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July 31, 2012

Seven Law Firms Investigate Whether to File Insider Trading Suits against Zynga: Report

By Ed Silverstein, TMCnet Contributor

Some seven law firms are investigating whether to sue gaming company Zynga (News - Alert), in light of questions related to insider trading allegations, according to news reports. One of the firms reportedly filed a class-action suit on Monday.

Zynga was trading below $3 a share on Tuesday afternoon – compared to a $10 for its IPO or $12 in April, when Zynga made a secondary offering of shares.

In April, CEO Mark Pincus, other early investors and a few top executives sold about $516 million in Zynga stock, according to Business Insider. Pincus back then sold 16.5 million shares, representing 15 percent of his total holdings, according to news reports.

The sale was allowed due to a waiver of the earlier price by underwriters Morgan Stanley and Goldman Sachs.

It was afterward that the company had a “disastrous” Q2, the report added, with full-year guidance lowered and the stock falling in value.

In response, a law firm, Newman Ferrara, filed a class-action insider trading lawsuit against Zynga in federal court in the Northern District of California on Monday, according to the San Jose Mercury News.

Some doubt the merit of such a legal action. “Anything's possible, but we highly doubt Zynga's top executives would really do something as colossally stupid as commit insider trading,” the Business Insider said in response to the suit. “We think he [Pincus] and his team are more interested in building a lasting business than cashing out short-term for a few million dollars.”

Among the reasons for them not doing it is that their wealth is mostly tied up in the company’s stock.

Business Insider reports that Zynga is focusing on mobile games now and could move toward online gambling. More, too, is being done to move to “male-oriented games," Business Insider said.

Newman Ferrara said its “investigation focuses on whether Zynga misrepresented or failed to disclose material adverse facts about its business and financial condition including, among other things, that Zynga has been: (1) experiencing a rapid decline in user numbers of existing web games; (2) experiencing substantial delays in launching new web games; and (3) entirely dependent on Facebook’s (News - Alert) online gaming platform.”

The Verge reported that to make cases effective, the law firms each need large investors as clients. In addition, The Verge speculates the law firms will seek pertinent e-mails and internal documents “to learn how much company insiders knew about the health of Zynga's business and when. If they had information that the company's results would be so poor, and failed to disclose that to the public before selling, then a case can be made for insider trading.”

In its inquiry, the law firm, Kessler Topaz Meltzer & Check LLP, questioned if Zynga was “concealing declines in users and the sale of virtual goods, the company's prime revenue source,” Reuters reported. The law firm wants class-action status for the lawsuit.

In a recent report, TechZone360 said Zynga saw a loss of $22.8 million during the latest quarter, which ended in June. In the most recent quarter, Zynga also saw revenue of $332.4 million, compared to an average analyst projection of $344.12 million, according to data from Thomson (News - Alert) Reuters.

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Edited by Braden Becker

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