First Zynga insider trading lawsuit filed

Soon after Zynga’s crash-and-burn quarter reduced its stock to the $3 level, five legal firms have announced investigations into allegations of insider trading.

The problem?

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As we reported before, Zynga executives and investors, including CEO Marc Pincus, sold over $500 million in stock just three months before. Pincus sold $200 million of Zynga stock, chief operating officer John Schappert sold $3.9 million, and chief financial officer David Wehner sold stock worth $4.6 million.

Those five firms were Schubert Jonckheer & Kolbe, Newman Ferrara, Johnson & Weaver, Wohl & Fruchter, and Levi & Korsinsky.

Today San Francisco-based Newman Ferrara has announced the first lawsuit on behalf of Mark H. DeStefano and “all other persons similarly situated.” In other words … a class action. The firm believes that hundreds of investors share the same concerns and may be included in the suit.

Key among the law firm’s allegations are these:

• Executive stock lock-up agreements were initially set to expire May 28, 2012
  • All of our officers and directors and the holders of substantially all of our capital stock have entered into lock-up agreements with us which provide that they will not offer, sell or transfer any shares of our common stock beneficially owned by them for 165 days, subject in certain cases to extension under certain circumstances, following the date of this prospectus. We have agreed with Morgan Stanley & Co. LLC and Goldman, Sachs & Co. not to waive these lock-up restrictions without their prior consent.
• Zynga issues positive guidance on stock price
  • In announcing its 2012 outlook, Zynga stated that “Bookings are projected to be in the range of $1.35 billion to $1.45 billion. We expect that growth will be weighted towards the back-half of the year with slower sequential growth in the first half of the year.”
• The lock-up agreements were revised on March 23, 2012
  • On March 23, 2012, before the Secondary Offering was completed, Zynga filed an Amendment to Form S-1 with the SEC. The Amended Registration Statement authorized the Secondary Offering of 42,969,153 shares of Class A common stock. Zynga’s March 23 Amended Prospectus waived the lock-up restrictions that previously restricted Zynga insiders from selling their common stock until May 28, 2012. Indeed, the Prospectus announced “[w]e are releasing the selling stockholders from these lock-ups to permit them to sell up to 49,414,526 shares (including the underwriters’ option to purchase additional shares) in this offering.”
• Which enabled Zynga insiders to sell stock early
  • The March 23 lock-up restriction waiver enabled Zynga insiders, including the Defendants, to sell their shares of Zynga stock when the Secondary Offering was on April 3, sooner than the May 28, 2012 expiration date.
• And allowed them to profit while ordinary investors did not (and rank-and-file employees could not)
  • As detailed below, the Individual Defendants promptly sold the shares they received in the Secondary Offering, for proceeds of over $500 million. While Zynga insiders were able to sell their holdings at $12 per share before Zynga’s second quarter financial results were announced, Zynga’s non-executive employees and other public shareholders suffered colossal losses on their investments.
• In addition, Zynga continued to issue positive guidance
  • On April 26, 2012, Zynga issued a press release on Form 8-K with the SEC and filed a corresponding Quarterly Report on Form 10-Q with the SEC announcing its financial results for the first quarter of 2012. Zynga touted its growth in both web and mobile bookings, reporting record bookings of $329 million for the quarter, up 15% year-over-year. The press release announced that “[w]e’re pleased with the progress that Zynga has made in the first quarter growing our audience reach 25% year over year and nearly 20% quarter over quarter.”
  • In issuing its 2012 outlook, Zynga announced that “Bookings are projected to be in the range of $1.425 billion to $1.5 billion. We expect growth to be weighted towards the second half of the year.”
• And, misrepresent or failed to disclose important information
  • Zynga misrepresented or failed to disclose material adverse facts about its business, operations, and growth prospects including, among other things, that: (1) Zynga had been experiencing a rapid decline in user numbers and virtual goods sold in existing web games; (2) Zynga had faced substantial delays in launching new web games; and (3) Zynga’s revenue and bookings were entirely dependent on Facebook’s online gaming platform.

It’s a serious lawsuit and obviously a major problem for Zynga. But the company and its executives will have their day in court and will be able to present their view of the events at that time.

One possibly bigger problem for the company right now?

I wonder if the rank-and-file employees, who were forced to wait longer to sell than key executives, are one of the parties feeling particularly aggrieved right now.

Especially if their options happen to be underwater at the moment.

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