red tape

Shutterstock/Jorgen McLeman

A case brought against Skillz by its shareholders won’t get resolved in court until 2022 at the earliest. The plaintiffs in the suit claim the skill games company misled them and perpetrated securities fraud.

On Nov. 15, the US District Court for the Northern District of California, San Francisco Division, extended the time Skillz has to respond to the allegations that it violated the Securities and Exchange Act of 1934. The case  centers on stockholders’ beliefs that the company was worth less than the $3.5 billion estimate provided by Skillz.

Skillz, which describes itself as an “online mobile multiplayer video game competition platform,” had reached that estimate “based on revenue projections in excess of $550 million for 2022,” according to the original complaint.

Judge Richard Seeborg ordered on Nov. 15:

“The Initial Case Management Conference scheduled for December 16, 2021, shall be continued to June 16, 2022, at 10:00 a.m., along with all associated deadlines under the Federal Rules of Civil Procedures and the Local Civil Rules for the United States District Court for the Northern District of California and all associated ADR Multi-Option Program deadlines, until a date that is convenient for the Court, following resolution of the anticipated motions to dismiss.”

Skillz uses a controversial business model designed to skirt legal definitions of gambling. Such definitions usually include the phrase “games of chance,” and Skillz feels its games involve sufficient strategy not to qualify as such. It’s not the only company doing this, and some jurisdictions are more open to the concept than others. For instance, some Pennsylvania legislators want to formally regulate retail skill machines, creating tax revenue in the process.

What may happen next in the Skillz case

Despite the delay, the case won’t necessary drag out into next year. The parties could decide to settle the lawsuit out of court before then.

However, the nature of class action lawsuits is that there are a lot of plaintiffs to please. On May 7, Thomas Jedrzejczyk became the lead plaintiff on a class action filed with the court. In August, Seeborg consolidated it with similar suits and named a lead plaintiff named “The Skillz Investor Group.”

Then it got more complicated.

As the Nov. 15 order states:

“On October 8, 2021, Lead Plaintiffs filed an Amended Consolidated Complaint for Violations of the Federal Securities Laws … The Amended Complaint added Defendants [Jerry] Bruckheimer, [Christopher] Gaffney, [Vandana] Mehta-Krantz and [Kent E.] Wakeford, in addition to the Underwriter Defendants, and asserted additional claims for violations of the Securities of 1933.”

Hence, the need for the extension.

This isn’t the first time Skillz has found itself in court in recent memory, either. Last year, two players sued for $6 million, alleging that the company had both failed to protect them from other players’ cheating, and banned them unfairly when they complained.

Stockholders allege Skillz misled them

Plaintiffs included in the action are those who bought Skillz stock between Dec. 16, 2020, and April 19, 2021, according to the May 7 complaint.

During that time, the class action filing states:

“The Company failed to inform investors that downloads of the games that account for a majority share of its revenue have been declining since at least November 2020. In reality, the Company’s prospects for attaining that revenue scale was far from realistic given its size, market share, reliance on third-party app stores, declining downloads of its most popular games and, critically, the enormous amount of incentive Bonus Payments that Skillz routinely provides to its gamer customers, a fact that investors were misled about. These Bonus Payments are routinely provided to its customers, who are expected to use them for game entry fees, which, in turn, artificially inflates Skillz revenue.”

The first indications stockholders had of a problem emerged on March 8 in the Wolfpack Report, according to the lawsuit. The report’s title: SKLZ: It Takes Little Skill To See This SPACtacular Disaster Coming.

Skillz lost $762 million in market value that day, according to the suit.

More analysts piled on.

On March 15, @Restrinct tweeted allegations about Skillz being overvalued.

On April 19, Eagle Eye Research released its take. The lawsuit states shares dove $254 million that day.

Later, Skillz announced its earnings. According to the complaint:

“The new information to the market about Skillz’s failed business prospects and overhyped valuation was confirmed on May 5, 2020, when Skillz issued its first quarter earnings statement which reflected a $53 million loss, despite the fact that its earnings had increased, as compared to the same time in 2020.”

Skillz stock that reached a high of $43.72 on Feb. 5 sits at $10.72 as of 1:39 p.m. today.

Court filing

Below is the original complaint filed by the plaintiffs in the case.

Richard Schultz v. Skillz Inc.





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