Take Two may face further investigations over Hot Coffee

US analysts have warned that Take Two may face investigations from the Federal Trade Commission and the Securities and Exchange Commission after the company reduced its Q3 revenue guidance by $40 million in the wake of the Hot Coffee scandal.

Commenting in a research note yesterday, Banc of America Securities analyst Gary Cooper said that "regulatory risks remain for Take Two" and described a class action lawsuit over the matter as "inevitable."

"Some political figures are agitating for an FTC investigation on the grounds of indecency and/or false advertising related to GTA San Andreas and the original product rating," he said, going on to note that the company has not created an exchange or return programme for the 12 million already sold copies of San Andreas, something which the FTC could push it to do.

It's not just the Federal Trade Commission which may look at Take Two now, however; Cooper warned that several stock transactions over the past few weeks could also come under scrutiny from the Securities and Exchange Commission.

"Several TTWO insiders, including Chief Operating Officer Gary Lewis sold common shares recently," he noted. "Lewis sold 20,000 shares on July 13th and filed to sell 40,000 shares on July 19th. The SEC could choose to investigate these sales. It remains unclear as to when the ESRB investigation began."

It's not just these investigations which concern Banc of America Securities, however; in the firm's research note, Cooper also questions whether there could be more far-reaching effects for the GTA franchise as a whole.

"Lots of stakeholders are upset," he commented, "from retailers to 1st party platform providers to the game-rating agency to politicians and regulatory authorities. Rockstar and TTWO might now face a dilemma about the adult-content and risque nature of GTA."

"Will the company soften GTA content?" he asks. "It seems unlikely to us that this will happen. Still, pressures will mount and scrutiny will intensify surrounding the next release of GTA, which is scheduled for October of 2006."

However, Wedbush Morgan Securities' Michael Pachter doesn't agree that the scandal will have a major impact on Grand Theft Auto going forward.

"We do not expect this issue to recur," Pachter said today. "After speaking with company management, we are confident that the company has taken this matter quite seriously, and believe that all employees involved are sufficiently embarrassed and contrite so as to ensure management will carefully vet any proposed controversial content in the future."

Pachter believes that the whole affair does demonstrate that Rockstar's management has been too "lax" in its handling of the incredibly valuable GTA franchise, however.

"We are at a loss to understand the desire to write the sex minigame in the first place," he noted. "While we were not particularly offended by the content, and understand that such content is perfectly acceptable in the United Kingdom (Rockstar North, the developer of the game, is headquartered in Scotland), we question the judgment of the development team in taking such a risk with the crown jewel of the Take-Two empire."

"We again, acknowledge that the decision to omit the content from the commercial version was a prudent one, but question whether the company's management is too lax in its oversight," he concluded.

The scandal has also tarnished the reputation of the ESRB ratings body in North America, which has been forced to retract its M-rating for GTA San Andreas in favour of the far less common AO (Adults Only) rating - an embarrassing and highly public retraction for the body, which has recently been under fire from a number of vocal politicians.

In light of this, the ESRB plans to introduce tougher standards for its ratings, which will demand more detail from publishers so that all content shipped on the disc, regardless of how accessible it is, can be considered in creating the rating for a game.