District Court Denies Zynga’s Motion to Dismiss Class Action Securities Complaint

In In re Zynga Securities Litigation, No. C 12-04007 JSW, 2015 BL 83862, (N.D. Cal. Mar. 25, 2015), the United States District Court for the Northern District of California issued an order denying the motion of Zynga, Inc. (“Zynga”), Mark Pincus, David M. Wehner, and John Schappert (“Defendants”) to dismiss lead plaintiff Mark H. DeStefano’s (“Plaintiff”) first amended consolidated complaint (“Complaint”).

Plaintiff alleged Zynga violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (claims under the Securities Act of 1933 were filed but abandoned). Relying on a number of confidential witnesses, the Complaint alleged that Zynga misled investors as to the growth in bookings, the strength of the new game pipeline, and changes to Facebook that would negatively affect bookings.

Zynga sought dismissal, arguing that Plaintiff did not plead: (1) with particularity that the statements were false or misleading; (2) facts demonstrating a strong inference of scienter; and (3) loss causation.

First, with respect to allegations that Zynga represented its bookings to be strong even though bookings were in fact decreasing, Defendants argued Plaintiff failed to plead facts with the requisite particularity to show the falsity of the statements. The court determined the inflated bookings allegations were based on the “sufficient personal knowledge” of the confidential witnesses, and found them sufficient.

Second, Plaintiff alleged Zynga represented its new game pipeline to be “strong” and “robust” and “very healthy,” even though long delays were occurring. The court found the alleged representations regarding the new game pipeline constituted “business puffery,” and, therefore, those allegations were inactionable.

Third, Plaintiff alleged Zynga did not disclose information it possessed about a specific pending change to Facebook that would adversely impact the company. Zynga had stated general warnings that changes to Facebook could affect the business. But a confidential witness alleged Zynga knew of a specific change to Facebook and failed to disclose that information, and the court found those allegations to be sufficient.

Finally, Plaintiff alleged Zynga issued incorrect projections for the year 2012. The court found that the projections for 2012 could be actionable to the extent premised upon the alleged misrepresentations concerning bookings and the change to the Facebook platform. Moreover, the allegations were sufficient to show that the Defendants were “aware of undisclosed facts tending seriously to undermine” the accuracy of their financial guidance.

With respect to the need for a strong inference of scienter, the court noted that a number of confidential witnesses had declared officers of Zynga “were aware of the bookings numbers on a consistent and daily basis.” Additionally, a confidential witness declared Zynga was similarly well aware of pending changes to Facebook. The court found Plaintiff’s complaint contained enough particularity to show a strong inference of scienter.

To establish loss causation, the allegations had to be sufficient to show that 1) the plaintiff paid an artificially inflated price for the company’s stock; and 2) the stock price fell after the truth became known. The court noted that when Zynga’s actual results and guidance were announced, the company’s stock price dropped significantly. The court also noted its findings that the bookings and Facebook change representations might be actionable misrepresentations. The court found the Plaintiff sufficiently pleaded facts supporting loss causation.

Accordingly, the court denied Zynga’s motion to dismiss the complaint.

The primary materials for this post can be found on the DU Corporate Governance website.

Michael Reining