CDPR Sued For Securities Violations

[embee]

And now, the water having been chummed, a class action lawsuit has been filed in the US District Court for the Central District of California, alleging violations of the Securities Act of 1934 arising out of alleged material misrepresentations about the playability of Cyberpunk 2077, in turn ultimately leading to damages caused when the company's stock price declined precipitously surrounding performance issues on current-gen consoles.

Possibly notably, this lawsuit appears to be styled as a class action and not a shareholder derivative action brought on behalf of the corporation.

 

[Eltab]

The folks filing the lawsuit are in effect inviting disappointed players (or would-be players) of the game to join in the suit?

 

[Ryujin]

People who purchased the game wouldn't have standing to join the class, given the reasoning behind the suit. They didn't buy stock. They bought a product and weren't materially harmed by the drop in stock price.

"This is a class action on behalf of persons or entities who purchased or otherwise acquired publicly traded CD Projektsecurities betweenJanuary 16, 2020and December 17, 2020, inclusive (the “Class Period”)."

So this is a suit, against the company and its principals, for actions that resulted in material loss to shareholders. Company pushed for release and got money. Shareholders may get money from the company. Developers, who were dragged by the nuts in order to complete the game for release in whatever form it ultimate made it to, got paid whatever pittance over-stressed, overworked developers get these days. Customers get a flawed product.

 

[Morrus]

I know next to nothing about stock trading, but if the shareholders sue the company, aren't they suing themselves? If the company has to pay them money, aren't they paying themselves money?

 

[Ryujin]

I know next to nothing about stock trading, but if the shareholders sue the company, aren't they suing themselves? If the company has to pay them money, aren't they paying themselves money?

Yes and no. They are shareholders but they get dividends on their investment, or sell the shares and cash out to make a profit on the initial investment. All profits do not go to shareholders. They're suing against those company retained profits to recover what they claim has been lost, in the value of their stocks, because on company misfeasance/malfeasance. What I don't know is how that loss can be quantified if those investors don't actually cash out their stocks. The losses would seem to be speculative until they do so. The value of the stock could bounce back.

 

[embee]

I know next to nothing about stock trading, but if the shareholders sue the company, aren't they suing themselves? If the company has to pay them money, aren't they paying themselves money?

I know next to nothing about corporate law or corporate litigation.

That said, a shareholder derivative suit (which this is not) is brought by a shareholder of a corporation for the benefit of the corporation. A shareholder’s class action lawsuit is brought by a shareholder for the benefit of themselves and the other shareholders. The practical difference is that in a derivative suit, any damages awarded are paid to the corporation; in a shareholder class action, the damages go to the class (the shareholder's).

So why do one instead of the other?

A derivative suit is usually brought to cure waste or self-dealing. Let's say the Board or portion thereof engaged in self-dealing. Well, the only way to hurt a corporation is through its wallet. So, to the extent there was monetary damage for, say, selling an asset at a below market price, the derivative suit could seek the shortfall and the award would go to the corporation.

Here, the claim (as I understand it) is that the Board made material misrepresentations about the completeness and playability of Cyberpunk during an October conference call, representing that the game was complete and playable across all advertised platforms, current-gen consoles included. This led to some investors either retaining their shares or increasing their position and the ensuing revelation that the game was buggy and performed poorly on current-gen consoles caused a precipitous decline in the traded share price following news reports, thereby injuring the shareholders monetarily.

I make no representations as to the viability of this claim or any tactical or negotiation value such claims have, other than to say it's a newly filed action, the defendants still have time to interpose an Answer or file motions to dismiss, and the class still has to be certified.

 

[Morrus]

I still don't get it! If you as a shareholder sue the company, and the company has to pay you money, the value of the company goes down, so your shares are now worth less, surely? You've just sued yourself, effectively.

Eh. I know. I'm about as clueless as can be with stuff like that. I'm sure it makes sense to people who know how it works.

 

[shawnhcorey]

So why don't the shareholders fire the board of directors and hire ones that will do what they want? Isn't that how capitalism suppose to work?

 

[embee]

So why don't the shareholders fire the board of directors and hire ones that will do what they want? Isn't that how capitalism suppose to work?

They may not be able to.

The process for changing the board of directors is generally contained in the corporation's bylaws, which are the written rules of conduct for the corporation.

Directors serve for a term. In order to end it early, generally, there needs to be a special shareholder meeting and there must be a quorum of voting shareholders present. This is 50% unless the by-laws say otherwise. And then, you need a majority of those present voting in favor of removal.

So you need at minimum 25% of the voting shares to vote to replace.

Why "voting" shares? Not all shares are created equal. There may be different share classes and not all classes may be voting (entitled to vote). They have equity only, not control. CDPR appears to only have one class. But...

25% of the shares are held by the founders. The CFO (who is also a Board member) owns another 6.8%. This leaves about 66% remaining. If only the founders and Board members who own stock vote at the meeting, the vote will fail. My math fails me but, as said, a majority of those present need to vote.

Corporations are not evil; they are, however, amoral. The best you can hope for is a corporation to act out of enlightened self-interest.

 

[embee]

I still don't get it! If you as a shareholder sue the company, and the company has to pay you money, the value of the company goes down, so your shares are now worth less, surely? You've just sued yourself, effectively.

Eh. I know. I'm about as clueless as can be with stuff like that. I'm sure it makes sense to people who know how it works.

You assume that you, as a shareholder, are only interested in selling at the maximum amount at any given point in time.

You may be interested in increasing your position now that the share price is lower, increasing your equity in the company at a lower cost. This is known as "buying on bad news." The trick is knowing whether there is an acute problem that can (and hopefully will) be fixed or the problem is systemic.

Example 1: Buying shares of airline stocks after news of pandemic travel bans. Airline stocks plummeted in mid-February, and lost 2/3 of their share price in the next 30 days. One would buy on the bad news - while the price is plummeting - because airlines are a major part of the global economy and world governments have a vested interest in bailing them out to ensure travel continues. It's an acute problem.

Example 2: Buying shares of department store companies (like Macy's). The clothing retail sector has completely changed over the past decade. Macy's was trading at $70 in 2015. It's at $10 now. Times changed and brick and mortar is on a decline, evidenced by a parade of retail bankruptcies. That's a systemic problem.

So that's the trick...

Bringing it all back, what do you do with movie theatre companies like AMC, Regal, and Carmike?

Sure, people want to go to the movies. But can a movie theatre chain remain solvent? Solvent is a term that means "able to meet liabilities as they come due." These companies owe tons in rent and mortgage arrearage and don't know when they'll be able to generate any revenue. And when they do generate revenue, WB and Disney automatically take half of what comes in.

Is their problem acute or systemic?

Welcome to the world of high finance!