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Zynga Can't Dodge Consolidated Suit Over IPO, Stock Dump

By Linda Chiem

Law360, New York (March 25, 2015, 7:05 PM ET) -- A California federal judge on Wednesday rejected social-media game maker Zynga Inc.’s bid to toss a consolidated class action alleging it deliberately misled investors about Zynga’s business prospects in connection with its 2011 initial public offering and a subsequent secondary offering.

U.S. District Judge Jeffrey S. White said the plaintiffs have sufficiently alleged that Zynga and some of its directors duped investors — who sustained losses after Zynga’s stock tanked in mid-2012 — by making material misrepresentations or concealing information on the company’s booking numbers and on an upcoming platform change at Facebook that they knew would hurtZynga’s social-media gaming business.

Judge White said the plaintiffs included enough specific facts to back up its arguments regarding the falsity and materiality of Zynga’s statements and included lengthy testimony from confidential witnesses on real-time reports of Zynga’s booking numbers to support a strong inference of scienter under Section 10(b) of the Securities Exchange Act of 1934.

The judge also said there were sufficient allegations that Zynga made further misrepresentations by issuing positive guidance and assurances for the full year 2012 that were weighted toward the back half of the year.

For example, the plaintiffs allege that after Zynga reported dismal second-quarter 2012 earnings and a drastically lowered outlook for the remainder of 2012, shares of Zynga common stock plummeted over 37 percent in one day down from a July 25, 2012 close of $5.08 to a July 26, 2012 close of $3.18 per share on extremely high volume, according to the opinion.

“As the court has already found that the representations about bookings and changes to the Facebook platform may form the basis for a claim of material and misleading representations, and that at the announcement of the true results and guidance, the stock price fell considerably, the court finds that there is a triable issue of loss causation,” Judge White said.

The consolidated class action alleges that Zynga and its highest-ranking executives, including Co-Founder Mark Pincus, former Chief Financial Officer David M. Wehner, and former Chief Operating Officer John Schappert artificially inflated Zynga’s stock price by misleading investors about Zynga’s core business metrics.

The suit, first filed in 2012, accused Zynga’s top brass of hiding the fact that the company was facing substantial delays in launching new web games and its revenue and bookings were entirely dependent on Facebook’s online gaming platform. Meanwhile, they deceptively touted significant 2011 investments in international market development, mobile games and technology infrastructure, saying they would drive long-term growth in the latter half of 2012 that did not materialize, according to court documents.

Those select Zynga insiders also unloaded over half-a-billion dollars worth of personally held stock in a secondary offering in April, just three months before reporting disastrous financial results in 2012 that subsequently sent Zynga's stock price plummeting to less than $3 a share, according to court documents.

Judge White had dismissed an earlier version of the consolidated class action in February 2014, allowing the plaintiffs a chance to amend their suit. They then trimmed down their suit significantly by dropping certain defendants, shortening the class period, abandoning all claims they had raised under the Securities Act of 1933, and tossing references to certain confidential witnesses, according to court documents.

San Francisco-based Zynga develops online social games such as FarmVille, Mafia Wars and Words With Friends that are available on mobile platforms and social networks such as Facebook.

It went public in December 2011 with a market valuation of $10 billion, opening trading at $11 a share.

The plaintiffs’ co-lead counsel Jeffrey Norton of Newman Ferrara LLP told Law360 on Wednesday that he was happy with the ruling.

“We’re very pleased with the result,” he said.

Counsel and press representatives for Zynga did not immediately respond to requests for comment on Wednesday.

The plaintiffs are represented by Jeffrey M. Norton, Roy Shimon and Ramzi Abadou of Newman Ferrara LLP and Joseph J. Tabacco Jr., Nicole Lavallee and Victor S. Elias of Berman Devalerio.

Zynga is represented by Jordan Eth, Anna Erickson White and Kevin A. Calia of Morrison & Foerster LLP.

The consolidated case In Re Zynga Inc. Securities Litigation, case number 4:12-cv-04007, in the U.S. District Court of the Northern District of California.

— Editing by Ben Guilfoy.

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