Zynga Inc. has reached a $23 million settlement ending class action litigation with investors who accused the social media gamemaker of misleading shareholders about its prospects leading up to a 2011 initial public offering (IPO), according to a regulatory filing last month. The FarmVille creator said the preliminary agreement, reached after a mediation session overseen by retired federal judge Edward Infante, will require final approval in a California federal court. The company said the settlement will be funded by insurance and will have no impact on its financial statements if finalized in its current form. Zynga did not elaborate on terms of the settlement, which it disclosed in its quarterly Securities and Exchange Commission filing.
The class action, first filed in 2012 by shareholder David Fee, claimed that Zynga misled investors about financial projections around time of its 2011 IPO, as well as its secondary offering in 2012. Investors alleged Zynga leaders concealed the fact that the company’s launch of its new Web games was delayed and misrepresented its booking numbers, which investors did not realize were fully dependent on Facebook’s online gaming platform. Investors also claimed the company promised they would see long-term growth in 2012 thanks to investments in international market development, mobile games and technology infrastructure.
That growth failed to happen, and investors say they lost money when Zynga’s stock took a dive in 2012, falling more than 37 percent in one day, down from a close of $5.08 per share on July 25 to $3.18 on July 26. The investors said this was the result of an artificially inflated stock price. When Zynga went public in December 2011, it offered its stocks at $11 a share, with a market valuation of $10 billion. Shareholders of Zynga, which develops online social games including FarmVille, Mafia Wars and Words with Friends, said that before that stock dive, the company unloaded more than half a billion dollars of personally held stock in a second offering in April.
Judge White first rejected a motion to dismiss by Zynga in March, stating that shareholder claims regarding the falsity and materiality of the company’s statements could be supported. He also dismissed an earlier version of the consolidated class action in February 2014, allowing the Plaintiffs to amend their suit. The scope of their suit was then significantly reduced by dropping certain Defendants, shortening the class period, abandoning all claims they had raised under the Securities Act of 1933 and no longer referring to certain confidential witnesses.
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