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‘Candy Crush’ IPO Was Full of Fudge, Class Says

SAN FRANCISCO (CN) - The makers of "Candy Crush Saga" concealed that their cash cow was drying up to capitalize on an initial public offering, investors claim in a class action.

King Digital Entertainment went public last year after a frenzy of interest in its "Candy Crush" mobile app. While the company has other titles, such as "Pet Rescue Saga" and "Bubble Witch Saga," "Candy Crush Saga" represented 78 percent of the firm's gross bookings at the end of 2013, the complaint filed March 17 in San Francisco County Superior Court states.

By the time of King's IPO in March 2015, however, its "cash cow, Candy Crush Saga, had entered into a serious decline," lead plaintiffs Sean Debotte and Michael Nunes say.

The IPO raised nearly $500 million, and King kept around $329 million, while its venture-capital funders, insiders and underwriters pocketed the rest.

Debotte and Nunes came to the party a little late. Debotte picked up 500 shares in April 2014 and Nunes bought 470 shares in July 2014.

Though its numbers were deteriorating at the time, "King Digital represented in its IPO prospectus that there were 1.065 billion average daily games of Candy Crush played by 97 million daily active users," according to the complaint.

"The reality was that a significant number of individuals paying to play Candy Crush Saga, which was the primary driver of King Digital's revenues, were no longer playing Candy Crush Saga and that ... due to its decline, Candy Crush Saga had become a weight on King Digital that was hampering and would continue to hamper the Company's financial results," the complaint continues.

Debotte and Nunes say King's share prices were thus "artificially and materially inflated at the time of the offering."

King allegedly did not reveal that monthly unique payers had declined between the end of 2013 and the March 2014 until a May 7, 2014, conference call.

The complaint quotes King's chief financial officer as saying on that call: "We believe this dynamic is the result of the fact that Candy Crush Saga is a game that brought first-time mobile gamers and payers to our network. As the game is maturing, we are seeing less payment activity from the occasional payers."

On the day of that conference call, King shares declined 13 percent to close at $16.25, according to the complaint.

Though the price picked back up to $18.20 on Aug. 12, Debotte and Nunes say it crashed again when King "shocked investors" after the close of trading that day to report "a $69 million decline ... in Candy Crush bookings."

Shares closed at $13.99 on Aug. 13, "a decline of approximately 23 percent," according to the complaint.

King had emphasized gross bookings in its pre-IPO registration statement, defining the term as the "total amount paid by our users for virtual items and for access to skill tournaments."

Though the company claimed that gross bookings offered a way "to evaluate the results of our operations, generate future operating plans and assess our performance," it added the use of these numbers in an analysis "should be considered supplemental in nature and is not meant as a substitute for revenue recognized in accordance with [International Financial Reporting Standards]," according to that statement.

Debotte and Nunes note that Candy Crush Saga bookings had started to drop by the time of the offering, having declined almost 13 percent between the quarters preceding the IPO, from $493 million in the last quarter of 2013 to $429.5 million in the first quarter of 2014.

In addition to King, the investors name its chief underwriters, J.P. Morgan Securities and Credit Suisse Securities, as defendants, as well as nine directors and officers at King Digital and 11 more investment banks.

Seeking damages and rescission for violations of the federal Securities Act, the class is represented by John Jasnoch with Scott+Scott in San Diego.

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