Zynga Subject of Class-Action Lawsuit for Insider Trading

By Andrew Lu on August 02, 2012 | Last updated on March 21, 2019

Online gaming giant Zynga is being sued in a class action lawsuit that claims the company and some of its early investors engaged in insider trading.

It's alleged that the company's executives and early investors knew that the company was struggling long before the public had this information. As a result, these insiders, including the company's CEO, supposedly sold off millions of shares right before prices plummeted by 75 percent, reports the San Jose Mercury News.

Selling on such insider information is obviously illegal, and one has to wonder just how the company's in house counsel could have allowed this to happen -- assuming the allegations are true.

Insider trading is a tricky issue for a company's lawyers. After all, corporate insiders are allowed to trade the company's stock, so long as they meet certain SEC filing requirements. However, things get trickier when insiders trade stock on information not publicly available.

Given the volume of stock that was traded, it's arguable that Zynga's attorneys should have known that corporate insiders were trading. If it is revealed that the executives traded on illegal information, Zynga's in house counsel may have owed a duty to the company's shareholders to report the illegal activity.

In a publicly traded company, in house counsel serve a unique role as they may owe a duty to the company's shareholders and not specific individual executives. So if illegal trades were made, the attorneys should have reported it to protect the shareholders, even if company executives would have gotten into trouble. If Zynga's attorneys had taken such steps, a class action lawsuit may have been averted.

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