In a July 27, 2012 article entitled “In Sliding Internet Stocks, Some Hear Echo of 2000” (here), the New York Times detailed how the shares of some of the hottest publicly traded social networking and Internet companies have been hammered recently. The Times suggested that as the companies’ shares dropped “there were instant echoes of the crash of 2000, when the money stopped flowing, the dot-coms crumbled and Silicon Valley devolved into recriminations and lawsuits.”


Whether or not the attempt to draw parallels to the ear of the dot com crash is valid, the comparison certainly seems apt in one particular sense; all four of the companies the article mentions by name as having had their shares pummeled – Facebook, Groupon, Netflix and Zynga – have been hit with securities class action lawsuits this year.


The latest company to be sued is Zynga, the Internet gaming company that relies heavily on Facebook as a platform for its gaming services. Zynga went public in December 2011 and its share price recently dropped after the company issued disappointing financial results. On July 31, 2012, a securities class action lawsuit was filed against the company and certain of its directors and officers in the Northern District of California. A copy of the complaint can be found here. According to the plaintiffs’ counsel’s July 31, 2012 press release (here), the Complaint alleges that: the defendants made certain misrepresentations about the company, specifically that:


(a) the December 15, 2011 Registration Statement for the Company’s IPO failed to disclose that under Zynga’s agreements with Facebook, Zynga game cards could only be distributed and redeemed on Facebook until April 30, 2012, or the true extent of the current risk of Facebook policy changes on Zynga’s bookings prospects and overall financial condition; (b) Facebook, upon which the Company was heavily reliant for users and bookings, had already begun to change its platform and user policies to a degree that would negatively impact Zynga’s current and future bookings metrics and growth prospects; (c) the March 2012 acquisition of OMGPOP and “Draw Something” could not support the increased bookings and financial forecasts issued during the Class Period; and (d) in light of the facts set forth above, the Company did not have a reasonable basis for its fiscal 2012 financial forecasts issued during the Class Period.


The plaintiffs’ complaint also specifically refers to the company’s April 3, 2012 secondary offering in which company insiders (including the individual defendants) sold more than 18.8 million shares of their holdings in the company’s stock, at a price of $12 per share. (The company’s current share price is $2.72 per share). The complaint refers to and quotes a July 26, 2012 online article by analyst and Internet commentator Henry Blodget entitled “Zynga Insiders Who Cashed Out Before the Stock Crashed” (here).


The lawsuit against Zynga follows in the wake of lawsuits that were filed against the other three Social Media companies mentioned in the Times article. Netflix was first; as discussed here, Netflix and certain of its directors and officers were sued in a securities class action lawsuit in January 2012 after the company’s shares dropped following the company’s botched attempt to rejigger the way it charged its customers for its services.


The next up was Groupon, which, as discussed here, was hit with a securities class action lawsuit in April 2012 after the company announced that it would have to revise its previously released financial results for the fourth quarter 2011 and for the full year 2011 as well.


Finally, and as discussed in a prior post (here), Facebook was hit with a raft of securities class action lawsuit almost immediately following its IPO, largely due to the flawed offering process and the immediate decline in the company’s share price.


The lawsuits against these four companies are nothing compared to the litigation wave that followed the dot com crash, But the four suits do seem to represent their own distinct phenomenon, as company’s that were briefly darlings of the new media world of the Internet saw their fortunes quickly falter and the lawsuits quickly emerge.


For many years beginning in the 2007 time frame, financial services companies saw the greatest concentration of corporate and securities litigation activity, including securities class action lawsuit filings. While the financial services companies were at the center of the storm, it was pretty quiet for technology companies. As the credit crisis has receded into the past, the activity in the financial services sector has diminished (although stay tuned about the emerging Libor scandal litigations). If nothing else, these four lawsuits suggest that the relatively quiet period for technology companies might have ended.