Risk & Compliance

Judge Finds Zynga Investors Have Viable Fraud Claims

Shareholders accuse the online gaming company of failing to disclose slumping revenue growth.
Matthew HellerMarch 26, 2015
Judge Finds Zynga Investors Have Viable Fraud Claims

A San Francisco federal judge has allowed Zynga Inc. shareholders to proceed with their class-action lawsuit alleging the online gaming company failed to disclose slumping revenue growth before its market value declined by several billion dollars in 2012.

As Reuters reports, U.S. District Judge Jeffrey White on Wednesday denied Zynga’s motion to dismiss the case, which involves the company’s disclosures to investors before and after its December 2011 initial public offering.

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Zynga's FarmVille

Zynga’s FarmVille

According to the plaintiffs, Zynga concealed declining user activity, masked how changes in a Facebook platform for its games would affect demand, and inflated its 2012 revenue forecast. The shares fell from a peak of $15.91 on March 2, 2012 to below $3 on July 26, 2012, when Zynga posted disappointing earnings and cut its outlook.

“With Judge White’s ruling, plaintiffs intend to aggressively pursue evidence in support of their claims and work toward class certification, an adjudication on the merits, and a favorable recovery on behalf of aggrieved investors,” lawyers for the investors said in a news release.

Zynga priced its IPO on Dec. 15, 2011 at $10 per share. The suit alleges Zynga concealed its weaknesses to allow insiders to sell $593 million worth of stock before a post-IPO lockup was to expire, and to avoid a drop in its share price after the IPO.

The stock has been below $5 for more than a year, Reuters noted, amid Zynga’s failure to develop games as popular as “FarmVille,” and the rise of mobile gaming rivals such as King Digital Entertainment, the maker of “Candy Crush Saga.” The shares were trading at $2.75 on Thursday, down about 0.7% on the day.

Judge White previously dismissed the shareholders’ case in February 2014 but allowed the plaintiffs to amend their complaint. The testimony of confidential witnesses, he said in his ruling Wednesday, supported the claim that Zynga management intended to commit fraud.

Photo: flickr user ThemePlus, CC BY-SA 2.0