First Lawsuit Filed Over Zynga Insider Trading Claims

Casual games publisher Zynga has come under fire recently over accusations that top members of the company's executive team dumped company stock ahead of a massive drop last week. Five different law firms have been investigating Zynga and its corporate heads over possibilities that top brass may have violated federal insider trading laws, and now the first suit on the subject has been officially filed.

According to the suit (first acquired by The Verge), law firm Newman Ferrara is claiming that members of Zynga's executive team, including CEO Mark Pincus, had the company's underwriters--Goldman Sachs and Morgan Stanley--waive a restriction that would have prevented them from selling their stock shares prior to May 28 of this year. By waiving the restriction, Pincus and company were able to cash out over $500 million in stock while the price was at $12 a share this April. At the time of the lockup's expiration for other employees, the stock had dropped to roughly $6 a share. As of today, it's closer to $3.

"Zynga's regular employees were still locked up from selling their shares. But the guys at the top, who saw what was coming down the pipe, got to cash out," Ferrara attorney Roy Shimon explained to The Verge.

Pincus had apparently dodged a question regarding the unloading of his stock during last week's company earnings call, telling BTIG analyst Richard Greenfield, "We believe in the opportunity for social gaming and play to be a mass-market activity, as it is already becoming," instead of responding to his question.

As The Verge points out (by way of the New York Times), Pincus himself only cashed out a fraction of his total stock earnings, meaning he took a significant financial hit along with other shareholders. However COO John Schappert sold roughly 45% of his total stock, while CFO David Wehner unloaded more than half his shares.

I'll just go ahead and attempt to preempt the whole slew of inevitable "Zynga is evil" comments by asking a question. Um. Uh...so...are any of you still playing Words With Friends? Nobody accepts my invites anymore...

What up with Zynga these days?

Only $500 million? Pfft, that's nothing!

Nope, I gave up on Words With Friends after it allowed bullshit words to work and get tons of points. 

@wumbo3000 said:

What up with Zynga these days?

gettin sued.

@wumbo3000 said:

What up with Zynga these days?

I don't think it's "these days" really. Haven't they always been considered... well, a bit shady? That's been my impression at least.

@Bobby_The_Great said:

Nope, I gave up on Words With Friends after it allowed bullshit words to work and get tons of points.

I stopped for the same reason. "Axelled" is not a word. (Unless it was accepting Swedish medical terms)

Poor Mark Pincus. Now he's only a millionaire instead of billionaire. Oh the pain.

Everything related to Zynga doing bad, I'm very OK with.

Apparently he isn't smarter then his competitors, and he is getting sued for it.

Please let those involved face actual consequences for their actions. Far too often the people involved in these sorts of things get off with a slap on the wrist.

I don't use Facebook.

Looks like I'm missing out on something magical.

@BrockNRolla said:

@Bobby_The_Great said:

Nope, I gave up on Words With Friends after it allowed bullshit words to work and get tons of points.

I stopped for the same reason. "Axelled" is not a word. (Unless it was accepting Swedish medical terms)

A car mechanic is late paying his illegal loan shark. The loan shark sends a shylark to the mechanic's place of work to collect the debt. The car mechanic, who is working beneath a large pickup truck's rear end, says he doesn't have it. Then the shylark drops the truck onto the mechanic. As the car mechanic writhes in agony, the shylark steps over to him and says, "You just got Axelled, bitch."

See, the "bitch" qualified it.

@Russcat said:

@wumbo3000 said:

What up with Zynga these days?

I don't think it's "these days" really. Haven't they always been considered... well, a bit shady? That's been my impression at least.

Maybe? I know their games have always been considered exploitative, but I don't recall hearing talk of shady business practice up till now.

I am amazed at how fast Word with Friends went from insane popularity to almost 0 interest.

@C_Rakestraw said:

@Russcat said:

@wumbo3000 said:

What up with Zynga these days?

I don't think it's "these days" really. Haven't they always been considered... well, a bit shady? That's been my impression at least.

Maybe? I know their games have always been considered exploitative, but I don't recall hearing talk of shady business practice up till now.

Yeah, they're a bunch of uncreative hacks, but this is the first time I can think of them doing something explicitly illegal or "evil". They've never been a moral (people always forget moral and legal are different things) company, but not villainous.

That's super shady. Throw the book at em.
I thought I was gonna love Words With Friends but my disinterest in tapping random letter combos to try to score huge points like my friends were doing killed that game for me.
I'm on that Hero Academy tip. I'm all about it.

I think the next part of this story goes a bit like "And you borrowed money from the mob,and yesterday you lost your job."

These are the breaks.

I had heard he cashed out, but I had written it off before. Don't a lot of entrepreneurs do that? Set up a company, get big, go public, sell out? However, the lockup being waived just for the folks at the top makes it way sketchier. That's not cool.

@Kaigan said:

I don't use Facebook.

Looks like I'm missing out on something magical.

Not really.

In the 6 years i have had FB i have wanted to delete it just about every day. I hate it and don't want it but i have a lot of out of city/state friends/family that use it and it's just easier to talk to them over FB then it is to email.

Never played a Zynga game, never will.

Glad to see the bubble is about to burst. Their stock was grossly overvalued, just like facebook's. Even "casual gamers" can only play so many social online games before getting tired of the whole "get ripped off or die grinding"-scheme.

it sucks that people use IPOs to cash out. This is the tech bubble same as before with delayed results. I say of course 80% of the clicks of facebook ads are bots! Do you know anyone who actually clicks on facebook ads?

@MooseyMcMan: yea, didn't take spend a 1Billion for draw something?

@GenocidalKitten said:

But, Patrick Zynga is evil because of words with friends, coffeed is not a word and only pure evil would say otherwise!

You mean Alex.

I can't wait to see how this plays out.

@Scrawnto said:

I had heard he cashed out, but I had written it off before. Don't a lot of entrepreneurs do that? Set up a company, get big, go public, sell out? However, the lockup being waived just for the folks at the top makes it way sketchier. That's not cool.

yeah, but zynga has never been cool.

Material non-public information. Criminals, all of them.

I'd like to see these cumbags lose and get thrown in prison.

@NegativeCero said:

@GenocidalKitten said:

But, Patrick Zynga is evil because of words with friends, coffeed is not a word and only pure evil would say otherwise!

You mean Alex.

I can't wait to see how this plays out.

havent you heard? Partick IS Alex.

But guys! EA says that the way of the future is casual gaming and DLC. Zynga is king of casual gaming, so it can't be true! Right, guys?! RIGHT?!

It sounds like they were just aware of what everyone else was, that the company was not going to be doing so hot in the future. I'm not sure what the legality is of waiving that restriction, but if that is perfectly acceptable then it looks like they can't be held accountable for any wrong doing. Everyone knew the company was in a downward spiral, that was public knowledge 6 months ago. So, just because Zynga is an evil company doesn't mean they can't be smart enough to get some money out of their shitty company before it goes under.

If convicted, they'll serve maybe 2 years in prison and maybe get hit with up to a $5 million dollar fine. I won't see $500 million in my lifetime, so crime does pay.

@Lunar_Aura said:

I'd like to see these cumbags lose and get thrown in prison.

One missing letter made that statement way dirtier. Unless that's what you were going for...

THose guys sold out their own company. Its shameful.

tl;dr - Zynga is the new Gizmondo, only they actually pulled it off this time.

Yes I still do play Words...

@NegativeCero: Honest typo, but either worked so I didn't correct.

I'd really like to get upset about this, but if I was a CFO of a company, had a bunch of stock, and saw trouble coming, I'd probably try to do the same.

Of course, I'd try and cover my tracks a little better

Your friend Farmer Pincus just sold his entire farm and reduced the value of your farm by 50%! Click here to send Pincus a friendly lawsuit in return!

Man what sucks is these guys will look forward to a white collar prison, or known as the "CEO's time-out play palace" That's what sucks about high dollar crime. Also Alex I'll accept your invites, but I warn you I use a lot of bullshit words!

Zynga is connected to Goldman Sachs? What's next, David Wehner at a Bilderberg Group meeting?

Occupy Zynga, where you at?

@DoctorWelch said:

It sounds like they were just aware of what everyone else was, that the company was not going to be doing so hot in the future. I'm not sure what the legality is of waiving that restriction, but if that is perfectly acceptable then it looks like they can't be held accountable for any wrong doing. Everyone knew the company was in a downward spiral, that was public knowledge 6 months ago. So, just because Zynga is an evil company doesn't mean they can't be smart enough to get some money out of their shitty company before it goes under.

Insider trading is still a crime regardless of the trading restriction.

@zeekthegeek said:

Insider trading is still a crime regardless of the trading restriction.

It's only insider trading if they base if off knowledge not yet available to the public. By the time they sold their stocks, everyone knew this company was going downhill.

@Ravenlight: A slap on the wrist that involves a fine far smaller than the gains they made, making it meaningless.

@BrockNRolla said:

@Bobby_The_Great said:

Nope, I gave up on Words With Friends after it allowed bullshit words to work and get tons of points.

I stopped for the same reason. "Axelled" is not a word. (Unless it was accepting Swedish medical terms)

A car mechanic is late paying his illegal loan shark. The loan shark sends a shylark to the mechanic's place of work to collect the debt. The car mechanic, who is working beneath a large pickup truck's rear end, says he doesn't have it. Then the shylark drops the truck onto the mechanic. As the car mechanic writhes in agony, the shylark steps over to him and says, "You just got Axelled, bitch."

See, the "bitch" qualified it.

Dirty pool very much so dirty pool

@Scrawnto said:

I had heard he cashed out, but I had written it off before. Don't a lot of entrepreneurs do that? Set up a company, get big, go public, sell out? However, the lockup being waived just for the folks at the top makes it way sketchier. That's not cool.

I'm no economist so I'm probably talking out of my ass here, but what you're thinking of is the venture capital model. A company or individual invests money into a private startup business with the intent to gain profit through an eventual sale or merger. That's completely legal and common and is in fact pretty much exactly what happened to Giant Bomb and all the other Whiskey Media sites back in March.

This is insider trading, which means financial officers within Zynga, a publicly traded company, used non-public information for profit. In this case, they knew their stock prices were about to plummet before their shareholders or employees did, and used that to cash in. That's illegal. And generally just a scummy thing to do, though Zynga has a history of scummy practices from practically the word "go."

@Kaigan: I thought I was the only one in the world that hasn't ever joined Facebook or for that matter any social network.

Is it weird that I quite enjoyed playing Draw Something, but the second the Zynga logo showed up, I instantly deleted it and haven't looked back.

Only just thought of that. Huh.

From what I've read, their defense so far is probably going to be that the stock crashed because almost everyone responsible for the company pulled most of their personal stakes. Which makes a lot of sense, considering that most traders are news traders, or think they are at least.