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Case3:12-cv-04007-JSW Document125 Filed04/03/13 Page1 of 114 1 Joseph J. Tabacco, Jr. (SBN 75484) Nicole Lavallee (SBN 165755) 2 Victor Elias (SBN 262269) BERMAN DEVALERIO 3 One California Street, Suite 900 San Francisco, CA 94111 4 Telephone: (415) 433-3200 Facsimile: (415) 433-6282 5 Email: [email protected] [email protected] 6 [email protected] 7 Jeffrey M. Norton (Admitted Pro Hac Vice) Roy Shimon (Admitted Pro Hac Vice) 8 NEWMAN FERRARA LLP 9 1250 Broadway, 27th Floor New York, NY 10001 10 Telephone: (212) 619-5400 Facsimile: (212) 619-3090 11 Email: [email protected] [email protected] 12 13 Co-Lead Counsel and Attorneys for Lead Plaintiff David Fee and Named Plaintiff Joy Arjoon-Singh 14 [Additional counsel on signature page] 15 UNITED STATES DISTRICT COURT 16 NORTHERN DISTRICT OF CALIFORNIA 17 SAN FRANCISCO DIVISION 18 IN RE ZYNGA INC. SECURITIES ) Lead Case No. 3:12-cv-04007-JSW 19 LITIGATION ) ) Consolidated with Case Nos. 20 ) 12-CV-4048-JSW ) 12-CV-4059-JSW 21 ) 12-CV-4064-JSW ) 12-CV-4066-JSW 22 This Document Relates To: ) 12-CV-4133-JSW All Actions. ) 12-CV-4250-JSW 23 ) ) CONSOLIDATED COMPLAINT 24 ) ) CLASS ACTION 25 ) ) 26 27 28 [3:12-cv-04007-JSW] CONSOLIDATED COMPLAINT Case3:12-cv-04007-JSW Document125 Filed04/03/13 Page2 of 114 1 TABLE OF CONTENTS 2 PAGE I. NATURE OF THE ACTION ............................................................................................ 1 3 II. JURISDICTION AND VENUE ...................................................................................... 10 4 III. THE PARTIES................................................................................................................. 11 5 A. PLAINTIFFS ....................................................................................................... 11 6 B. DEFENDANTS ................................................................................................... 11 7 1. The Company ........................................................................................... 11 8 2. The Officer Defendants ............................................................................ 12 9 3. The Director Defendants .......................................................................... 13 10 4. The Underwriter Defendants .................................................................... 14 11 IV. CLASS ACTION ALLEGATIONS ................................................................................ 15 12 V. BACKGROUND ............................................................................................................. 18 13 A. CONFIDENTIAL WITNESSES ......................................................................... 18 14 B. OVERVIEW OF ZYNGA’S BUSINESS ............................................................ 27 15 1. Zynga’s Free-to-Play Model Relied on Sales of Virtual Goods In Its 16 Games To A Small Percentage of Users .................................................. 27 17 2. Zynga’s Relationship with Facebook ....................................................... 30 18 3. Zynga’s Key Financial and Operating Metrics ........................................ 30 19 4. Overview of Zynga’s Revenue Recognition Practices ............................ 32 20 C. THE IPO .............................................................................................................. 34 21 D. THE SECONDARY OFFERING ........................................................................ 36 22 VI. THE EXCHANGE ACT DEFENDANTS’ ACTIONABLE CONDUCT ...................... 37 23 A. THE EXCHANGE ACT DEFENDANTS ENGAGED IN A SCHEME TO DEFRAUD ........................................................................................................... 37 24 B. THE EXCHANGE ACT DEFENDANTS’ FALSE AND MISLEADING 25 STATEMENTS.................................................................................................... 38 26 1. IPO Materials ........................................................................................... 38 27 2. Fourth Quarter 2011 (“Q4 2011”) Results and 2012 Guidance ............... 42 28 [3:12-cv-04007-JSW] CONSOLIDATED COMPLAINT i Case3:12-cv-04007-JSW Document125 Filed04/03/13 Page3 of 114 3. Secondary Offering Materials .................................................................. 48 1 4. First Quarter 2012 (“Q1 2012”) Results and Revised 2012 Guidance .... 52 2 5. J.P. Morgan Global Technology, Media and Telecom Conference ......... 58 3 C. THE TRUTH IS REVEALED ............................................................................. 61 4 D. ADDITIONAL SCIENTER ALLEGATIONS REGARDING THE 5 EXCHANGE ACT DEFENDANTS ................................................................... 69 6 1. The Fact That The Exchange Act Defendants Prematurely Removed Lock-Up Restrictions On Their Shares In Order To Engage In 7 Massive Insider Trading On Zynga’s Artificially Inflated Stock Price Supports A Strong Inference Of Scienter ....................................... 70 8 2. Given Zynga’s Internal Monitoring, The Exchange Act Defendants 9 Were Either Aware Of Or Deliberately Ignored That Key Metrics, Such As Bookings, Were Falling And That Game Launches Were 10 Delayed. ................................................................................................... 74 11 3. Prior To Its Second Quarter Earnings Release, Zynga Had Knowledge Of Facebook’s Platform Changes That Would 12 Adversely Affect Zynga’s Business ......................................................... 80 13 4. The Timing Of The Collapse Of Zynga’s Business Shortly After The Exchange Act Defendants Issued False Statements Further Supports 14 Scienter .................................................................................................... 81 15 5. The Misconduct Related To Zynga’s Core Business ............................... 82 16 6. Defendants Pincus And Wehner’s Sox Certifications Further Evidence Their Scienter ........................................................................... 83 17 7. The Confluence Of These Factors Evidence That Zynga’s Reduction 18 In WAL Was Designed To Manipulate Its Revenue Figures In Order To Artificially Inflate The Current Condition Of Its Business ................ 85 19 8. Contemporaneous Departures Of Zynga’s Top Executives And 20 Undisclosed Management Restructuring Supports A Strong Inference Of Scienter ............................................................................... 87 21 E. LOSS CAUSATION/ECONOMIC LOSS .......................................................... 88 22 F. PRESUMPTION OF RELIANCE ....................................................................... 92 23 VII. THE UNTRUE STATEMENTS CONTAINED IN THE OFFERING 24 MATERIALS ARE ACTIONABLE UNDER THE SECURITIES ACT ....................... 93 25 A. THE OFFERING MATERIALS CONTAINED UNTRUE STATEMENTS ..... 93 26 1. Untrue Statements in the IPO Offering Materials .................................... 93 27 2. Untrue Statements in the Secondary Offering Materials ......................... 95 28 [3:12-cv-04007-JSW] CONSOLIDATED COMPLAINT ii Case3:12-cv-04007-JSW Document125 Filed04/03/13 Page4 of 114 B. ADDITIONAL FACTS REGARDING THE FAILURE OF THE 1 UNDERWRITER DEFENDANTS TO CONDUCT ADEQUATE DUE DILIGENCE ........................................................................................................ 96 2 VIII. NO SAFE HARBOR ....................................................................................................... 97 3 CLAIMS FOR RELIEF ............................................................................................................... 98 4 COUNT I ......................................................................................................................... 98 5 COUNT II ...................................................................................................................... 100 6 COUNT III ..................................................................................................................... 103 7 COUNT IV..................................................................................................................... 104 8 COUNT V ...................................................................................................................... 107 9 COUNT VI..................................................................................................................... 108 10 PRAYER FOR RELIEF ............................................................................................................ 109 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 [3:12-cv-04007-JSW] CONSOLIDATED COMPLAINT iii Case3:12-cv-04007-JSW Document125 Filed04/03/13 Page5 of 114 1 Court-appointed Lead Plaintiff David Fee and Plaintiff Joy Arjoon-Singh (collectively, 2 “Plaintiffs”), by and through their undersigned counsel, bring claims arising under the 3 Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (the 4 “Securities Act”), individually and on behalf of a class of similarly situated persons and entities, 5 except defendants and their affiliates, who purchased Zynga, Inc. (“Zynga” or the “Company”) 6 common stock in an initial public offering completed on December 15, 2011 (the “IPO”), in a 7 secondary offering completed on April 3, 2012 (the “Secondary Offering”) (hereinafter 8 collectively referred to as the “Offerings”), and/or on the open market from December 15, 2011 9 through and including July 25, 2012 (the “Class Period”). 10 Plaintiffs