Zynga to Face Lawsuit Alleging Fraud Tied to IPO

Zynga Inc must face a lawsuit accusing the online gaming company known for "FarmVille" of defrauding shareholders about its prospects before and after its December 2011 initial public offering.

Reuters | Robert Galbraith

Ruling 13 months after dismissing an earlier version of the lawsuit, U.S. District Judge Jeffrey White in San Francisco on Wednesday said shareholders could pursue claims that Zynga concealed declining user activity, masked how changes in a Facebook Inc platform for its games would affect demand, and inflated its 2012 revenue forecast.

The lawsuit was based in part on at least a half-dozen confidential witnesses, and White said their testimony supported the claim that Zynga management intended to commit fraud.

"Plaintiff alleges that the officers at Zynga obsessively tracked bookings and game-operating metrics on an ongoing, real-time basis, with regular updates on the activity and purchases by every user of every Zynga game," White wrote. "Confidential witnesses all corroborate that the updates on game users and spending data was readily accessible to Zynga's management."

White rejected a claim over Zynga's alleged product launch delays, saying it was mere "business puffery" for the company to call its game pipeline "strong," "robust" and "very healthy."

Shareholders claimed that 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 roughly 75 percent drop in its share price over the next four months.

Kelly Pakula Kunz, a Zynga spokeswoman, on Thursday said the San Francisco-based company had no comment on White's decision.

Lawyers for shareholders led by an individual, David Fee, did not immediately respond to requests for comment.

Zynga priced its IPO on Dec. 15, 2011 at $10 per share.

The price peaked 2-1/2 months later at $15.91, but slid below $3 on July 26, 2012 after Zynga posted weak earnings and cut its outlook.

Zynga's share price has been below $5 for more than a year, amid a failure to develop games as popular as "FarmVille," and the rise of mobile gaming rivals such as Dublin-based King Digital Entertainment Plc, maker of "Candy Crush Saga."

In morning trading, Zynga shares were down 4 cents at $2.73.

The case is In re: Zynga Inc Securities Litigation, U.S. District Court, Northern District of California, No. 12-04007.

(Reporting by Jonathan Stempel in New York)