THQ Brought to Court in (Only One) Class-Action Lawsuit Over uDraw

It’s no secret that THQ has been having severe financial problems as of late. Back in May we reported that the company experienced heavy losses – more than the previous year – despite having surpassed their sales projections. Shortly after, THQ filed a notice with the SEC for a stockholder’s meeting to discuss a reverse split of the company’s stock. This was done in an effort to avoid being delisted from NASDAQ as a result of their stock falling below the mandatory $1/share price point. Following this, it was announced that Executive VP of Core Games Danny Bilson and Senior VP of Core Studios Dave Davis had left the company, while Naughty Dog co-founder Jason Rubin would be appointed president and co-founder of Flektor and Monkey Gods Jason Kay, chief strategy officer.

Part of the reason THQ experienced such heavy losses was the expansion of the uDraw tablet to the 360 and PS3 platforms. The original uDraw was for the Wii and sold over 1 million units during the 2010-2011 holiday season. THQ expected to duplicate this with the 360 and PS3 platforms, but instead met with highly lacking demand. The result left them with 1.4 million unsold units and they subsequently announced plans to drop all hardware and software development for the uDraw.

This led Holzer Holzer & Fistel, a law firm, to begin an investigation into whether or not THQ violated federal securities laws by making “false and misleading” statements about the expected demand for the uDraw in the 360 and PS3 markets. Immediately after, on June 15th a class-action lawsuit was filed against the company on behalf of Khalil Zaghian by law firm Robbins Geller Rudman & Dowd LLP in the United States District Court for the Central District of California (Southern Division) for “recklessly disregarding”:

(a) that demand for the Company’s uDraw was well below internal expectations and the Company would have to take back, or provide price protection, on hundreds of thousands of uDraw units that it had sold; (b) that the uDraw for the Microsoft Xbox 360 and Sony PlayStation 3 was a failure and not being purchased by owners of those gaming systems; and (c) as a result of the foregoing, defendants lacked a reasonable basis for their positive statements about the Company and its prospects.

Contrary to other reports located across the web, there is in fact only one lawsuit against THQ. Various law firms dealing in securities have made announcements regarding the case, but are not actually involved in it. This is a good way to get publicity and to let one’s own clients know about something that may potentially concern them.

The court filing has been embedded at the bottom of this article.

Analysis: Well, there you have it, ladies and gentlemen – THQ is utterly screwed at this point. Their stock wasn’t even 2/3 of the required $1/share when they filed that SEC notice, although the reverse split has been approved by now and their stock is resting at $5.30/share. This class-action suit is only going to serve as a reason for their stocks to plummet more and I’m having a hard time seeing them surviving the year, especially if they are forced to pay damages. Their market cap is currently only $36 million, which means the entire company is valued less than the budget for many games developed in the industry. That says a lot about the possible future of the company. Forcing them to pay damages now is all but impossible, unless they want to pay their investors in uDraw tablets.

The move to bring Jason Rubin aboard was a wise one, as was the decision to stop developing the uDraw. The only way THQ will survive is by cutting their loses and not taking any big risks. It is apparent that they have begun to do this by the closing of their San Diego studio and dropping Devil’s Third from their lineup in favor of staying with their already known and profitable IPs.

Despite the fact they are now making the right choices to recover, I think this suit will kill them. The legal costs to fight against it will be as hard of a blow as a settlement to pay out would be. They simply don’t have the money to spare, so their best option may be to try and stall for time as much as possible. This is a good example of what’s wrong with the gaming industry: Investors aren’t happy that the uDraw flopped on the other 2 systems and lost them money, so rather than wait for a while to see if the company recovers, they’d rather kill it and suck it dry to recoup their money.

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