THQ 2007 Annual Report Download - page 90

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82
SEC Informal Inquiry
On August 4, 2006,we received an informalinquiry from theSecurities andExchange Commission
(“SEC”)requesting certain documents and information relating to our stock option grant practices from
January 1, 1996 to the present. We publicly announced this inquiry on August 7, 2006. Prior to August 4,
2006, we were already conductingan internal review of our historical stock optiongrant practices with the
assistance of outside counsel. We initiated the internal review following extensive news coverageand
analyst reports about the option practices of numerous companies across several different industries. The
Company hascooperated fullywith the SEC’s inquiry.
Upon receipt of thenotice of informal inquiry from the SEC, our Boardof Directors (the “Board”)
formed a special committee consisting of one outside director, Jeffrey Griffiths (the “Special Committee”),
to conduct an independent and comprehensive investigation of our stock option practices and to oversee
our response to the SEC. TheSpecial Committee retained independent outsidelegal counsel and forensic
accountants (the “Investigative Team”) to aid in its investigation.
TheSpecial Committee concluded its investigation and reported its findings to the full Board on
December 2, 2006. The Special Committee found no evidence of fraud or misconduct by any person with
respect to thecompany’s historical stock option grant practices. The Special Committeedid identify
instances where documentation of certain option grants was lacking. The Special Committee also
determined that an incorrect measurement date for financial accounting purposes was used on anumber
of occasions. These errors resulted primarily from misapplication of accounting standards related to
certainmeasurement date selectionmethodsdiscussed in detail in Note2totheNotes to the Consolidated
Financial Statements of our Amendment No. 2on Form 10-K/A for the year ended March 31, 2006, which
in a number of occasions resulted in employees receiving options with stated exerciseprices lower than the
market prices as measured basedupon the measurement dates as determined by the applicable accounting
standards. The Special Committee also recommended certainremedial measures with respect to the
Company’s stock option granting practices, which were adopted by the Board. TheSpecial Committee and
the Investigative Team reported the Special Committee’s findings to theSEC on January 8, 2007.
Lawsuits related to our historicalstock option granting practices
Kukor and Ramsey v. Haller, et. Al.On August 25, 2006, followingour announcement of the informal
inquiryby the SEC, apurported shareholderderivativeaction captionedRamsey v. Haller et Al.was filed
against certain of our current and former officers and directors in the California Superior Court, Los
Angeles County. Thecomplaint alleges,amongother things,purported improprietiesin ourissuance of
stock options,breach of fiduciary duty and unjust enrichment. Another lawsuit wassubsequentlyfiledby
the same law firm on behalf of another purported shareholder, David Kukor, and the parties stipulated to
consolidate the two actions. On or about April 19, 2007, aConsolidated Shareholder Derivative Complaint
(the “Consolidated Complaint”) was filed, alleging the same types of claimsand quoting from various
public statements by THQ since thefilingof theoriginal complaint. THQ is also named as a nominal
defendant. The Company intends to demur to theConsolidated Complaint. Pursuant to court order,the
demurrer must be filed by May 28, 2007, andahearingforthe demurrer is currentlyscheduled for
August 9, 2007. Discovery in this matter is currently stayed.
Hawaii Laborers Pension Fund v. THQ, et. Al. In October 2006, a purported shareholderderivative action
captioned Hawaii Laborers Pension Fund v. THQ, et. Al., was filedagainst certain of our current andformer
officers and directors in federal district court, alleging claims under Section 14(a) of the Securities
ExchangeAct of 1934aswell as various state law claims arising out of alleged breaches of fiduciary duty
related to stock option practices. On or about April 20, 2007, theplaintiff filed an Amended and Verified
ShareholderDerivative Complaint (the “Amended Complaint”) alleging that certain current andformer
officers and directors engaged in a conspiracy to manipulate grants dates associated with stock options and