In a lawsuit that video-game publishers—including those of popular sports games—should follow, the maker of the wildly anticipated, widely panned game Cyberpunk 2077 has been sued for securities fraud. The lawsuit, filed on Dec. 24 in Los Angeles federal court, is brought by investor Andrew Trampe against CD Projekt (CDP), a Polish company incorporated in Delaware. Several company officials are also named as defendants.
The complaint is drafted by attorney Laurence Rosen, an expert in securities class actions and derivative litigation. He maintains that on Dec. 14, Trampe purchased 328 shares of CDP stock, at $21.30 a share ($6,986.40 total), on the OTC Pink trading market. Trampe did so four days after Cyberpunk 2077—a first-person, open-world action game—was released for Windows, PlayStation 4, Xbox One and Google Stadia. Rosen contends that Trampe was knowingly misled by CDP’s effusive characterizations about the game. Further, his investment was marred by damage to the company’s brand in the wake of the PlayStation 4 and Xbox versions being harshly criticized upon the game’s release on Dec. 10.
Push Square, for instance, scored Cyberpunk 2077 as “bad, 3 out of 10”. The publication chastised the game as “blatantly unfinished” and added, “the worst part is that CD Projekt has known this to be the case for quite some time. On PS4 and PS4 Pro, poor performance comes close to wrecking the experience.” IGN, scoring the game as “bad, 4 out 10,” wasn’t much kinder: “The PlayStation 4 and Xbox One versions,” IGN wrote, “are simply not in an acceptable state… . You should absolutely get a refund if possible.”
Some buyers have been able to get their money back. Sony Interactive Entertainment, which has removed Cyberpunk 2077 from its online store “until further notice,” offers refunds. The same is true of the Microsoft Store for those who bought the Xbox One version. Cyberpunk 2077 reportedly plays much better on computers, PlayStation 5 and Xbox Series X. CDP has also provided game updates to remedy some of the glitches.
Trampe’s case isn’t based on disappointment from playing Cyberpunk 2077. It’s instead about discrepancies between how CDP promoted and hyped the game and the actuality of that game—and the accompanying impacts on stock prices.
The complaint furnishes a detailed retelling of the game’s development history, including CDP’s statement on Jan. 16 describing Cyberpunk 2077 as “complete and playable.” The statement mentioned the game’s release date would be pushed back to September—there would ultimately be three postponements—to “finish playtesting, fixing and polishing.” This statement appears to be misleading or fabricating, at least with respect to the PS4 and Xbox versions. Those games struggled in December, never mind 11 months earlier.
The harsh reviews of Cyberpunk 2077 upon its release prompted CDP officials to apologize and acknowledge errors. On Dec. 14, CEO Adam Kicinski is quoted as saying the company had “underestimated the scale and complexity of the issues, we ignored the signals about the need for additional time to refine the game.” Kicinski’s remarks contrasted with his earlier assurances about Cyberpunk 2077‘s quality. During a Nov. 25 call to discuss CDP’s quarterly results, Kicinski opined, “We believe that the game is performing great on every platform.”
Cyberpunk 2077’s controversial rollout has placed CDP’s stock price on a rollercoaster. As detailed by the complaint, the company’s American depositary receipts (ADRs) fell from $27.68 on Dec. 9 to $20.75 on Dec. 14. During that same time, CDP’s common share plummeted from $107.65 to $86. After Sony announced the refund option four days later, stock prices tumbled further. ADR fell to $18.50 per share while common stock dropped to $78.80 per share.
Trampe maintains that because of CDP’s “wrongful acts and omissions,” he suffered “significant losses and damages.” The relevant legal theory is found in Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b-5. Section 10(b) supplies the SEC with authority to combat fraudulent acts in the selling of stocks and other securities. This statutory provision makes it illegal to mislead investors on material facts relating to their decision to buy or sell. 10b-5 similarly casts false statements and omitted information about investments as illegal acts. Section 20(a), meanwhile, authorizes joint liability for company officials who facilitate in fraud.
CDP and its officials are accused of “making untrue statements” about Cyberpunk 2077. They did so, Trampe insists, while knowing investors would be listening. Investors allegedly wouldn’t have purchased CDP stock at “artificially and falsely” inflated market prices if they knew the severity of the game’s problems. Trampe demands a jury trial and unspecified monetary damages.
Trampe also seeks to have his case certified as a class action on behalf of those who bought CDP stock between Jan. 16, 2020 (the day the game was postponed) to Dec. 17, 2020 (the day before Sony invited refunds). Trampe will need to convince the presiding judge, Fernando Olguin, of the four elements of certification—numerosity (whether there are enough investors to constitute a class); commonality (whether the questions of law and fact are similar among investors); typicality (whether Trampe’s claims are typical of investors) and adequacy (whether his interests are aligned with others who would be in the class). One likely hurdle is that investors who purchased stock before the game’s release may have different (stronger) arguments than those who, like Trampe, took a chance after the game had been released and ridiculed.
Forecasting CDP’s Legal Defenses
CDP will answer the complaint in the coming weeks. The company has already expressed that it will “will undertake vigorous action to defend itself.”
Expect CDP to insist that none of its statements amounts to an unlawfully false or misleading proclamation.
To that end, defendants in securities fraud cases sometimes argue that advertising and promotional statements should be regarded as “puffery.” Puffery refers to vague, feel-good expressions of optimism about a product or service rather than legally binding promises. The company might portray its earlier hype of the game and depiction of it as “playable” as mainly in reference to the Windows and Stadia versions, not the PS4 or Xbox versions. CDP might also contend that “playable” is a subjective term and that while they’re saddled with in-game nuisances, the PS4 and Xbox versions still technically “work.”
CDP could also maintain that investors in video game companies should know that high-profile games are often released with “bugs” that are subsequently corrected or mitigated by online game updates. While Cyberpunk 2077’s woes appear more ruinous than those typically found in new games, its less-than-finished state is not unique or surprising.
As the Cyberpunk 2077 saga plays out, EA, 2K (through parent Take-Two Interactive) and other publishers of sports games should keep close tabs. Those companies are, like CDP, publicly traded entities. They have also released sports games that attracted criticisms for glitches and necessitated updates. If CDP is found liable, it would have an impact on how companies promote games pre-release and on the completeness of those games when they’re released.