A United States District Court judge has dismissed a lawsuit brought against Midway Games by a group of shareholders who had alleged that the company artificially inflated its stock by deceiving the public.

Filed by Joseph Zerger, “on behalf of himself and all others similarly situated,” the suit targeted Midway Games’ Steven Allison, James R. Boyle, Miguel Iribarren, Thomas Powell and David Zucker.

In a filing dated October 19, 2009, Northern District Illinois Eastern Division Judge David Coar ruled against the plaintiffs, stating:

Plaintiffs have failed to show that Defendants said or did anything more than publicly adopt a hopeful posture that its strategic plans would pay off. Such preening for the financial press is classic puffery. Even if these statements were not puffery, Plaintiffs cannot establish that they were false when made.

The plaintiffs had alleged that:

While the executives rushed to sell their Midway stock at the trumped-up prices their “scheme” temporarily sustained, the lead plaintiffs and other putative class members purchased it—and lost millions when the market eventually learned the truth.

Midway declared bankruptcy in February of this year.
 

|Image Via icanhascheezburger|

Midway's fade into gaming oblivion continues with word that all 60 employees at the bankrupt firm's Chicago HQ will be let go in September.

The cuts include CEO Matt Booty and other execs, reports the Chicago Tribune.

That popping sound you hear is the deployment of golden parachutes for the top dogs.

This one is strictly a rumor at this point, but a reliable U.K. source tells GamePolitics that Midway's Newcastle studio in the U.K. has been shut down this morning following a surprise visit by CEO Matt Booty.

Workers have reportedly been let go without pay and some are apparently posting about the situation on Facebook. We have an e-mail in to Midway seeking confirmation.

Midway, of course, was recently acquired by Warner Bros. in a deal approved by a U.S. Bankruptcy Court judge.

UPDATE: This one is CONFIRMED. Develop has details...

A U.S. Bankruptcy Court judge has approved the sale of Midway to Warner Bros. for $33 million, reports the Chicago Tribune.

No other bids were submitted.

The decision apparently ends Mortal Kombat film producer Larry Kasanoff's bid to lay claim to much of the MK series' IP. In a story broken by GamePolitics last week, Kasanoff claimed that "the Mortal Kombat series, as it stands today, is far more a creation of... Kasanoff than of Midway."

The man who brought Mortal Kombat to the big screen has sued Midway in U.S. Bankruptcy Court over what he claims are his intellectual property interests in the franchise. The suit may interfere with a proposed  $33 million sale of Midway assets to Warner Bros.

In a complaint filed yesteday, Lawrence Kasanoff, through his company, Threshold Entertainment, asked the Court to preserve his IP rights including copyrights to certain MK series characters. Kasanoff also wants to retain the right to create derivative film and television projects based on the popular fighting game franchise.

Kasanoff claims that it was he who made Mortal Kombat more than just a video game:

In 1993, Kasanoff visited Midway... with an idea to launch the Mortal Kombat concept in a totally new direction. Specifically, Kasanoff proposed to develop... a full feature-length motion picture, a television series, and other productions. Midway was initially skeptical, as Kasanoff's idea was revolutionary at the time...

 

The Mortal Kombat series, as it stands today, is far more a creation of Threshold and Kasanoff than of Midway. Midway's creative input was almost entirely limited to the videogames. On their own, the videogames provided only minimal back-story and mythology, and only flat, "stock" characters... Kasanoff and Threshold were responsible for virtually all of the creative input that went into turning the videogame concept into a multimedia enterprise.

In his lawsuit, Kasanoff also claims credit for making MK characters like Liu Kang, Sonya Blade and Scorpion into recognizable names. The suit estimates that the franchise has grossed more than $4 billion over the years.

In petitioning the Bankruptcy Court, Kasanoff seeks to block the proposed sale of Mortal Kombat assets to Warner Bros.

DOCUMENT DUMP: Grab a copy of Kasanoff's complaint here.

It appears as if Mark Thomas's brief and controversial reign as owner of Midway Games has come to an end

Bloomberg reports that Thomas reached a settlement with the bankrupt publisher's main creditors late last week. As GamePolitics reported last month, a committee of creditors alleged fraud and breach of fiduciary duty against Thomas, former owner Sumner Redstone, and several current and former Midway board members. The just-announced settlement, however, applies only to Thomas; litigation against the other defendants continues.

Thomas, an otherwise obscure investor, picked up Midway for a song last November, paying just $100,000 for the debt-ridden company. Under terms of the settlement he will walk away with up to $5 million and will be paid prior to other creditors whose claims aren't backed by collateral.

Attormey Linda Dakin-Grimm, who represents the creditors committee, told Bloomberg:

The committee is satisfied with the [Thomas] settlement. We believe the result is an important first step in the ongoing effort to recover damages.

Midway will hold an auction for its remaining assets on June 29th. Leading bidder Warner Bros. has already offered $33 million for Midway.

Gamasutra reports that bankrupt Midway's unsecured creditors have banded together to bring suit against former owner Sumner Redstone (left), new owner Mark Thomas and several current and former board members. Among other allegations, the suit charges the defendants with fraudulent transfer, corporate waste, breach of fiduciary duty and unjust enrichment.

GamePolitics readers will recall that Redstone unloaded Midway to Thomas last November for the bargain basement price of $100,000.

The suit alleges that Midway's board of directors, most of whom had non-Midway business ties to Sumner Redstone, put the media mogul's interests ahead of those of the troubled game publisher in approving the deal. The 2008 fire sale to Thomas, the suit alleges, allowed Redstone to write off $700 million in losses, generating "a massive tax refund" and denying Midway the same tax opportunity. Redstone concocted the scheme to sacrifice Midway, the suit claims, in order to salvage the rest of his troubled financial empire, which includes CBS and Viacom.

The suit is unsparing in its criticism of new owner Thomas:

Thomas [was] completely unsuited to be the 87% owner of a publicly traded company... Thomas knew he was not an appropriate owner of Midway. He had no background in the video game industry. He had no assets to invest in Midway. Upon acquiring his controlling interest, he refused to speak with any officer or director of the company and even refused to disclose his middle initial so that an investigation could be made into his background.

More juicy tidbits:

The Redstone-Thomas transaction was completed in less than two weeks and the Redstone defendants kept the transaction secret from Midway's Board of Directors and management...

 

The... transaction gave Thomas a controlling stake in Midway worth tens of millions of dollars and the right to receive interest and principal payments on a $30 million secured loan and $60 million in unsecured loans... for a mere $100,000...

 

One business day before closing [the deal] after analyzing the litigation risks... [and] being told that  [Redstone] would not give him an indemnity in connection with the transaction... Thomas transferred title and ownership in his house to his wife for $1...

DOCUMENT DUMP: Grab a copy of the lawsuit here.

A heavily-redacted statement filed last week by mysterious Midway owner Mark Thomas has been added to U.S. Bankruptcy Court records.

Despite the confidentiality edits, some interesting nuggets of information are contained in the document:

• Midway will run out of cash in late June
• Midway has no games set to launch in that window that might provide an influx of cash
• Midway overstated the value of the Mortal Kombat franchise
• Midway has operated at a loss for most of the last decade
• In 2008 CitiGroup failed to find anyone interested in acquiring Midway
• Mark Thomas initially offereed $1,000,000 for Midway but lowered his offer to $100,000 after re-assessing the risks; by necessity, the deal was finalized quickly and Thomas says that he did not have time to conduct normal due diligence.

Unfortunately, the juicier bits appear to have been redacted, leaving us to wonder how - and by how much - Midway managed to overvalue the MK series; which companies have been bidding on Midway's  carcass; and how Midway actually benefitted from being acquired for a mere $100K.

DOCUMENT DUMP: Grab the 44-page PDF here.

UPDATE: According to a report in the Chicago Tribune, a Midway spokesman insists that the troubled publisher has enough cash to make it to August, and possibly beyond.

Bailed-out insurer A.I.G. isn't the only in-the-toilet company doling out questionable bonuses to the very execs who ran it into the ground.

For example, there's Midway.

Ben Fritz, who pens Variety's The Cut Scene blog, reports that the financially-troubled game publisher tried to persuade the U.S. Bankruptcy Court to permit it to:

• pay "incentive" bonuses for an event which already happened (the sale of Wheelman to Ubisoft)
• pay $1.3M in bonuses for either selling the Mortal Kombat franchise or developing a plan to reorganize the company
• pay $2M in bonuses for closing the Mortal Kombat deal or getting the reorganization plan approved by the Court

However, the government's Bankruptcy Trustee objected, noting that:

• it's hard to pay an incentive for something that happened in the past. The Trustee called this "disingenuous"
• what else do Midway execs have to do except either sell MK or reorganize the company? That's kind of their job at this point
• the size of the proposed bonuses are "outrageous," in the words of the trustee:

The Debtors seek authority to pay bonuses to a selected group of officers and managers which are four hundred percent greater than bonuses paid to the same group in 2008 when the Debtors were not before the Bankruptcy Court.

 

Given the current state of the general economy, coupled with historical data related to incentive bonuses paid by these Debtors, the Motion constitutes an outrageous request and is not justified by the facts and circumstances of the case.

DOCUMENT DUMP: Grab a copy of the Trustee's objection here.

UPDATE: The Cut Scene has posted an update indicating that Midway has yielded to the Trustee's objections. Its new bonus plan:

• eliminates the Wheelman bonus
• the Mortal Kombat bonus now only applies if Midway sells all of its assets
• A bonus still kicks in a reorg plan is approved by the Court

Earlier this month GamePolitics broke the news that media mogul and former Midway owner Sumner Redstone had been subpoenaed for a deposition by unsecured Midway creditors who suspected hanky-panky in the November sale of the Mortal Kombat publisher for a mere $100,000 last November.

According to Redstone's subpoena, he was to be deposed in Manhattan yesterday. But attorneys for Redstone and business associate Robert Steele appeared in Bankruptcy Court in Delaware on Friday in an attempt to quash those subpoenas.

That maneuver failed, however, and the Court ruled today that Redstone's deposition was "appropriate."

That being the case, Redstone will be deposed on Friday of this week, while Steele will give his deposition on Thursday.

The motion to quash apparently did not include Redstone's daughter Shari, who formerly chaired Midway's board. Shari Redstone's deposition was scheduled for March 19th.

As the Midway bankruptcy works it way through the court system, there has been more than a passing interest in Mark Thomas, the unknown who purchased the financially-troubled publisher from media mogul Sumner Redstone for a mere $100,000 last November. In addition to Midway, Thomas also acquired $70 million of Midway debt in the deal.

Since Midway declared itself bankrupt on February 12th, there have been assertions by some creditors that questionable dealings occurred in relation to the Mortal Kombat publisher's sale and subsequent bankruptcy proceedings. As GamePolitics reported last month, a court document alleged that, under certain conditions, Thomas stood to make a 30,000% return on his original investment.

And, earlier this week, GamePolitics broke the news that Sumner Redstone and his daughter Shari, who formerly served as Midway's chairperson, were subpoenaed for depositions which appear to be directed in part at probing their relationship with Thomas.

Now, Mark Thomas is fighting back.

In a court document filed yesteday, Thomas declares - under penalty of perjury - that he never met or spoke to either of the Redstones until he became aware of the opportunity to purchase Midway on November 14th, 2008. The deal closed two weeks later. Thomas also writes that he did not speak with them during the negotiations to buy Midway and hasn't spoken to them since.

Thomas declares that he was initially informed by one of Redstone's attorneys that Midway might be available. Thomas, a 52-year-old attorney, lives in Massachusetts, and writes that his personal net worth is in excess of $10 million and that he has no debt.

Thomas goes as far as to attach a resume, which lists jobs as far back as 1980. Currently he serves as Managing Director of Estabrook Partners, LLC, a private equity firm which he founded. Prior to that, his most recent position was with another private equity firm, Georgetown Partners, LLC in which Thomas held a 48% ownership position.

DOCUMENT DUMP: Get the Mark Thomas declaration here.

UPDATE: The Chicago Tribune has additional coverage on the Mark Thomas revelations.

Last month, GamePolitics broke the news that some creditors of bankrupt Midway were alleging that the recent sale of the financially troubled Mortal Kombat publisher was a sham.

In a document filed with the U.S. Bankruptcy Court, attorneys for certain of Midway's unsecured creditors charged that insider dealing had occurred between the former owner, media mogul Sumner Redstone, and the new owner, mystery man Mark Thomas. According to those allegations, Thomas, whose shell company, Acquisitions Holding Subsidiary, purchased Midway for a mere $100,000 in November, stood to reap a 30,000% return on his investment.

As of this morning, civil subpoenas have been issued for Sumner Redstone and his daughter, Shari, who formerly served as chairperson of Midway. Both are required to appear later this month for separate depositions in New York City. The Redstones will be required to bring documents, notes and e-mails relating to the operation of Midway as well as to their dealings with Mark Thomas.

So far, court records do not indicate that Thomas has been subpoenaed.

GP: It is important to note that these subpoenas are related to a financial dispute between creditors in Midway's bankruptcy case. They are not related to any type of criminal or government regulatory investigation.

DOCUMENT DUMP: See Shari Redstone's subpoena here. For Sumner Redstone's subpoena, click here.

Do you get the feeling that Midway's ongoing bankruptcy drama isn't going to end well?

Reports yesterday indicated that executives planned to either structure a reorganization or sell off the company's only major IP asset - Mortal Kombat. Guess which one of those will be easier to do.

But a filing by Midway's new owner seems just as alarming.

GamePolitics readers may recall our February 15th exclusive report on allegations of sleazy insider dealing in the Midway affair. At the time, some Midway creditors wondered who new owner Mark Thomas was and how he was able to purchase Midway from media mogul Sumner Redstone for a mere $100,000 in November.

Thomas, through his shell corporation, Acquisitions Holding Subsidiary, fired back in U.S. Bankruptcy Court on Friday. Midway, says AHS, is hemorrhaging cash and Thomas wants his investment collateral protected:

[Midway has] an immediate need to access and use AHS's Cash Collateral. Nor can it be disputed that, based upon the Debtors' 13 week forecasted Budget, [Midway is] hemorrhaging cash at an alarming rate. Indeed, the [Midway] Budget indicates that between February 9, 2009 and May 4, 2009, [Midway] will burn through approximately $12,392,598 in cash representing an approximately 75% depletion of its cash reserves...

 

The Objecting Noteholders have made several unsubstantiated and unsupportable accusations - none of which are true - regarding the relationship and transactions between Sumner Redstone and AHS' s principal Mark Thomas... each of those allegations is without merit... 

 

The Limited Objection is replete with unsupported and, frankly, irrelevant factual allegations regarding the relationship between Mark Thomas and Sumner Redstone...

We asked Wedbush-Morgan analyst Michael Pachter to comment on Midway's situation:

Unfortunately, their low cash position, high debt load, and unforgiving creditors place them in the position of having to generate cash at a bad time, and it's always easiest to sell the assets with the most value.
 
I think it's premature to say that they are dead, but fair to say that a [potential] sale of Mortal Kombat will weaken them.

DOCUMENT DUMP: The AHS/Mark Thomas objection...

We've asked three times, but the Entertainment Software Association apparently won't confirm - or even respond to - our inquires as to whether bankrupt Midway has relinquished its membership in the software publishers' lobbying group.

As GamePolitics reported earlier this week, Midway has recently been removed from a listing of member companies on the ESA website. On several past occasions such removal has preceded an ESA acknowledgement of a member's pullout.

The reason for the silence is unclear as we've had normal communications with the ESA on other topics this week. One knowledgeable source speculated that the ESA might be acting at Midway's request.

In any case, it is hard to fathom what the ESA - which has been doing a much better P.R. job in recent months - gains by not making a clean break with the information.

Bankrupt game publisher Midway has apparently left the membership ranks of the Entertainment Software Association. The Washington, D.C.-based ESA represents the interests of U.S. game publishers.

GamePolitics notes that Midway, which filed for bankruptcy last week, has been removed from the list of member companies on the ESA's website. Such removal has preceded the ESA's official acknowledegment of memco departures in several recent cases.

The move probably speaks more to Midway's desperate financial straits than anything else. With Midway's exit, the ranks of the ESA have dropped to 20. At the beginning of 2008, 28 companies belonged to the organization.

We have asked the ESA for confirmation.

We're unable to translate, but found it interesting that our recent exclusive list of creditors in the Midway bankruptcy case was picked up by a gaming site in China:

到底负债多少？ Midway欠账单公布

中关村在线 - 北京市,China
感谢GamePolitics，我们得到了一组Midway破产前夕的外债清单，从这串长长的帐单上，Midway究竟欠了谁的钱又欠了多少大家可以一目了然，这其中既有发行商、零售商，也有 ...

UPDATE: Reader Aaron Mitschelen sent us a much-appreciated machine translation:

Midway's financial situation is in fact not a sharp turn for the worse overnight, and As is, of course, a variety of reasons, but judging by the results, bankruptcy is a fact. However, on the "Mortal Kombat" series of the founders of the specific circumstances of the debtor, before the outside world knows very little about.

Thanks to GamePolitics, we get a group of foreign debt on the eve of Midway bankruptcy list, from this string of long bill, Midway exactly who owes the money owed to the number of U.S. at a glance, which both distributors, retailers, also have investment companies and banks.

But even if these bills are creditors who are not necessarily good day number, for example, the largest creditor Wells Fargo Bank, just report one quarter of a loss of 2.73 billion U.S. dollars ... ..."

When mystery man Mark Thomas acquired troubled game publisher Midway for a mere $100,000 last November, the deal raised more than a few eyebrows. It also raised questions like:

• Who is Mark Thomas?
• How could a company which owns popular franchises like Mortal Kombat and TNA Impact! be purchased so cheaply?

A motion filed on behalf of certain Midway creditors in U.S. Bankruptcy Court in Delaware on Friday makes those questions a matter of record and seeks to block the troubled publisher's move to spend collateral which obscure buyer Mark Thomas's Aquisitions Holding Subsidiary (AHS) put up as part of the Midway purchase.

The language of the motion, which seeks to protect the interests of holders of $150 million of senior Midway debt, comes close to alleging fraudulent insider dealing:

These cases... are tainted by highly unusual transactions by insiders of the Debtors... that, to put it charitably, require significant scrutiny... The rights and protections now offered [to AHS] are excessive and, under the circumstances, inappropriate...

The motion also digs into the shadowy relationship between former Midway owner Sumner Redstone (far left) and mysterious purchaser Mark Thomas:

[Midway] was dominated and controlled until November 28, 2008, by Sumner Redstone...

 

As recently as February 29, 2008, [Midway's] balance sheet was far less encumbered by debt... On February 29th, 2008 [Midway took three loans from Redstone-controlled entities]... just like that [Midway's] $15 million in outstanding loan indebtedness... ballooned to $90 million... to [Redstone]...

 

After the consummation of these Insider Loans... the Redstone parties sold for [$100,000] all of their [holdings] to... a very secretive individual named Mark Thomas... a person virtually unknown in the video game industry...

 

No disclosures ever have been made regarding Thomas or what, if any, relationship Thomas or his companies have with any Redstone Party... But it is safe to assume there must be a connection... given that Redstone essentially gifted [Midway for a mere $100,000]... to Thomas...

 

[Thomas stands] to reap an enormous, almost unprecedented windfall... if paid in full... the Thomas Parties will recover some 30,000% on their $100,000 investment within a matter of a few months... The Thomas Parties' return stands in stark contrast to the tens, or potentially even hundreds, of millions of dollars... that the Redstone-Thomas transaction may have stolen from [other creditors]...

Based on such language, it sounds like things could get very ugly, very quickly in the Midway bankruptcy proceedings. With that in mind, GamePolitics turned to Wedbush-Morgan analyst Michael Pachter for comment on the allegations:

The simple answer is that the unsecured creditors are alleging that the issuance of debt to Redstone secured by collateral was an “insider” deal.  The secured debt has preference over unsecured debt in liquidation, meaning that Redstone’s successor (Thomas) gets paid first.

The filing goes on to allege that when Redstone sold his equity and secured debt to Thomas, the act was a change of ownership, and triggered rules that wiped out tax losses, accelerated default provisions on the unsecured debt, and impaired Midway’s ability to refinance.

The unsecured creditors apparently don’t like the fact that Thomas was a financial buyer, and has full control now.  It is not in Thomas’ best interests to risk his big payday, and the unsecured creditors apparently believe that Thomas is going to force repayment of the debt as accounts receivable are collected.

In substance, they’re saying that Redstone orchestrated this, and they don’t like it.  They are trying to keep Thomas from pulling cash out until they get a chance to reorganize, as that could accelerate and exacerbate Midway’s troubles.

GP: We'll keep GamePolitics readers posted on developments...

DOCUMENT DUMP: Grab a copy of the creditors' motion here.

UPDATE: The Chicago Tribune has a piece on the guessing game surrounding Mark Thomas's identity (via Kotaku).

Yesterday, GamePolitics and other outlets reported that financially-troubled Midway, publisher of the Mortal Kombat series, had filed for Chapter 11 bankruptcy protection.

Since that time GamePolitics has combed through federal court records for additional insights into Midway's status. We've learned, for example, that Midway claims $167,523,000 in assets versus $281,033,000 in liabilities.

Perhaps more interesting, however, is the list of Midway's top 30 creditors. Among these, Wells Fargo Bank has the most to lose. The troubled game publisher owes the bank an eye-popping $150,000,000 of unsecured loans.

Others holding sizeable Midway IOUs include the current owner of the company, its former CEO and a variety of game retailers and licensees:

• Wells Fargo Bank - $150,000,000
• Acquisition Holdings Subsidiary  - $40,000,000 unsecured loan (Thomas is the mystery man who purchased Midway late in 2008)
• National Amusements, Inc. - $20,147,864
• NBA Properties, Inc. - $17,294,849  (License/royalty settlement)
• Tangible Media, Inc. - $8,675,954
• Warner Bros. Interactive - $6,654,203
• Artificial Mind & Movement - $2,000,000
• Epic Games - $1,975,000 (License/Royalties)
• Walmart - $1,576,035
• Far Sight Technologies - $1,279,151
• Best Buy - $1,114,036
• Target - $934,156
• Technicolor Video Services - $637,769
• Toys R Us - $615,276
• Ditan/Synergex Canada - $578,316
• CBS Outernet - $314,600 
• David Zucker - $300,000 (severance pay)
• Multi Packaging Solutions - $287,036
• A.A.F.E.S Headquarters - $276,314
• Kmart - $218,497
• Tigon Studios - $200,000(license/royalties)
• Hollywood Entertainment - $190,982
• TNA Entertainment - $160,000 (license/royalties)
• Professional Films, Inc. - $150,000
• Synergex - Latin America - $149,027
• Pioneer.JB Marketing - $133,353
• Eclipse Advertising - $132,687
• GameStop - $127,250
• Sear, Roebuck - $125,495

UPDATE: We've made Midway's Chapter 11 petition available for you. Get it here.

Financially-troubled Midway Games has filed for Chapter 11 bankruptcy protection.

A Midway press release announced the move, which applies only to the company's U.S. operations. Despite the bankruptcy filing, CEO Matt Booty remains optimistic:

This was a difficult but necessary decision... this filing will relieve the immediate pressure from our creditors and provide us time for an orderly exploration of our strategic alternatives...

Midway enters this process with strong underlying fundamentals, as evidenced by solid fourth quarter sales that exceeded expectations in spite of a challenging retail and general economic environment. Overall, Mortal Kombat vs. DC Universe sales are approaching two million units shipped, TNA iMPACT! has shipped approximately one million units, and our Game Party franchise has sold close to three million units in total.

As GamePolitics reported last month, Mortal Kombat publisher Midway was sold at the fire sale price of $100,000 to mystery investor Mark Thomas, who also assumed $150 million worth of Midway debt.

The troubled company's creditors held the right to demand repayment later this month, a move which could have driven the final nail into Midway's corporate coffin. But Edge is reporting that Midway's creditors have agreed to extend the deadline to February 19th.

It's worth noting that Midway is scheduled to release Wheelman on February 16th. Could sales and Metacritic scores of the Vin Diesel game help note-holders make up their minds about Midway's fate?

As Wedbush-Morgan analyst Michael Pachter told us last month, it is in the creditors' best interests if Midway survives:

Creditors cannot expect Midway to repay unless the company remains in business.  If the creditors compel bankruptcy liquidation, they'll get something, but arguably less than the full $150 million.  Midway's assets are worth something, but in this market, it is hard to figure out how much.  As a comparison, THQ has an enterprise value of only $80 million, so Midway's assets in liquidation would have to be worth twice as much as THQ's (as a going concern) for the creditors to be repaid.

My guess is that Midway works out a deal with the creditors and remains in business, but they are going to have to start generating sustainable profits soon, or their creditors will become impatient.