 10-K that contained many of the alleged false statements regarding the Options Backdating Fraud. (SAC ¶¶ 188, 206, 229, 255.) Although it is conceivable that Emmel, Flug, and Grace signed these Forms 10-K without being aware of the false statements contained therein,

see, e.g., In re Marsh & Mclennan,

501 F.Supp.2d at 485 (“The mere existence of allegedly misleading language in a group-published document does not compel a conclusion that all of the signatories were aware that it was misleading.”), because defendants Emmel, Flug, and Grace were members of a committee charged with ensuring the proper pricing of options (SAC ¶¶ 62-64), it is eminently plausible to infer that they knew of the false statements. Moreover, the preeminent role Take-Two’s stock-option plans accorded Emmel, Flug, and Grace in the options granting process, in combination with these defendants’ endorsement of the relevant Forms 10-K, supports Lead Plaintiffs’ allegations that Emmel, Flug, and Grace had the opportunity to influence at least those portions of the Forms 10-K that bore on the options-granting process. In light of these considerations, and given the oft-cited presumption that corporate directors have the opportunity to commit fraud,

Pension Comm. of the Univ. of Montreal Pension Plan,

446 F.Supp.2d at 181 , Lead Plaintiffs have adequately pleaded opportunity with respect to defendants Emmel, Flug, and Grace.

In sum, the Court holds that Lead Plaintiffs have pleaded sufficient facts demonstrating that defendants Emmel, Flug, and Grace had motive and opportunity to commit fraud. Therefore, Lead Plaintiffs’ allegations give rise to an inference that these defendants acted with the requisite scienter. Cf

. In re Openwave,

528 F.Supp.2d at 250 (ruling in options-backdating case that plaintiffs had adequately pleaded scienter of compensation committee members who were charged with granting stock options with an exercise price no lower than the fair market price of the stock on the grant date, because such individuals were under a specific “duty to monitor” the exercise dates of options granted) (citing

Novak,

216 F.3d at 311 ).

(2) The Inference That Emmel, Flug, and Grace Acted With Scienter Is More Compelling Than Competing Nonculpable Explanations for Their Conduct

Having found that the SAC pleads facts giving rise to an inference that Emmel, Flug, and Grace acted with scienter, the Court must now determine whether that inference is cogent in light of competing nonculpable explanations for these defendants’ conduct.

Tellabs,

127 S.Ct. at 2510 . In this respect, defendants Emmel, Flug, and Grace argue that the most compelling inference to be drawn from the facts on the record is that they were unaware of the widespread options backdating at Take-Two. As support for this contention, Flug and Grace cite the conclusions of the SC, which ascribed primary responsibility for Take-Two’s options backdating to defendant Brant. (Foldenauer Decl.

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Ex. A.)

The SC reported that Brant “controlled] and dominate[d] the [options] granting process,” and “engaged in a pattern and practice of backdating options.” (Foldenauer Decl. Ex. A.) Moreover, the SC “did not find that [defendants Grace or Flug] ... engaged in willful misconduct or other dishonest acts” (Foldenauer Decl. Ex. A), and did not even mention defendant Emmel (Emmel Reply 7). Defendants Grace and Flug further note that some options granted to them bore a grant date that was actually less favorable than the proper grant date would have been. (Foldenauer Decl Ex. B.) Moreover, defendant Emmel contends that, as an outside director, he was not, and had no reason to be, aware of how Take-Two accounted for its options grants, and therefore, he cannot be held liable for Take-Two’s allegedly fraudulent accounting. (Emmel Reply 2-4.) The Court addresses these contentions in turn.

Lead Plaintiffs’ scienter allegations with respect to defendants Emmel, Flug, and Grace rely partly upon the SC’s findings. (SAC ¶¶ 84, 98.) Thus, insofar as the SC ultimately absolved Emmel, Flug, and Grace of “willful misconduct,” Lead Plaintiffs’ scienter allegations are somewhat attenuated.

Fed.R.Evid. 106 (allowing adverse party to introduce omitted portions of writing or recorded statement placed in evidence in order to provide context). Nevertheless, on the record properly before the Court,

the SC’s conclusions support Lead Plaintiffs’ inference of scien-ter more than they undermine it. Contrary to the interpretation set forth by defendants Emmel, Flug, and Grace, the SC attributed blame for Take-Two’s options backdating not only to defendant Brant, but also to other corporate actors. (Foldenauer Decl. Ex. A.)

Most importantly, the SC found that the Compensation Committee, which included defendants Emmel, Flug, and Grace, “abdicated its option granting responsibilities and permitted the Company’s prior Chief Executive Officer, Ryan Brant, to control and dominate the granting process.” (Fol-denauer Decl. Ex. A.) The SC also found that the available contemporaneous documentation used to support Take-Two’s options grants was “unreliable, deficient or nonexistent in many cases.” (Wohl Decl.

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Ex. 9.)

Because the Compensation Committee was allegedly responsible for ensuring that the purchase price of Take-Two’s options was no less than the fair market value of the company’s shares on the grant date (SAC ¶¶ 62-64, 67), the Committee’s members possessed a duty to monitor the grant dates and exercise prices of the options Take-Two issued.

In re Openwave,

528 F.Supp.2d at 250 . Thus, the SC’s finding that the Compensation Committee abdicated its responsibilities actually provides strong support for Lead Plaintiffs’ scienter allegations on the theory that Em-mel, Flug, and Grace failed to observe their “duty to monitor” stock-option grants.

Id.; see also Novak,

216 F.3d at 308 (holding that scienter may be predicated on allegation that defendants “failed to review or check information that they had a duty to monitor”). Therefore, even if the SC’s conclusions undermine Lead Plaintiffs’ allegations of “willful misconduct,” they strongly support Lead Plaintiffs’ scienter allegations with respect to Flug, Grace, and Emmel.

In addition, the reliance defendants Flug and Grace have placed upon then- alleged receipt of “unfavorably” backdated options is misplaced. Evidence that the backdated options did not, in the aggregate, significantly benefit these defendants would undoubtedly bear upon the relative plausibility of Lead Plaintiffs’ scienter allegations. After all, one would not expect an individual to participate knowingly in an unlawful backdating scheme, or to conceal the accounting consequences of such a scheme, if the scheme did not benefit him. Nevertheless, in the instant case defendants Grace and Emmel have not provided any evidence that they received “unfavorably” backdated options. Moreover, although Flug received approximately 17,000 backdated options that were slightly unfavorable to him (Foldenauer Decl Ex. B (noting receipt of options with original exercise price of $17.33 rather than proper exercise price of $17.17)), materials properly before the Court also show that Flug received well over 60,000 “favorably” backdated options (Foldenauer Decl. Ex. B). Flug’s failure to maximize the profits he could have garnered from options backdating is not fatal to Lead Plaintiffs’ scienter allegations, especially because Lead Plaintiffs have amply alleged that Flug received significant windfalls through backdating. Indeed, the extent to which defendants Em-mel, Flug, and Grace benefited from the backdating of options — notwithstanding some “unfavorably” backdated options— weighs strongly in favor of a finding of scienter.

Furthermore, defendant Emmel’s contention that he was unaware of how Take-Two accounted for its options grants is unavailing. The SAC alleges that, as a member of the Compensation Committee, Emmel was responsible for ensuring that the exercise price for options was not “less than 100% of the fair market value for each such share on the Date of Grant.” (SAC ¶ 63.) Given this oversight role, Emmel either knew, or was highly reckless in not knowing, that there was rampant improper dating of options at Take-Two. It is rather implausible for Emmel to claim that he did not know this rampant backdating would have significant financial consequences, or that he believed Take-Two had properly expensed improperly dated options, which were granted in violation of the company’s stock-option plans. Moreover, some of the alleged material misstatements in Take-Two’s public filings

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pertained not to Take-Two’s accounting, but rather to its compliance with the company’s stock options plans. (SAC ¶¶ 191, 209, 231, 257.) Emmel’s asserted ignorance of Take-Two’s accounting does not undermine Lead Plaintiffs’ inference of scienter with respect to these statements.

In light of the foregoing, defendants Emmel, Flug, and Grace have not significantly undercut the plausibility of Lead Plaintiffs’ proposed inference of scienter. Moreover, these defendants have mustered only weak support for nonculpable explanations of their conduct. The pleadings allege that Emmel, Flug, and Grace were members of the Compensation Committee, which was charged with setting the exercise prices for Take-Two’s options grants (SAC ¶¶ 62-64, 67); that these defendants abdicated their options granting responsibilities, approving or acquiescing in options grants for which there is no extant documentary justification (SAC ¶ 98; Wohl Decl. Ex. 9); that these defendants secured substantial personal benefits as a result of options backdating at Take-Two (SAC ¶ 95); and that these defendants eventually agreed to repay to Take-Two certain sums of money acquired through improperly dated options (SAC ¶¶ 92-95). The most compelling inference to be drawn from these facts is that defendants Emmel, Flug, and Grace acted with scienter. Accordingly, Lead Plaintiffs have adequately pleaded facts giving rise to a strong inference of scienter with respect to Emmel, Flug, and Grace.

c. The SAC Inadequately Alleges Ei-beler’s Scienter

Lead Plaintiffs rely principally upon the “motive and opportunity” test to plead defendant Eibeler’s scienter.

(See

Pis.’ Opp’n 46.) As with defendants Emmel, Flug, and Grace, Lead Plaintiffs contend that Eibeler’s motive to commit fraud arose from his receipt of 140,000 backdated options. (SAC ¶40; Pis.’ Opp’n 46.) Moreover, Lead Plaintiffs argue that Ei-beler possessed the opportunity to commit fraud because he was President and CEO of Take-Two during most, if not all, of the relevant time period. (Pis.’ Opp’n 46.) For the reasons that follow, Lead Plaintiffs have adequately pleaded Eibeler’s motive and opportunity to commit fraud, which gives rise to an inference of scienter. Nonetheless, the Court holds that this inference of scienter is not “strong,” within the meaning of the PSRLA, because it is not as compelling as competing nonculpa-ble explanations for Eibeler’s conduct.

(1) The SAC Adequately Alleges That Eibeler Possessed Motive and Opportunity

As the Court determined in the previous section, the receipt of significant numbers of backdated options may justify a finding of motive.

See supra

Part II.A.2.iii.b(l). Here, Lead Plaintiffs’ allegation that Ei-beler received backdated options rests upon their averment that 140,000 of the 995,000 options granted to Eibeler between 1997 and 2005 bore the date with the lowest share price of the relevant month. (SAC ¶ 77.) Of course, Eibeler’s receipt of favorably dated options does not lead ineluctably to the conclusion that those options were improperly dated, or that he knew them to be so. Nevertheless, the Court holds on the record before it that Lead Plaintiffs have established a minimally cognizable financial motive for Eibeler’s participation in the backdating of options. Moreover, although Lead Plaintiffs’ analysis once again elides the distinction between the motive to backdate options and the motive to misrepresent the accounting consequences of options backdating

(see

Pis.’ Opp’n 42), for the reasons set forth in the Court’s discussion of Em-mel’s, Flug’s, and Grace’s scienter,

see su

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pra

Part II.A.2.iii.b(l), Lead Plaintiffs’ allegation that Eibeler received backdated options establishes his motive to misstate Take-Two’s accounting for such options grants.

With respect to Eibeler’s opportunity commit the securities fraud in question, there is no serious dispute. Eibeler served as Take-Two’s CEO from January 2005 through March 2007, and as the Company’s President from July 2000 through June 2003 and April 2004 through March 2007. (SAC ¶ 40). “[CJourts often assume that corporations and their officers have the opportunity to commit fraud.”

In re GeoPharma,

411 F.Supp.2d at 441 (citation omitted). Given Eibeler’s long-standing role as a principal officer of Take-Two, Lead Plaintiffs have adequately pleaded his opportunity to commit the securities fraud in question. In light of the foregoing, the SAC adequately alleges Eibeler’s motive and opportunity to commit fraud, which gives rise to an inference of scienter.

(2) The Inference That Eibeler Acted With Scienter Is Not as Compelling as Competing Nonculpable Explanations for His Conduct

Though the SAC adequately alleges Eibeler’s motive and opportunity to participate in the Options Backdating Fraud, the SAC’s scienter allegations with respect to Eibeler are attenuated in significant respects. First, and perhaps most importantly, Lead Plaintiffs’ illation that Eibeler received at least 140,000 backdated options is based on the issuance of those options on the date with the lowest share price of the corresponding month. (SAC ¶ 77.) Thus, unlike the allegations respecting defendants Emmel, Flug, and Grace, who repaid funds received through improperly dated options (SAC ¶ 92), Lead Plaintiffs’ allegations do not definitively demonstrate that Eibeler even received backdated options at all. Moreover, although the SAC provides statistical analysis evaluating the improbability, in the aggregate, of the options granted by Take-Two (SAC ¶ 76), there is no similar statistical analysis estimating the probability of random options grants having the timing of those made particularly to Eibeler. The SAC is also devoid of allegations explaining how the 140,000 purportedly suspect options were issued,

ie.,

whether such options were issued in a one-time grant, or in several grants.

Furthermore, the SAC fails to address the effect of the other 850,000 options Eibeler received (SAC ¶ 77) upon the relative improbability of the grants made to him. These considerations all undermine Lead Plaintiffs’ seminal allegation that Eibeler received improperly dated options. Inasmuch as Lead Plaintiffs’ averment that Eibeler received backdated options is attenuated, the inference that he intentionally or recklessly participated in the Options Backdating Fraud is correspondingly weakened.

Second, Lead Plaintiffs’ proposed culpable inference is further debilitated insofar as errors in the accounting for options grants may not be readily apparent because of the complexity of options accounting.

See Weiss,

527 F.Supp.2d at 949.

Given these considerations, two plausible nonculpable explanations for Eibeler’s conduct emerge. First, Eibeler may not have known about options backdating at Take-Two until very. recently, after the

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SC’s investigation and Brant’s guilty plea.

GSee

Eibeler Mot. Dismiss 2.) Indeed, the SC, which conducted an internal investigation of Take-Two’s option granting practices, reached this very same conclusion, finding that defendant Eibeler had not “engaged in any misconduct with respect to the Company’s option granting practices.”

(Foldenauer Decl. Ex. A.) Second, Eibeler may have been aware that options backdating had occurred and even benefited from it, but he may have been unaware that such backdating violated Take-Two’s stock-option plans and caused the company to misstate substantially its earnings.

Although the relative plausibility of these nonculpable explanations is admittedly difficult to discern, on the record as it currently stands, these nonculpa-ble explanations for Eibeler’s conduct are more compelling than the culpable inference Lead Plaintiffs advocate.

In this respect, the Court reiterates the weak support for Lead Plaintiffs’ allegation that Eibeler received backdated options. While the SAC contains ample evidence of widespread options backdating at Take-Two (SAC ¶¶ 73-76), it contains comparatively little evidence — statistical or otherwise — that the options actually granted to Eibeler were backdated. The SAC’s failure to address with more particularity facts showing that defendant Eibeler received backdated options robs Lead Plaintiffs’ allegations of some of their relative plausibility.

Additionally, the SC’s findings that Ei-beler had not “engaged in any conduct raising concerns about the reliability of [his] representations to [Take-Two’s] auditors” and that he had not “engaged in any misconduct with respect to the Company’s option granting practices” (Foldenauer Decl. Ex. A) lend support to the plausible nonculpable explanations for his conduct outlined above. The SC’s findings are not conclusive in this action and cannot absolve Take-Two’s officers of liability for securities fraud. Nonetheless, given that Lead Plaintiffs rely in part upon the SC’s report to support their scienter allegations (see,

e.g.,

SAC ¶ 96), the ultimate conclusions of that report with respect to Eibeler’s lack of scienter bear upon the Court’s comparative analysis of the available plausible inferences that may be drawn from the record.

In light of the absence of sufficient, particularized allegations showing that Eibeler received backdated options, and given the SC’s findings, which absolved Eibeler of any relevant misconduct, the inference of scienter proposed by Lead Plaintiffs is not as compelling as the nonculpable explanations for Eibeler’s conduct. Lead Plaintiffs have adequately alleged that Ei-beler was an important officer and director of Take-Two (SAC ¶ 40) at a time when there was widespread options backdating

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(SAC ¶¶ 74-76), which had significant financial implications (SAC ¶ 110) and ultimately led to the criminal conviction of several important Take-Two officers (Pis.’ Opp’n, Wohl Deck Exs. 1, 2,

3).

Absent more compelling allegations that Ei-beler knew of this options backdating and its financial consequences, however, these generalized allegations concerning Eibeler’s position at Take-Two and the guilt of some of his associates do not give rise to a strong inference of scienter.

d. The SAC Inadequately Alleges Winters’s Scienter

Because Lead Plaintiffs do not allege that defendant Winters received backdated options, they rely principally upon the circumstantial evidence test to plead his scienter. (SAC ¶¶ 291-92; Pis.’ Opp’n 48-49.) The SAC alleges that widespread options backdating occurred at Take-Two during a period lasting over six years. (SAC ¶ 291.) The SAC further alleges that Winters was Take-Two’s CFO during at least eighteen months of that six-year period of rampant backdating. (SAC ¶ 292.) In that role, Winters allegedly enjoyed “access to internal corporate documents, conversations and connections with other corporate officers and employees, [and] attendance at management meetings and committees thereof.” (SAC ¶ 41(b).) The SAC also avers that Winters signed various Take-Two SEC filings, which improperly accounted for option grants and contained false information about the Company’s compliance with its stock-option plans. (SAC ¶¶188, 194, 199, 203, 206, 212, 219, 224, 237, 244, 249, 263, 268.) Furthermore, the SAC alleges that Winters “repeatedly certified” in Take-Two’s SEC filings during the Class Period that he had designed disclosure controls and procedures to ensure that material information regarding Take-Two and its consolidated subsidiaries was made known to him. (SAC ¶41.) On the strength of these allegations, Lead Plaintiffs claim that Winters knew of the falsity of Take-Two’s asserted compliance with its stock-option plans and accounting for option grants, or was reckless in connection therewith. (SAC ¶¶ 41(b), 292.)

Lead Plaintiffs’ scienter allegations with respect to defendant Winters fall far short of the mark. “[G]eneral allegations regarding the magnitude of the fraud or the organizational role of a de

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