A New York firm has filed a class-action lawsuit against Zynga, claiming the company's executives and early investors knew the company was struggling when they sold millions of shares before announcing a substantial drop in projected earnings.
Newman Ferrara filed the lawsuit Monday afternoon in federal court in the Northern District of California, home of the San Francisco-based online gaming company, according to Roy Shimon, a lawyer with the firm. The complaint lists only one original plaintiff, shareholder Mark DeStefano, but Shimon said his firm expects "dozens and dozens" more to join.
Zynga executed a secondary offering to its initial public offering in April, almost two months before the end of its traditional "lockup" period for post-IPO share sales, in which CEO Mark Pincus and other executives and early investors sold more than 43 million shares at $12 apiece, $2 higher than the IPO price, for proceeds in excess of $500 million.
At the time of the secondary offering, Zynga was forecasting full-year earnings of 23 to 29 cents a share on $1.425 billion to $1.5 billion in gross bookings; in its quarterly earnings report last week, Zynga drastically revised those expectations to 4 to 9 cents a share on gross bookings of $1.15 billion to $1.225 billion.
Before last week's earnings announcement, "Zynga had misrepresented and/or failed to fully disclose the true extent to which
Zynga's stock has dropped more than 40 percent since last week's announcement, and is down 75 percent from the $12 price commanded during the secondary offering, which Shimon said "raises some red flags and is highly suspicious."
Shimon said the company expects the discovery process - in which a defendant must turn over possible evidence to plaintiffs -- to deliver additional "concrete proof" that Zynga insiders knew of weaknesses within the company's business when selling the shares.
"We'll be able to gain a much better understanding and idea of what exactly they knew at the time of the sales and if Zynga's financials were suffering at the time of those sales" after discovery in the case, Shimon said in a telephone interview Tuesday morning.
Newman Ferrara is one of at least seven law firms that have publicly announced investigations into Zynga since the drastic cut in full-year earnings expectations, and more are likely to file suit.
"In all likelihood, at least a few others will file suit, and at some point the court will consolidate into one action," Shimon said.
Zynga declined to comment on the lawsuit.
Zynga stock closed lower for the fourth consecutive session since its earnings report, falling 2 percent to $2.95.
Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/mercbizbreak.