(Reuters) - Zynga Inc must face a lawsuit that accuses the gaming company known for its “FarmVille” game of defrauding shareholders about its prospects before and after its December 2011 initial public offering.
Ruling 13 months after dismissing an earlier version of the lawsuit, U.S. District Judge Jeffrey White in San Francisco said on Wednesday that 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.
Zynga’s market value slid by several billion dollars between March 2, 2012, when its share price peaked at $15.91, and July 26, 2012, when the price dropped below $3 after the company posted disappointing earnings and cut its outlook.
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 led by David Fee also claimed that Zynga hid its weaknesses to enable insiders to sell $593 million of stock before a post-IPO lockup was to expire, and avoid a roughly 75 percent drop in its share price over the next four months.
Zynga had priced its IPO at $10 per share on Dec. 15, 2011.
Kelly Pakula Kunz, a Zynga spokeswoman, on Thursday said the San Francisco-based company had no comment on White’s decision.
Nicole Lavallee, a partner at Berman DeValerio representing shareholders, said she was gratified by the decision.
Zynga’s share price has been below $5 for more than a year owing to a failure to develop games as popular as “FarmVille,” as well as the rise of mobile gaming rivals such as Dublin-based King Digital Entertainment Plc, maker of “Candy Crush Saga.”
Zynga shares were down 1.44 percent at $2.73 in afternoon trading on Nasdaq.
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, editing by G Crosse
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