More Proof Zynga Doesn’t Care About Shareholders?

Online, social game maker Zynga Inc. (NASDAQ:ZNGA) has found itself sued by a shareholder after allowing executives to sell stock totaling more than $200 million after its IPO while everyone else was blocked from selling their shares for 165 days. Zynga is the largest maker of online social games in the world. A former product manager for Zynga, Wendy Lee, contends that after the IPO on December 16th, 2011, basically all shareholders including all officers and directors were barred from selling shares for 165 days but this was waived for some executives in a secondary offering, accord to Bloomberg. The information was filed in a complaint filed in a Delaware Chancery Court and made public yesterday.

Lee said that the high-ranking executives were allowed to “cash out early” and that Zynga’s board “did not extend the same opportunity to Zynga’s non-executive and former employees.” The executives “nearly doubled the proceeds from their sales” but by the time the share lockup ended, “Zynga’s share price had dropped 49.3%,” Lee went on to say. Lee had acquired 30,000 shares of Zynga stock and was only able to sell them at $3.15 after receiving them at $3.805 apiece. Zynga’s shares have fallen 71% in the full year proceeding Friday.

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Zynga produces a number of highly popular social-enabled, online games including FarmVille, CityVille, Mafia Wars, and Words With Friends.  Besides this lawsuit, Zynga faces a number of challenges including accusations and even admissions that it copies games, according to Game Politics. The company is also trying to shift away from using Facebook (NASDAQ:FB) as the social platform driving its games and has launched its own game log-in and in-game purchase commerce platform via its website.

Other lawsuits over this same conduct by Zynga have been filed in the past by a number of involved parties. Nearly a year ago, NBC News reported that a number of lawsuits and investigations had begun that alleged that Zynga executives had engaged in insider trading.

One lawsuit read, “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…Zynga had misrepresented and/or failed to fully disclose the true extent to which it had been experiencing a sharp drop-off in users of its most profitable web games and delays in developing new games to launch on social media platforms.”

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Even if Zynga is ultimately vindicated from the lawsuits, it faces an uphill battle in the increasingly competitive social game space. The company’s initial successes have been largely replicated by other companies and Zynga’s shift away from Facebook will not be smooth. Facebook has begun actions to restrict the ability of Zynga games to self-promote to players’ friends via Facebook’s notifications system. Rebuilding trust with its shareholders will be difficult as well.

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