updated 2/14/2007 3:40:20 PM ET 2007-02-14T20:40:20

The founder and former chairman of Take-Two Interactive Software Inc., publisher of the “Grand Theft Auto” video games, became the first CEO on Wednesday to be convicted of backdating stock options to boost their value.

Ryan A. Brant, 35, pleaded guilty in Manhattan’s state Supreme Court to first-degree falsification of business records in a deal that lets him avoid prison with a sentence of five years probation. He will still pay a fine of $7.26 million.

State Supreme Court Justice Brenda Soloff set Aug. 1 as the sentencing date.

Stock options allow employees to buy shares of their company’s stock in the future at a set price. If the stock price rises before the options are exercised, the employee makes a profit. If the stock’s value drops, the option is worthless.

With backdating, an employee is guaranteed a profit by being given a retroactively dated option to buy at a low price, while the stock’s current market value is higher.

Brant backdated stock options to coincide with the low or near low Take-Two stock price for a specific period, prosecutors said. He then was able to exercise the options and sell them at an advantageous price.

This allowed Brant and other Take-Two senior executives and employees to receive millions of dollars in unrecorded compensation, Manhattan District Attorney Robert Morgenthau said.

“We believe this is the first time a CEO has ever been convicted of backdating options,” Morgenthau said. “As far as we know it’s the first time in the country.”

“CEOs and other executives who deliberately skew their books to hide the full extent of their compensation are engaged in a fraud on their stockholders and creditors,” Morgenthau said. He said they will be criminally prosecuted if caught.

The district attorney said backdating options grants falsely informs the investing public of the company’s financial state.

If the options grants were recorded properly, Morgenthau said, Take-Two’s financial statements would have had to report larger general and administrative operating expenses — including higher compensation to Brant and other employees.

In a seven-year period, from 1997 to 2003, Brant received 10 backdated option grants for a total of approximately 2.1 million shares of Take-Two stock, Morgenthau said. He said Brant exercised all of them before resigning from the company in October 2006.

Morgenthau said Take-Two’s records reflect that on Feb. 22, 2002, 15 people received grants of 511,000 stock options, with 100,000 of those going to Brant. On that date, he said, the company’s stock closed at $15.25 per share, the lowest price during the company’s February to April 2002 fiscal quarter.

But many of those options were not granted until mid-April 2002, when the stock price was above $20 per share, Morgenthau said. He said Take-Two’s business records, including purported compensation committee minutes, were falsified after the fact to reflect the earlier grant date.

Similarly, Take-Two’s records falsely show that on June 21, 2002, Brant received 100,000 stock options, and two other executives received 25,000 stock options, all with an exercise price of $16.83, the district attorney said.

In fact, Morgenthau said, the grants were made after June 21, at a time when the stock price was higher. The June 21 date was chosen because that was when Take-Two stock dropped to its lowest price in the May to July fiscal period.

Take-Two is one of a number of companies under internal, federal and local investigation for possible backdating of stock option grants.

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