The investment firm, Russia's Digital Sky Technologies, led a broader group of investors in putting money into San Francisco-based Zynga, according to the New York Times. It's DST's second Silicon Valley conquest, following two investments in Facebook earlier this year that totaled $300 million and that allowed the social network to cash out employee equity.

Usmanov (pictured), who reportedly owns 32 percent of DST, comes with the sort of unsavory press clippings worthy of a long-survivng oligarch in anarchic, organized-crime-ridden Russia: He's been accused by a former British ambassador of being a "gangster and racketeer" and of close ties to mafia drug trafficking and, as we've reported previously, controversially tried to censor bloggers who linked to news of the accusations.

Then there was this, last year: After Usmanov bought a chunk of mobile phone operator Megafon through a holding company and from a fund called IPOC, a former Megafon shareholder said he had been physically coerced into selling his Megafon holdings to IPOC; he later disappeared from his bloodstained vacation home in Latvia.

Zynga is used to dealing in the dark fringes of the markets; it made loads of ad revenue off scammers who deceptively sold "learning CD" and SMS subscriptions to gamers trying to earn virtual currency and now faces a class action lawsuit. Now, despite all the company's talk about reforming its way back into the light, it is, in a way, going deeper into the shadows. Zynga CEO Mark Pincus once bragged about "doing every horrible thing just to get revenues right away." Let's hope, for his sake, he's not making such a recklessly calculated move now.

The suit was probably inevitable. As we first reported, the Sacramento-based firm of Kershaw, Cutter & Ratinoff has been looking for victims of scammy ads in games like Mafia Wars and Farmville to potentially file a class action suit. Less than a week later, the firm's suit has hit federal district court in Northern California.

You can read the initial complaint in full here.

Neither gaming startup Zynga nor social network Facebook actually originates the advertisements in question; instead, other companies take out ads in Zynga's games, which run on Facebook's network, and the two companies make reportedly large sums of money from the offers. Some of the ads trick users into signing up for unauthorized cell phone charges or expensive mail-order products like educational CDs, typically by disguising them as "free" offers or "free trials," or as part of an "online quiz." TechCrunch has run an aggressive series of articles, cataloged at the bottom of this post.

Zynga reportedly takes in close to one-third of its revenue from "commercial offers" like those, and Facebook does well too, as KC&R lawyers point out in their complaint. An excerpt (click to enlarge):

Swift's attorneys also point to Zynga CEO Mark Pincus' damning video confession that "I did every horrible thing in the book just to get revenues" in their complaint, indicating it will be a significant piece of courtroom evidence, just as we predicted.

The prospect of being on the hook for massive damages has to make both Zynga and Facebook's investors sweat. Facebook is the darling of Silicon Valley, with VCs having valued it in the billions of dollars, while Zynga counts the elite firm of Kleiner Perkins Caufield & Byers among its major investors. Yet both companies have come to rely on greasy advertisers for much of their revenue; in addition to the game-ad scammers, Facebook is also sells ad to marketers who resort to tactics like using stolen pictures of apparent underaged girls to promote their products. If the company's are found to be liable of helping con customers by working with these sorts of slimeballs, it's hard to say where the payouts might end.

Below, an excerpt of the scams allegedly perpetrated on the lead plaintiff in the case, Rebecca Swift.

(Top pic: Facebook CEO Mark Zuckerberg, by Raphaël Labbé)

[Full court filing]

Click any image to enlarge.

TechCrunch publisher Mike Arrington began writing his high-profile posts exposing the misleading ads carried by Zynga on October 31. Four days later, according to documents filed with the SEC yesterday, Zynga began issuing shares as part of its latest $15 million round of financing that included firms like the gold-standard Silicon Valley shop Kleiner Perkins Caufield & Byers (past investments: Google, Amazon, Netscape, etc.), as PaidContent points out.

Of course, it took until Nov. 6 for video to emerge of Zynga CEO Mark Pincus admitting that some of the ads his company ran were "horrible." But we'd venture to guess that Zynga's investors, now into the startup for at least $54 million, would still have gone forward with their investment even that video emerged earlier. They care no more about Zynga's murky origins than they did about those of Zynga's chief clients like MySpace (born from a spam and spyware operation) and Facebook (which paid $65 million to settle claims it was founded on stolen technology). In Silicon Valley, the sins of the past are regularly washed away by infinite promise of the all-important future.

(Pic: Zynga CEO Mark Pincus, by Joi Ito)

Amid withering press from TechCrunch and other outlets, the Zynga CEO has finally removed scammy commercial offers from his company's online games, like Mafia Wars and Farmville. That's nice. But maybe the whole scandal could have been avoided if he'd taken a less skeptical take on his Harvard Business School ethics class. From his 2006 blog post about the class:

The school had this bullshit 3 week class called 'ethics' which we all took together at the outset of the program - guess it was to make sure we all had at least heard the term a few times and might feel more comfortable even using it...

Pincus goes on to tell how his amoral, investment-banker classmates defended a banker who left a sick Indian man behind to die in order to finish climbing a Himalayan mountain the banker had long wanted to conquer. Pincus accused his classmates of moral bankruptcy and became a black sheep, he says.

He was also aghast when a fellow student got off with a slap on the wrist after he was caught stuffing the ballot box in an election to head the school's Finance Club. Pincus thought he would be expelled or at least suspended for a year.

I'd soo love to know where that kid's career went and what he's doing today. He must be a major leader as he soo gets our system.

Pincus ended his blog post on an optimistic, pro-ethics note, saying that "this century's newest success stories" like Google, Bill Gates and eBay "are about authentic people taking responsibility and serving all stakeholders," i.e. acting ethically, donating money to charity, etc. Despite this conclusion, Pincus soon found himself on a darker path; he was soon doing "every horrible thing in the book to... get revenues right away" at Zynga, he told fellow entrepreneurs at a mixer earlier this year.

Said mixer wasn't the first time Pincus gave up a sleazy vibe; check out the tweets below from entrepreneur and former Valleywagger Alaska Miller. Apparently Pincus' ethics were derailed some time after he wrote that "authentic people" are the bright future of American business. It's hard to know whether to the blame that stumble on Pincus' obvious cynicism toward his Harvard ethics class — or on his failure to cling to his cynical conclusions more tightly through the years.

(Top pic: Pincus, by Joi Ito)

Sacramento-based Kershaw, Cutter & Ratinoff, LLP is looking for people who faced "unauthorized charges imposed on Facebook and MySpace users who participate in social games like 'Farmville' and 'Mafia Wars.'" The firm, which said it has launched an investigation into such scams, specializes in class action suits, among other areas.

Mike Arrington's TechCrunch has posted a series of articles on the issue of sleazy revenue models for online games, exposing the practice of sneaking mobile data subscriptions and pricey "learning CD" packages past players trying to earn online "points." Mafia Wars and Farmville creator Zynga gets a third of its revenue from such "commercial offers," while Facebook in turn gets 10-20 percent of its money from Zynga, according to Arrington.

Zynga has yanked some of its ads; Facebook, in turn, has suspended one of Zynga's smaller games. But there's evidence this issue could have been addressed much sooner. TechCrunch found video (below) shot this past spring in which Zynga's CEO said he "did every horrible thing in the book to, just to get revenues right away."

That sounded bad enough when it was reprinted on a tech blog; imagine how it's going to sound in court.

(Top pic: Zynga CEO Mark Pincus, possibly calling his lawyer, by Joi Ito.)

The Valley fad of social network games like Mafia Wars and Farmville disguise old-school scams, Mike Arrington has been demonstrating over at TechCrunch this weekend. High-revenue don of social networking games Zynga, which makes the aforementioned Mafia Wars and Farmville, gets one-third of its revenue from various shady "commercial offers" and lead-generation systems, Arrington reports. Here's how HotOrNot founder James Hong described the social networking cash scene in a TechCrunch comment:

The offers that monetize the best are the ones that scam/trick users.... i'm pretty sure most of the money ended up getting our users hooked into auto-recurring SMS subscriptions for horoscopes and stuff.

Examples, via TechCrunch:

• "Users are offered in-game currency in exchange for filling out an IQ survey... They are told their results will be text messaged to them... and are texted a pin code to enter on the quiz. Once they've done that, they've just subscribed to a $9.99/month subscription."
  
• "Users are offered in game currency if they sign up to receive a free learning CD... The user is told they pay nothing except a $10 shipping charge. But the fine print, on a different page from checkout, tells them they are really getting a whole set of CDs and will be billed $189.95 unless they return them."

There's an entire thriving "ecosystem" devoted to these sort of "deals," the sort of thing that in a different context might just be called a "crime ring." It's a profitable network, at least for the people at the top: Arrington estimates Facebook might be taking in $50 million per year from Zygna alone.

So, social networks are basically turning in to just another snakeoil sales channel in the mold of late-night 1-800 number commercials. Which sucks not only for the marks who've been duped but, ultimately, for Facebook's investors, since taking this sort of easy cash reduces internal pressure to come up with some sort of truly innovative revenue stream.

Not to mention what it does to user trust: Who's going to want to hand over their credit card information or even cell phone number to the likes of Facebook amid all these scams? (Answer: People who passed their "IQ test" with flying colors and a useless $10/month subscription.)

Build, or perhaps buy. In July, RockYou acquired Speed Racing, one of the top games on Facebook. But RockYou, in diverting its attention from its rivalry with Slide, will face well-funded competitors in startups Zynga and SGN. By the time all this becomes a serious business, isn't it just as likely Electronic Arts will be the Electronic Arts of social games?

Zynga makes its games easier to win for users who successfully spam their friends into signing up to play. See the above image for how Zynga does this with Attack, its version of world-concquering game Risk. The problem for Zynga and its new investors: The executives who run Facebook's platform don't like this kind of viral growth. In a blog post Monday, Facebook's Paul Jeffries explained:

Facebook is about empowering and connecting people through the sharing of information. That’s undermined if users who receive an invitation or other communication suspect it was sent for an ulterior motive, such as gaining points in a game.

Yesterday, Jeffries' thoughts became rules for the Facebook platform. According to Inside Facebook,

Applications are no longer allowed to “create artificial or inappropriate incentives to use Facebook features (including, for example, sending requests and adding profile boxes).

In the past few weeks, Facebook has temporarily banned apps by top widgetmakers Rock You and Slide, and has punished other popular app makers too, making it clear that widgetmakers which break Facebook's ever-changing platform rules — "crack its code," so to speak — don't get away with it anymore.

That is, unless they're announcing funding from Kleiner Perkins on a day dedicated to convincing Facebook developers that such a sweet deal could happen for them, too.

VCs already were asking why should I not worry about Facebook copying [your widgets]. But it was a theoretical question. Now, it is practical and amplified. I think that Facebook has really killed the potential for investment in the platform or the attractiveness to entrepreneurs. I am unaware of a single VC investment in a Facebook app company post the new regime (Sheryl, Elliot, policy enforcement). and now this will definitely affect matters. The last two VC investments I believe were Friends For Sale and SGN [Social Gaming Network] — doubt either investor is happy nor would they do the same deal again.

If our widgetmaker source is correct, it is bad news for at least two Facebook hangers-on — Zynga, a widgetmaker and SocialMedia, an ad-network for Facebook widgetmakers. Both are trying to prove him wrong by raising a new round of financing.

A source tells us SocialMedia founder Seth Goldstein spent last week in New York trying to raise $20 million. A VC in the community confirms he's recently heard Goldstein's pitch. Goldstein himself tells us, "We're talking to investors," but he wouldn't confirm the terms.

Zynga, which in January raised $10 million in funding from Union Square Ventures, Peter Thiel, Reid Hoffman, and Bob Pittman, is said to have hired a bank in order to find more funding.

Goldstein says that those worried about worried whether Facebook's aggressive moves against Slide will stunt VC investment in startup widgetmakers should worry about top widgetmakers like Slide or its closest rival, RockYou, instead.

These guys wanted to believe there wouldn't be a long tail of apps on the Facebook platform. But Facebook wants lots of little apps relevant to lots of little groups. Two guys from Estonia will be able to beat a team of 45 top flight engineers. Facebook doesn't want three major developers taking over the platform like some kind of CBS, NBC and ABC. Top Facebook apps aren't all going to be made South of Market.

Remember, Goldstein's a Facebook bull because his business depends on it. But one way to read his comment is as a confirmation that no one — including VCs — should expect widgetmakers to turn into large media companies. There may be a future on the Facebook platform, but last year's frenzy that once led HotorNot founder James Hong to declare the Facebook platform "the new Internet"? It's over.

1. Current Facebook profiles allow users to move application boxes around their profile wherever they like. Zuckerberg's new profiles won't allow as much customization. "The question is whether users will like the return to a uniform "profile" that looks the same for everyone. I would bet that users actually prefer to customize the look & feel of their profiles," an exec at one of the major widgetmakers tells us.
   
2. Zuckerberg wants to integrate the News Feed with the Wall. One developer tells us: "Mixing in 'X wrote on Y's funwall" along with more personal messages from friends may deteriorate the quality of the new wall/feed feature as a whole."
   
3. Facebook widgetmakers hate the tabs on Zuckerberg's new profile. One complains that most apps will suffer due to them: "By default a few apps will get their own tab and most will be relegated to the 'more' tab." Another source tells us this is one area where Zuckerberg has definitely caved to developer pressure.

   Facebook has some improvements in the latest version which should mitigate some of this effect on developers. Nevertheless, a substantial fraction of traffic to developers' apps will likely be lost as navigation to new tabs is unlikely to equal current profile traffic.

   
   
4. This search bar better not disappear like it does in the other profile preview. If it does, one developer asks:

   How will users easily find their applications and search for new ones as well as do a quick search of their friends? Getting users to adopt to such a massive change without any major problems is going to be a huge x-factor.

At the very least, it's no longer a Mark Zuckerberg production. The widgetmakers have taken it over. Large Facebook-application developers — VC darlings like Slide, RockYou and Zynga which have thrived on Facebook's platform since it launched last May — panicked when they saw Zuckerberg's plans. And, perhaps because Google's rival app platform, OpenSocial, gave them leverage, the widgetmakers' collective kiboshed Zuckerberg's plan to launch the redesigned profiles in April. They wanted to see changes first. And now, we hear, they got them. Zuckerberg and his team are already "improving the design to have less radical implications for developers," one tells us.

Back when the Facebook platform launched, reporters compared Zuckerberg to Bill Gates. Gates ruled programmers who wrote applications for his Windows platform with such an iron fist that Europe's courts still aren't over it. But how often did third-party software makers push Gates into making Windows the way they wanted it? By contrast, Zuckerberg is hardly putting the "eek" in his ecosystem.

You can't invite via MySpace.You can't notify via MySpace. So these apps are spreading by less effective means than the Facebook apps did.

"VideoEgg is the bait and switch. CPM is bullshit, and [Facebook's] Social Ads are bullshit," said Mark Pincus during a panel on Facebook applications at the annual Game Developer's Conference. Pincus said he was lucky to get 5 cent CPMs on his apps. What Pincus didn't mention: His competitors at Social Gaming Network are making at least $100,000 a month from their Warbook application — all from VideoEgg-run advertising campaigns.

The venture is called the Zynga Game Network and it's the company behind social network apps such as "casual games" Poker, Attack, and Battleship. So far, Zynga makes all its money by promoting other applications, earning 50 cents each time a user installs one on their profile.

Pincus told the New York Times Zynga has already broken even and has not yet tapped into any of its venture capital. Users click on about 50,000 links to application install pages each day.

Let us know when Coca-Cola buys ad space. Until then, the Facebook application platform will remain a viable economic ecosystem like the Hapsburgs were a model of genetic diversity.