Final Fantasy VII - Barett Wallace

While the character of Barett Wallace eventually evolved through the course of a few Final Fantasy games, critics of the series immediately noticed that Wallace seemed to embody the awful "lazy" stereotype that's been used in negative portrayals of African Americans, given his proclivity for a weird, Japanese version of Black English Vernacular and superficial similarities to Mr. T. Defenders of Barett also acknowledged the problem, but cited that Japan has a different cultural understanding than the US, and the character, though tone-deaf, was created with the best of intentions. By the time Wallace reached Dirge of Cerberus years later, Square Enix had finally written him as a complete character instead of a one-note racist cliche.

Streets of Rage 3 - Ash

The designers of Streets of Rage couldn't decide if they wanted boss character Ash to be a ridiculous gay stereotype or a ridiculous transgender stereotype, so they just kinda stopped in the middle at the most ridiculous place imaginable. Ash, who can only be described as a leather daddy, wears an enormous medallion of the male symbol (indicating his romantic preference, apparently), leggings, and high heels. His fighting moves are that of a deranged ballerina, even though he deals a ton of damage. The stereotype did not go unnoticed, and while the code remained in the American version of the game, the character does not make an official appearance.

Final Fight - Poison & Roxy

It's hard to define exactly where Poison and Roxy went wrong, because it gets weird in so many places. The two enormous, tough women appeared in the original Japanese version of Final Fight, but were omitted from the American version because it was deemed offensive in 1989 to fight women in a video game, even though 1987's Double Dragon intro lady-gut-punch was somehow okay. Capcom responded by stating that the pair were either pre-op transgendered people or transvestites, tacitly making the argument that as long as they still had biologically male parts, it was okay to beat them up. It still was too confusing for an American audience, and later literature and appearances remain completely ambiguous what's really going on, but no matter how Capcom spins it, their careless treatment has been established.