Zynga is being sued by its shareholders over alleged fraud

Gaming company Zynga has lost a court battle to stop a group of its investors suing the company for alleged fraud in the months leading up to its disastrous IPO, Ars Technica reports.

U.S. District Judge Jeffrey White has ruled that a group of Zynga shareholders can proceed with their lawsuit. The shareholders claim that Zynga's management mislead investors into thinking that the company was far healthier than it actually was. Management then sold their own stock before the internal bad news became public, and they made more than $500 million doing so.

A key claim made by the group of shareholders is that Zynga failed to inform them of an upcoming change to Facebook's platform that would have had an adverse effect on Zynga's games. Investors claim that Zynga knew about the change in advance, and had even been testing its games on the platform, but failed to update potential investors. In late 2012, Facebook changed its rules and Zynga games were no longer able to share automatic game progress updates on Facebook. Zynga says that it wasn't allowed to share Facebook's future plans, especially as the change was far from certain.

Another allegation made in the suit is that Zynga reported strong growth and revenue in its games, but its internal accounts told a very different story. The shareholders claim that "bookings declined significantly during the class period and yet Defendants continued to represent to the public that the bookings were strong." But Zynga says that the shareholders aren't in a position to know whether its internal accounts differed from its public statements.

Shareholders are also unhappy over claims made by Zynga regarding its pipeline of upcoming games. They say that Zynga represented its future game production as "strong," "robust," and "very healthy." But The plaintiffs claimed that those statements were misleading because the pipeline was actually seeing "substantial delays." Zynga insists that the games it launched were strong, and that delays did not have an effect on its output. The court ruled that describing Zynga's game pipeline as "strong" and "robust" was simply "business puffery" and not an actionable securities violation.

The lawsuit uses six witnesses inside Zynga to reveal what life was like inside the company at its peak. The document paints a picture of a company that "obsessively tracked bookings and game-operating metrics on an ongoing, real-time basis, with regular updates on the activity and purchases by every user of every Zynga game." Furthermore, the lawsuit says that "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."

One of the most damning claims in the lawsuit is that Zynga hid the weaknesses outlined above so that executive could sell off $595 million of stock before a post-IPO lockout expired. The shareholders claim that Zynga executives managed to avoid a "roughly 75 percent drop in its share price" by concealing problems in the company.