(CN) - A federal judge in Manhattan has allowed investors to proceed with a lawsuit accusing China-based game developer Giant Interactive Group of violating securities laws in connection with its $886 million initial public offering in the United States.
U.S. District Judge Robert W. Sweet denied Giant's motion to dismiss, saying the shareholders provided enough evidence to support their claims.
In November 2007, Giant sold 57 million shares to the public, raising more than $886 million.
Merrill Lynch and UBS, which served as underwriters, are also named as defendants.
The class claimed that documents Giant filed with the SEC failed to disclose that the company had lost subscribers due to a rule change in its flagship game, ZT Online.
The online role-playing game is set in ancient China has more than 1 million active subscribers. Players develop skills, use magical weapons and team up with other gamers to fight monsters and players from other kingdoms.
Giant turns a profit by selling prepaid game cards that represent game points, which are used to buy virtual products in the game, such as weapons or clothes.
The plaintiffs said Giant failed to warn them of the drop in users, due to a rule adjustment that increased restrictions on "gold farming." Gold farming is when a player acquires items of value within a game.
"This is usually accomplished by carrying out in-game actions (such as killing an important creature) repeatedly to maximize gains," the complaint states.
Companies hire people to play games solely to generate online currency, which is then sold on third-party Web sites for real cash to players who use the gold coins in the game.
The Nov. 19 financial report showed a 6 percent second-quarter drop in average users, and a 17 percent drop in peak users.
A conference call later that month revealed the extent of the gold-farming problem. Giant's CEO disclosed to investors that more than 800,000 people had been actively gold farming.
Following Giant's earnings release and the conference call, the stocks price fell from $14.88 per share to $11.10.
Giant argued that its registration statement to investors contained "adequate cautionary language concerning gold farming and its potential negative effects."
But the judge didn't buy it, pointing out that the defendants failed to disclose the facts for "many months," and then only warned that gold farming "could" negatively affect their business.
"At best, defendants have raised a factual issue as to the adequacy of the disclosures that cannot be resolved on this motion to dismiss," Judge Sweet concluded.
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