Some information was passed along to us regarding a massive lawsuit in the the UK vs. SouthPeak Games.

Gamasutra is the latest game news site to report on the allegations of SouthPeak defaulting on payments to vendors and contractors of Gamecock. A link to the full article is below:

Terry Phillips is the principle owner and Chairmen of the Board for SouthPeak Games. On May 2, 2007, the Securities and Exchange Commission wrapped up a case against Terry Philips and his former company, game publisher "Capitol Distributing, LLC" for violations of anti-fraud, financial reporting, and record-keeping. Here are some excerpts from the official SEC Litigation Release:

The Securities and Exchange Commission ("Commission") today announced that it filed a settled civil action in federal district court against video game distributor Capitol Distributing, L.L.C. ("Capitol") and one of its owners, Terry M. Phillips ("Phillips").

...Specifically, the complaint alleges that Take-Two shipped to Capitol hundreds of thousands of video games, typically at the end of reporting periods, and fraudulently recorded those shipments as sales when, in actuality, Capitol only temporarily parked the games for Take-Two and did not intend to sell them....

...According to the complaint, Capitol in two instances returned the games to Take-Two under invoices falsely describing them as "purchases" of "assorted product." The scheme enabled Take-Two to report approximately $15 million in phantom revenue from four separate parking transactions with Capitol.

In summary, the SEC was after Terry Phillips for using his company Capitol Distributing and one of his unrelated side companies "Philips Land Company", or "PLC", to shuffle hundreds of thousands of games into temporary limbo for Take-Two. The SEC claims Capitol and PLC operated an elaborate hoax, acting as if they were buying the games so Take-Two could inflate it's profits, by merely holding the inventory while Take-Two reported the games as actually sold. Capitol and PLC would then fraudulently return the games to Take-Two under false invoices, enabling Take-Two to report $15 million in phantom revenue.

Terry Phillips "without admitting or denying" the SEC's findings was fined $50,000 for his part in the fraud and consented to a cease and desist order.

Official SEC Litigation Release

Official copy of the SEC Complaint (PDF, 11 Pages)

Check out the Capitol Distributing, LLC address. Look familiar?


















POTENTIAL FRAUD AT SOUTHPEAK GAMES?

If there is any fraud that has led to or stemmed from SouthPeak not paying their legally owed debts to any deserving contractors and vendors, or if you have any information or evidence of a violation of securities laws in the business dealings of Terry Phillips' new publisher, SouthPeak Games, please contact the SEC immediately

Joystiq, one of the most respected sources of game industry news, just published a detailed article on the Gamecock / SouthPeak fallout:

Gamecock acquision goes south - vendors accuse SouthPeak of not paying up

In the article, Mike Wilson, industry veteran and former Gamecock CEO, goes on record for the first time about the acquisition, and provides some insight into the experience on the Gamecock corporate end. One of the most telling excerpts from the interview is below:

"The management partners at Gamecock were clearly not going to benefit from this sale at all, except in some hope that SouthPeak would leave our Austin operation in place, which is what they said they wanted to do. So, their idea for Harry and I to be able to make some money from the deal and feel good about moving forward, was to work to 'reduce the liabilities', and we were offered a commission basically on any moneys we could talk our partners out of taking. We have no experience in such things, but I'd imagine this is a pretty typical practice in public companies, so initially we said that we would of course talk to our vendor partners and see what could be done. Again, we were trying to play 'good company men' and hope for the best.

But it became apparent very quickly that what they actually meant by that was that they were going to try to pay as little as possible ... meaning telling everyone basically to 'screw off, sue us' if they wouldn't accept half or less of what they were rightfully owed. Harry and I clearly were not interested in this, and it became clear that us working with SP wasn't going to work out, and that they truly had no intention of keeping the Austin team in place."

This bit from an anonymous Gamecock contractor quoted in the article seems particularly relevant too:

If you have exhausted all options for receiving payment from SouthPeak Games and have decided to follow through with litigation, here are some tips from some contractors currently going through the process.

All valid debts owed to employees, contractors, and vendors of Gamecock Media Group were legally assumed by SouthPeak Games. The trade off is SouthPeak got the entire library of titles Gamecock was publishing. For the price paid, it was actually a great deal.

One of the largest reasons this blog exists is SouthPeak Games has allegedly chronically and delibetarely defaulted on owed debts to Gamecock vendors, employees, and contractors. If you have been in communication with SouthPeak or their representatives, you know how frustrating this experience can be.

Let's debunk some myths propagated by SouthPeak in recent months:

NO SIGNED CONTRACT

This has been SouthPeak's biggest attempt at a loophole to not pay deserving, and valid debts. While a contract is certainly helpful, especially in larger claims, all vendors and contractors work under some sort of agreed upon terms. For instance, for a contractor, an agreement to start work can come in the form of an email, or even for most states, verbally. If you performed valid work and submitted an invoice to Gamecock Media Group for services performed, the liability of that unpaid invoice was assumed by SouthPeak Games.

BANKRUPTCY

There is no known issue of bankruptcy for Gone Off Deep, LLC. SouthPeak acquired both the assets (games, etc) and the liabilities (debts owed). SouthPeak cannot simply "bankrupt the Gamecock corporate shell" to avoid payment of the liabilities.

NO CAPITAL TO PAY DEBTS

Several vendors and contractors have been told by SouthPeak attorneys since December 2008 that the acquisition "didn't go as planned" for SouthPeak, and that they essentially had no capital to pay debts. This is especially hard to swallow given the subsequent press releases boasting of record profit for SouthPeak Games in Q2 and Q3 of 2009. Press releases below:

3rd Quarter 2009 Results

2nd Quarter 2009 Results

ALL VENDORS ARE SETTLING OUT OF COURT

This isn't true. There are several cases currently in litigation, and several have been settled for terms far greater than initially offered (e.g. 80% vs 25%) after initiating litigation.

NO VENDOR IS BEING PAID 100%

Also not true. We have verified accounts of vendors being paid in full.

On October 15, 2008, video game publisher SouthPeak Games acquired the assets and liabilities of fellow publisher Gone Off Deep, LLC DBA Gamecock Media Group, fronted by longtime industry men Mike Wilson and Harry Miller. By published accounts, the acquisition was expeditious due to Gamecock's primary investor wanting to unload the business as quickly as possible citing economic woes.

SouthPeak's press release about the acquistion is here.

SouthPeak Games is a publicly held company. Details of the acquisition were filed with the SEC:

Summary

Full Filing (PDF, 48 pages)