The class action lawsuit hinges on shareholder complaints concerning upper-management communications between August, 2005 and May, 2006 and insider trades made in December, 2005 and January, 2006.
The plaintiff in the case, Stephan Dennis, alleges that top executives at Midway knew of a primary investor’s intentions to relenquish ownership of the company and sold out before the stock price took a hit.
Dennis and other shareholders are joining with at least nine other law firms around the country in response to the millions of dollars lost by investors as Midway’s stock plummeted 75 percent to $6 per share recently. Stock prices were around $22 per share at the time of the alleged insider trading.
Media tycoon Sumner Redstone, the beneficial owner of more than 89 percent of Midway Games, Inc, turned over majority control and almost 33 million shares of the company to his daughter, Shari Redstone, on December 28, 2005.
“Insiders knew [Mr. Redstone’s involvement] was the only thing propping up the stock,” said Kenneth Vianale, a lawyer with Florida-based Vianale & Vianale LLP. Vianale’s firm joined the class action suit on Monday.
The case against the videogame company alleges that insiders knew Redstone was planning to give control over to National Amusements Inc., a Massachusetts-based movie theater company controlled by his daughter.
Ms. Redstone is the president of both National Amusements, Inc. and Sumco, Inc. Together, these two companies control almost 75 percent of Midway.
But less than two weeks before Mr. Redstone relinquished his direct control, the President and CEO of Midway Games, David Zucker, began to unload 550,000 of his own Midway shares. At the time, Midway stock was trading at a six year high, reaching a peak of $23.26 per share in mid-December. By January 6, he had pocketed more than $9 million before taxes. Zucker had never before sold Midway stock.
Mr. Zucker was not alone. Thomas Powell, Executive Vice President and CFO of Midway, sold 40,500 shares on December 20, just eight days before Redstone’s deal. The same day, Miguel Iribarren, Midway’s vice president of finance sold 15,000 shares. Assistant Treasurer James Boyle sold 15,000 shares the next day. Chief Marketing Officer Steven Allison sold 21,250 the day after that. These five men are the defendants in the class action suit.
Two months after the Redstone deal went into effect, stock prices for Midway had dropped more than 50 percent to $9.91 per share.
In order to be successful, attorneys for the plaintiffs will have to prove Midway executives intentionally withheld knowledge of the Redstone deal and knew that executing trades on that knowledge was illegal, said Mitch Herr, a former chief trial council for the southeast region of the U.S. for the SEC.
Plaintiffs must also show that withholding information about the Redstone deal constituted an omission or misrepresentation of the company's financial prospects, and that they have been damaged.
At this time there is no reason to believe the Redstone family was a part of the allegedly illegal activity, Vianale says.
A spokesperson for Midway Games, Inc. was not available for comment.
Shares of Midway Games, Inc. were up 7 cents to $6.07 per share in afternoon trading Wednesday. Midway shares are down nearly 29 percent from a year ago.