How investors were sandbagged in Zynga and Facebook


How investors were sandbagged in Zynga and Facebook

Outrage brews as investors lick their wounds from their investment in Zynga Inc (NASDAQ:ZNGA) . Had it been a simple case of a company’s business gone wrong investors would have probably considered it par for the course. What hurts is that key Zynga Inc (NASDAQ:ZNGA) insiders sold a bunch of stock in the same quarter that the company reported dismal results and provided shaky guidance.

It has been reported that five law firms are considering action against the company or its executives for possible insider trading: Schubert Jonckheer & Kolbe, Newman Ferrara, Johnson & Weaver, Wohl & Fruchter, and Levi & Korsinsky.

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According to Schubert Jonckheer & Kolbe, its investigation will focus on “whether these insiders were privy to material adverse facts about Zynga’s business and financial condition at the time they sold their shares.”

Class action specialist Wold & Fruchter, said it was “investigating possible violations of federal securities laws and breaches of fiduciary duty by officers and directors of Zynga Inc (NASDAQ:ZNGA).”

It may be noted that the secondary stock offering by the insiders that netted them over $516 million could be perfectly legal, and these people still have substantial amounts invested in Zynga. So it is not as if they sold out and washed their hands of the company. Yet investors are complaining of a bad taste in the mouth, and justifiably so.

At Facebook, too, investors have received a raw deal. Given that equity investing is risky affair, yet some of the features of the IPO, in hindsight, appear to have set up the small investor for just the kind of bath he is presently taking on his investment in Facebook Inc (NASDAQ:FB).

The undernoted chart shows how key investors and insiders sold substantial chunks of Facebook in the IPO to the man on the street. Yes, it is true that they still hold stakes in the company, but the cost of holding these stakes must be far lower after their sale of a portion at the (now) fancy IPO price of $38. So is their risk. That’s not the case for the investor who paid that $38.

It may also be recalled how the fact that Facebook Inc (NASDAQ:FB) had filed an amended IPO prospectus expressing caution in its revenue and earnings. The banks and underwriters lowered their forecasts, and, surprise, they informed only the crème-de-la-crème of their clients of this crucial fact. Not the public.

What takes the cake is the fact that thereafter Facebook Inc (NASDAQ:FB) increased the price and number of shares offered in the IPO.


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