Here Come The Zynga Lawsuits!

OK, so it is no secret that Zynga, Inc. (NASDAQ: ZNGA) screwed its shareholders.  You should not be surprised because Zynga is one of these new-age Web 2.0 (or Web 3.0) companies with a split share class that gives the common shareholders no power whatsoever.  We warned that shareholders had no say here in our review of a dozen or so companies where shareholders have no power at all.

The company conducted a secondary offering when it was still arguable that the company would have known that its earnings were going to be so weak.  Whether or not that is entirely true is up for debate, but what is not at all questionable is that Zynga’s management team has known for weeks and weeks that it was going to suffer a shortfall. The numbers were so bad that the company cannot claim that things came apart just in the last hours of the quarter.  Its earnings expectations are now cut in half for 2012 and the analysts ran for the hills this morning with multiple downgrades.

Now Zynga will get to face something new, even if shareholders have no voting power.  The lawyers are coming.  You can expect that the class action suits will start to pile up.  We have already seen three such “pre-class” announcements today on the newswires:

• Bronstein, Gewirtz & Grossman, LLC Announces Investigation of Zynga, Inc.
• The Law Firm of Levi & Korsinsky, LLP Launches an Investigation into Possible Breaches of Fiduciary Duty by Zynga, Inc.
• The Law Firm of Levi & Korsinsky, LLP Launches an Investigation into Possible Breaches of Fiduciary Duty by Zynga, Inc.

Zynga shares are down 39.3% at $3.08 and we have seen more than 82 million shares traded with an hour still left in the trading day.  The prior post-IPO range was $4.45 to $15.91. Facebook, Inc. (NASDAQ: FB) is down 6.6% at $27.40 ahead of its earnings and the Global X Social Media Index ETF (NASDAQ: SOCL) is down 1.7% at $12.45 in sympathy.

Don’t be shocked that Zynga is going to be sued.  These “investigation” announcements will definitely become shareholder class action suits.  We have seen this movie before. Our only question is whether or not the brokerage firms behind the secondary offering are liable too.

JON C. OGG