Giant Interactive Group Inc. (“Giant”), an online game developer in China, has become the target of a class action lawsuit filed in the U.S. District Court for the Southern District of New York. The suit alleges that Giant lost subscribers after curbing gold farming activity in its popular “ZT Online” (aka “Zheng Tu Online”) title, and failed to tell investors of the decline.

ZT Online, set in the world of ancient China, claims 1.3 million active subscribers and was the most popular online game in China in 2006.

The lawsuit was filed on November 26 by the law firm of Coughlin Stoia Geller Rudman & Robbins LLP (“Coughlin Stoia”) on behalf of all persons who purchased “American Depositary Shares” in Giant between November 1, the date of Giant’s initial public offering, and November 19, when Giant released a new financial report.

The complaint (.pdf) alleges that Giant’s IPO Registration Statement filed with the SEC failed to disclose material information regarding a third-quarter decrease in average concurrent users (“ACU”) and peak concurrent users (“PCU”) in ZT Online. In its November 19 financial report, Giant reported ACU and PCU of 481,000 and 888,000, marking quarterly declines of 6.6 and 17.2 percent, respectively. However, the numbers used in the Registration Statement were based on ACU/PCU numbers from the quarter ending September 30, 2007.

The complaint asserts that Giant was required to disclose the allegedly material negative registration trend taking place in the month of October. Giant has attributed the fall in users to a rule adjustment that increased restrictions on gold farming. As the Complaint states, gold farming is an action wherein people play online games so that they can generate online currency which is then sold on third-party websites for real-world currency. One Fox News report claims there are hundreds of thousands of gold farmers in China, where gold farming is an increasingly viable way to make a living.

Commentary

There are several interesting aspects to this story. The lawsuit is based on the alleged misrepresentation by Giant regarding user numbers, of course. But apparently the Giant investors feel that gold farming in ZT Online was an important part of their investment, as opposed to the increasingly popular view that gold farming is damaging to an MMORPG’s economy as a whole (and thus, the long term health of the game).

This may be reflective of the relatively short-term investment potential in MMORPGs, where the next big thing may be just around the corner. Indeed, the fact that the one-month downward trend (any trend prior to September 30 should have been noticed by prudent investors who conducted their due diligence) has led to this class-action lawsuit further highlights the get-rich-quick mentality.

Giant probably took what it considered the correct action to preserve ZT Online’s economy for the long term. Whether a little more transparency was required in their actions will be determined by this lawsuit.

The suit could also impact how closely other developers of virtual worlds are forced to monitor their economy and report to shareholders.