LawsuitVille -Zynga investigated for insider trading

Steven Loeb · July 28, 2012 · Short URL:

At least five law firms reveal their investigation into why Zynga insiders sold stock back in April

Zynga's becoming the brunt of some pretty nasty jokes. The social gaming giant, whose games include CityVille, FarmVille, CasteVille and Words with Friends, is now being referred to as a company that should make games like "LawsuitVille and Screw with Friends." 

Several months ago, when Zynga's shares traded around $12, executives and of the company and the company's board sold more than $500 million in stock, igniting shareholder revolt, and questions whether insiders knew of any information that would adversely affect Zynga's financials before they sold.  

At least five law firms have announced that they will be investigating whether or not those Zynga insiders who sold off their stock in April were engaging in insider trading.

Law firms Schubert Jonckheer & KolbeNewman FerraraJohnson & WeaverWohl & Fruchter, and Levi & Korsinsky all released press releases Friday, revealing their investigations into what happened.  

So what happened?

Earlier this week, Zynga slashed its bookings forecast for the full year to $1.15 billion from $1.23 billion, down from as high as $1.5 billion. For Zynga, bookings are often considered a more accurate measure of how the company did during the period. Bookings represent what Zynga sells in the quarter, though it recognizes this revenue over a period of time. The company also reported net income (on an adjusted basis) and revenue that fell well below analysts' forecasts.

Shares took a nosedive of 40% to $3, on the news. Not such great news for shareholders. But making matters worse is now knowing that insiders sold shares back in April when the stock traded at around well above where it traded even before the company reported. 

Zynga executives, including CEO Mark Pincus, CFO David Wehner, COO John Schappert, and general counsel Reginald Davis, as well as many heavy investors, such as Google, Venture Partners, Union Square Ventures, Reid Hoffman and others, all cashed out part of their stock in April, months before the stock cratered on the disappointing earnings report.

In total, 43 million shares were sold for $516 million.  Pincus alone sold 16.5 million shares for $200 million, though he, and the other investors, only sold a portion of their stock, so it should be noted that they do still have a financial stake in the company.

Privy to bad news?

The “investigation focuses on whether these insiders were privy to material adverse facts about Zynga’s business and financial condition at the time they sold their shares,” Schubert Jonckheer & Kolbe wrote in its press release.

“The investigation stems from concerns that Zynga misrepresented and/or failed to disclose materially adverse facts about its business and financial condition. Furthermore, certain Zynga executive officers sold a combined 43 million shares of Company stock during the second quarter of 2012, shortly before Zynga reported poor financial results,” Levi & Korsinsky said in its release.

The investigations into whether or not people with knowledge of the company decided to make some quick cash by withholding information from investors may actually turn out to be a boon for those who own stock in the company. 

“Investors who purchased shares of Zynga common stock at any time before July 26, 2012, including those who purchased during the company's IPO in December 2011, and who currently still own any shares may have legal rights to compensation,” declared Johnson & Weaver.

What initially only seemed to be bad optics may now turn into something much, much worse.

Zynga stock has dropped 70% from its initial public offering of $10 a share in December. The stock peaked at $14.69 in early March when its close ties with Facebook were boosted by pre-IPO anticipation for the social network.

Zynga stock fell nearly 3% on Friday, hitting a new low of $3.09 a share.

Zynga could not be reached for comment

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Zynga is the largest social gaming company with 8.5 million daily users and 45 million monthly users.  Zynga’s games are available on Facebook, MySpace, Bebo, Hi5, Friendster, Yahoo! and the iPhone, and include Texas Hold’Em Poker, Mafia Wars, YoVille, Vampires, Street Racing, Scramble and Word Twist.  The company is funded by Kleiner Perkins Caufield & Byers, IVP, Union Square Ventures, Foundry Group, Avalon Ventures, Pilot Group, Reid Hoffman and Peter Thiel.  Zynga is headquartered at the Chip Factory in San Francisco.  For more information, please visit