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Zynga wins dismissal of fraud lawsuit linked to IPO

Player avatars from Zynga's FarmVille 2 are seen on a stairway at the entrance to Zynga headquarters in San Francisco, California April 23,
Player avatars from Zynga's FarmVille 2 are seen on a stairway at the entrance to Zynga headquarters in San Francisco, California April 23,

By Jonathan Stempel

(Reuters) - Zynga Inc has won the dismissal of a lawsuit in which shareholders accused the online gaming company of fraudulently misleading them about its financial and business prospects before and after its December 2011 initial public offering.

U.S. District Judge Jeffrey White in San Francisco said that despite their "excessively long and prolix" 110-page complaint, the shareholders failed to include "relevant, basic factual details" to support their claims against Zynga, company officials including founder Mark Pincus, and underwriters led by Morgan Stanley and Goldman Sachs & Co.

White also dismissed claims linked to an April 2012 secondary stock offering, saying the named plaintiffs lacked standing because they did not buy shares in that offering. He gave the shareholders a chance to amend their complaint.

Joseph Tabacco, a partner at Berman DeValerio representing the plaintiffs, said that while his clients were disappointed with parts of the ruling, "we are confident that the case will proceed, as we believe we will more than satisfy the court's concerns when we file our amended complaint."

Zynga did not immediately respond to similar requests.

The defendants were accused of inflating Zynga's stock price by concealing how a drop in user activity, product launch delays, and planned changes in a Facebook Inc platform for its games including "FarmVille" would negatively affect revenue and earnings.

Shareholders said Zynga did this to enable select insiders to sell more than $593 million of stock nearly two months before a post-IPO lockup was set to expire, and avoid a roughly 75 percent drop in the stock price in the ensuing four months.

Zynga went public at $10 per share, but its share price dropped more than 37 percent to below $3 on July 26, 2012 after the company had on the previous day posted disappointing earnings and slashed its full-year outlook.

The San Francisco-based company at the time said a recent change to Facebook's algorithm had reduced demand for its offerings. It also said "Draw Something," developed by the OMGPOP studio that Zynga had recently bought for $183 million, was underperforming.

David Fee, a resident of Pigeon Forge, Tennessee, is the lead plaintiff in the shareholder case, court papers show.

Pincus remains Zynga's chairman. Don Mattrick, who ran Microsoft Corp's Xbox business before succeeding Pincus as chief executive in July, is not a defendant.

Zynga last month said it would cut 15 percent of its workforce to reduce costs, and pay $527 million for mobile game developer NaturalMotion to refresh its games pipeline.

Zynga shares closed up 8 cents at $5.08 on the Nasdaq.

The case is In re: Zynga Inc Securities Litigation, U.S. District Court, Northern District of California, No. 12-04007.

(Reporting by Jonathan Stempel in New York; Editing by Bernard Orr)

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