A federal judge has refused to dismiss a class action seeking financial damages from social-media game company Zynga Inc. for allegedly misleading investors about its financial strength and business prospects including in connection with a secondary offering for which defendants and other insiders obtained an early release of their post IPO lock-up on selling shares.
In a March 25 decision, Judge Jeffrey S. White of the U.S. District Court for the Northern District of California said that confidential witnesses relied on in the complaint provided enough detailed information about the alleged fraud to warrant upholding the consolidated complaint.
Berman DeValerio is co-lead counsel in the case, which focuses on statements made by Zynga and individual defendants between February 14, 2012 and July 25, 2012. Zynga makes Farmville and other games played on social networking sites, like Facebook, and on mobile devices.
“We are gratified by the judge’s ruling and look forward to moving on to merits discovery,” said Nicole Lavallee, one of the Berman DeValerio partners involved in the case.
Judge White declined to dismiss the complaint alleging that Zynga executives touted the company to investors while withholding information about decreasing sales or bookings, and a platform change at Facebook that the defendants knew would hurt Zynga’s business prospects and issuing unsupportable guidance for 2012. Under the federal securities laws, plaintiffs must plead facts in detail to show a strong inference that defendants knew or should have known that their statements were false or misleading when made, a concept known as scienter.
In his ruling, Judge White said that the use of confidential witnesses in the complaint passed a two-step test to satisfy the pleading requirements for scienter and that plaintiff had done enough to plead that the alleged fraud had caused the subsequent stock drop.
Judge White stated that the witnesses testified about Zynga officials’ awareness of bookings numbers and the upcoming changes to the Facebook platform – and that statements the witnesses reported supported scienter. Moreover, he found that these allegations also rendered defendants’ statements regarding 2012 guidance actionable.
“In this action, the confidential witnesses – who all detailed their job descriptions and responsibilities – testify at length as to the accessibility of daily reports indicating in real time the company’s bookings numbers. …. The confidential witnesses all corroborate that the updates on game users and spending data was readily accessible to Zynga’s management and that the statistics were automatically reported to Zynga employees on a real-time basis,” the judge wrote.
“With regard to the Facebook platform, a confidential witness stated that Defendants were informed of the developments relating to the implementation of the platform changes and the fact that Zynga had beta-tested the new platform,” he continued.
With the denial of the motion to dismiss, available here, the case moved to the discovery phase preceding trial. The action is In re Zynga Inc. Sec. Litig., No. 12-cv04007 (N.D. Cal.)
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.