UPDATE 1-Zynga in $23 mln settlement over alleged fraud tied to IPO

(Adds comment from shareholders’ lawyer, closing share price)

Aug 7 (Reuters) - Zynga Inc reached a $23 million settlement to end litigation accusing the gaming company known for “FarmVille” of defrauding shareholders about its business prospects before and after its December 2011 initial public offering.

In its quarterly report made public on Friday, Zynga said the settlement in principle was reached this week through mediation and would have no financial impact on the company because insurers would fund the entire payout.

The accord requires final documentation, and eventual approval by U.S. District Judge Jeffrey White in San Francisco, where Zynga is based.

Zynga began struggling soon after its IPO from a failure to develop games as popular as “FarmVille,” and as customers switched to rival games played on mobile devices, such as King Digital Entertainment Plc’s “Candy Crush Saga.”

In the lawsuit, shareholders led by David Fee accused Zynga of concealing declining user activity, masking how changes in a Facebook Inc platform for its games would affect demand, and inflating its 2012 revenue forecast.

They also said Zynga hid weaknesses to enable insiders to sell $593 million of stock before a post-IPO lockup expired, and avoid a steep plunge in its share price.

Zynga priced its IPO at $10 per share on Dec. 15, 2011. The share price peaked at $15.91 on March 2, 2012, but slid below $3 less than five months later, wiping out several billions of dollars of market value.

The settlement is not reflected in court records. It typically takes a few months for similar class-action accords to win judicial approval.

In a statement on Friday, Zynga said the settlement removes the “distraction of protracted litigation.”

Nicole Lavallee, a partner at Berman DeValerio representing the shareholders, said she is pleased with the settlement.

On Thursday, Zynga said its second-quarter loss narrowed to $26.9 million, or 3 cents per share, from $62.5 million, or 7 cents, a year earlier. Revenue rose 30 percent to $199.9 million, though the number of monthly active users fell 32 percent to 83 million.

Zynga shares closed up 19 cents, or 7.8 percent, at $2.64 in Friday trading on the 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 Alan Crosby)