Why Zynga Inc. Stock Fell 10.1% in December

By Markets Fool.com

IMAGE SOURCE: ZYNGA INC.

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What happened

Shares of Zynga Inc.(NASDAQ: ZNGA) fell 10.1% in December,according to data from S&P Global Market Intelligence, as a significant shareholder lawsuit gained new life.

So what

Shares began to tumble early last month, after Reuters reported that the Delaware Supreme Court has revived a shareholder derivative lawsuit against Zynga's co-founder, former CEO, and controlling shareholder, Mark Pincus, as well as other board members for insider trading before the stock's massive crash in 2012.

More specifically, Delaware's high court ruled that the Court of Chancery was wrong to dismiss the lawsuit this past February. And in doing so, the court cleared the way for the 2014 suit brought by shareholder Thomas Sandys to proceed.

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Sandys' suit alleges that Zynga's board exempted its managers and directors from a rule which prohibits stock sales for at least three days following an earnings announcement. For perspective, Zynga executives sold 20.3 million shares in a secondary offering in early 2012, just three weeks ahead of a report that caused the stock the plummet. Within that total were16 million shares sold by Pincushimself, for $192 million.

Now what

Curiously, any settlement or judgments in the case would be paid directly to Zynga, as Sandys is essentially suing Pincus and the board on behalf of the company. And that's not to mention that Zynga appears to be making progress in its ongoing turnaround; mobile revenue last quarter climbed 16% year over year, to $145.9 million, or 80% of total revenue, while average mobile daily active users rose a modest 1%, to 16 million.

At the same time, I've always been critical of the economics and fast-changing consumer preferences supporting the free-to-play games industry. After all, businesses like Zynga must continuously pump out blockbuster titles to sustain their momentum and replace the often-waning popularity of older franchises.

In the end, while it remains to be seen whether this suit has merit, it obviously does the company no favors with regard to maintaining rapport with shareholders. If the financial motivations of Zynga's executive leadership are questionable -- and crucially not aligned with those of shareholders -- it's hard to blame those shareholders for bidding down the price of Zynga stock last month.

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Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.