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					Case: 1:11-cv-00490-SAS-KLL Doc #: 14 Filed: 12/12/11 Page: 1 of 54 PAGEID #: 116



                            UNITED STATES DISTRICT COURT
                             SOUTHERN DISTRICT OF OHIO
                                 WESTERN DIVISION


BRUCE E. RICKER, individually and on             Civil Action No. 1:11-cv-00490-SAS-KLL
behalf of all others similarly situated,         (Senior District Judge S. Arthur Spiegel)
                                                 (Magistrate Judge Karen L. Litkovitz)
                                 Plaintiff,

       v.                                        AMENDED CLASS ACTION COMPLAINT
                                                 FOR VIOLATION OF THE SECURITIES
ZOO ENTERTAINMENT, INC., MARK                    EXCHANGE ACT OF 1934, 15 U.S.C. §§78a,
SEREMET, and DAVID FREMED                        ET SEQ.

                                 Defendants.     DEMAND FOR A JURY TRIAL


                                 I. NATURE OF THE CASE

       1.      Lead Plaintiff Bruce E. Ricker (“Lead Plaintiff”) asserts the following claims and

causes of action on behalf of himself and all purchasers of the common stock of Zoo

Entertainment, Inc. (“Zoo” or the “Company”) from July 7, 2010, through April 15, 2011

inclusive (“Class Period”) against the Company and its Chief Executive Officer (“CEO”) Mark

Seremet (“Seremet”) and its Chief Financial Officer (“CFO”) David Fremed (“Fremed” and with

the Company and Seremet “defendants”). Lead Plaintiff brings these claims under the Securities

Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §78j, alleging that defendants disseminated

material statements with knowledge or reckless disregard of their falsity at the time of such

publication and omitted to reveal material information necessary to make defendants’ statements,

in light of such material omissions, materially accurate.

       2.      Founded in 2007 and presently headquartered in Cincinnati, Ohio, Zoo purports to

focus “on licensing, developing, and publishing a wide variety of casual and family-friendly

video games for Wii™, Nintendo DS™, Playstation®2 system, PSP (PlayStation®Portable)

system, iPhone™, and PC.” The Company operates through Zoo Games, Inc. (“Games”) and

Zoo Publishing, Inc. (“Publishing”), its wholly owned subsidiaries. The Company “sells its
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products primarily to retail chains, video game rental outlets, specialty retail stores and domestic

and international distributors.

       3.      Even before the Class Period began, defendants knew well that the Company’s

disclosure controls and procedures “were not effective at a reasonable assurance level.” Indeed,

defendants Seremet and Fremed – who as CEO and CFO, respectively, certified the accuracy of

the Company’s Class Period financial statements – had concluded that Zoo had “a material

weakness in our internal control over financial reporting related to not having a sufficient

number of personnel with the appropriate level of experience and technical expertise to
appropriately resolve non-routine and complex accounting matters or to evaluate the impact of

new and existing accounting pronouncements on our consolidated financial statements while

completing the financial statements close process.”

       4.      Notwithstanding those internal control issues, and with the knowledge that the

Company suffered from material problems related to revenue recognition, during the Class

Period, defendants issued a series of glowing financial statements for the first three quarters of

2010 that showed dramatically improved revenues and increasing net income or shrinking net

losses. For example, on May 17, 2010, defendants caused the Company filed with the Securities

and Exchange Commission (“SEC”) a Quarterly Report on Form 10-Q for the quarter ended

March 31, 2010 and also caused the Company to issue a press release, detailing its results for

that quarter. In both the 10-Q and the press release, the Company included unaudited financial

statements for the quarter, boasting of net income of $290,000 versus a loss of $1.403 million

during the first quarter of 2009. Defendants caused the Company to include these first quarter,

2010, financial results in registration statements that became effective in late June and early July,

2010 which was used to assist in raising over $8.5 million and allowed “selling stockholders” to

trade their shares on the NASDAQ stock market.

       5.      Similarly, defendants caused the Company to disseminate materially misleading

financial results for the second and third quarters of 2010 by press releases dated August 4, 2010

and November 11, 2010, respectively, and Quarterly Reports on Forms 10-Q dated August 6,

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2010 and November 12, 2010, respectively. For the six months ended June 30, 2010, the

Company reported a net loss of $186,000 down considerably from a net loss of $1.401 million

for the same period in 2009. Further, for the nine months ended September 30, 2010, the

Company reported net income of $128,000 versus a net loss of $16.731 million for the same

period in 2009.

       6.      Defendants were unabashedly positive about the Company’s financial results for

the first three quarters of 2010. They termed Zoo’s financial results – including health increases

in revenues – strong and boasted of progress in implementing the Company’s purported retail
strategy. They also touted a strong management team with a track record of industry success.

Unbeknownst to investors, however, Zoo’s actual results were materially worse than those

defendants Seremet and Fremed caused it to report.

       7.      After the close of trading on Friday, April 15, 2011, however, the Company filed

with the SEC a Current Report on Form 8-K, disclosing that it had erred “in recording certain

transactions in the Company’s previously filed unaudited consolidated financial statements” for

the first three quarters of 2010, ended March 31, 2010, June 30, 2010 and September 30, 2010.

As a result, the Company warned that investors should no longer rely on those financial

statements. In that Form 8-K, ultimately amended on April 27, 2011, the Company summarized

the effects of its “errors,” restating the Company’s diluted net income per share dramatically

downward from $0.10 to $0.01 for the first quarter of 2010, doubling the Company’s net loss per

diluted share from $0.11 to $0.22 for the second quarter of 2010, and reducing diluted net

income per share of $0.04 to $0.01 for the third quarter of 2010.

       8.      Upon the announcement of these results, the price of Zoo common stock

plummeted 34.3% from an April 15, 2010 close of $4.40 per share to an April 18, 2010 close of

$2.89, a 34% decline on unusually high volume of 1.045 million shares traded. Since then, the

Company has disclosed that certain key personnel have departed; it has received a subpoena

from the SEC, seeking information related to its restatement; NASDAQ has delisted its common

stock, and its stock currently trades on the pink sheets for approximately $0.84 per share.

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                              II. JURISDICTION AND VENUE

        9.      The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a).

        10.     This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and Section 27 of the Exchange Act, 15 U.S.C. §78aa.

        11.     Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28

U.S.C. § 1391(b). Zoo is incorporated in the state of Delaware and maintains its corporate

headquarters in Cincinnati, Ohio, within this district. Many of the acts and practices complained
of herein occurred in substantial part in this District.

        12.     In connection with the acts alleged in this complaint, defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications, and the facilities of the national

securities markets.

                                          III. PARTIES

A.      Lead Plaintiff

        13.     By Order dated October 19, 2011, among other things, the Court appointed Bruce

E. Ricker as Lead Plaintiff. As set forth in the accompanying certification, incorporated herein

by reference, Lead Plaintiff Ricker purchased the common stock of Zoo during the Class Period

and was damaged as a result of defendants’ wrongdoing as alleged in this Amended Complaint.

B.      Defendants

        14.     Defendant Zoo is a Delaware corporation, headquartered at 3805 Edwards Road,

Suite 400, Cincinnati, Ohio, 45209. The Company purports to develop, publish and distribute

“interactive entertainment software for both retail and digital distribution channels.”       Zoo

employs unaffiliated development studios to create the games it distributes. Historically, the

Company has developed games for distribution through national, regional and specialty retailers

and video game rental outlets.



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       15.    Defendant Seremet was, at all relevant times, the CEO of the Company. Seremet

has served the Company as President and CEO since May, 2009. He has served as President and

CEO of Zoo and Games respectively since January, 2009 and April 2007 and has served Zoo as a

director since September 2008. Throughout the Class Period, Seremet certified the Company’s

financial statements contained in quarterly filings with the SEC. To each of the current reports

on Forms 10-Q for the first three quarters of 2010, ended March 31, 2010, June 30, 2010 and

September 30, 2010, the Company attached Certifications Under Section 302 (“302

Certification”) from Seremet, stating:

              I, Mark Seremet, certify that:

              1. I have reviewed this Quarterly Report on Form 10-Q of Zoo
              Entertainment, Inc.;

              2. Based on my knowledge, this report does not contain any untrue
              statement of a material fact or omit to state a material fact
              necessary to make the statements made, in light of the
              circumstances under which such statements were made, not
              misleading with respect to the period covered by this report;

              3. Based on my knowledge, the financial statements, and other
              financial information included in this report, fairly present in all
              material respects the financial condition, results of operations and
              cash flows of the registrant as of, and for, the periods presented in
              this report;

              4. The registrant’s other certifying officer and I are responsible for
              establishing and maintaining disclosure controls and procedures
              (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
              internal control over financial reporting (as defined in Exchange
              Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

                      a. designed such disclosure controls and procedures, or
              caused such disclosure controls and procedures to be designed
              under our supervision, to ensure that material information relating
              to the registrant, including its consolidated subsidiaries, is made
              known to us by others within those entities, particularly during the
              period in which this report is being prepared;

                     b. designed such internal control over financial reporting,
              or caused such internal control over financial reporting to be
              designed under our supervision, to provide reasonable assurance
              regarding the reliability of financial reporting and the preparation
              of financial statements for external purposes in accordance with
              generally accepted accounting principles;

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                     c. evaluated the effectiveness of the registrant’s disclosure
              controls and procedures and presented in this report our
              conclusions about the effectiveness of the disclosure controls and
              procedures, as of the end of the period covered by this report based
              on such evaluation; and

                      d. disclosed in this report any change in the registrant’s
              internal control over financial reporting that occurred during the
              registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
              quarter in the case of an annual report) that has materially affected,
              or is reasonably likely to materially affect, the registrant’s internal
              control over financial reporting; and

              5. The registrant’s other certifying officer and I have disclosed,
              based on our most recent evaluation of internal control over
              financial reporting, to the registrant’s auditors and the audit
              committee of the registrant’s board of directors (or persons
              performing the equivalent functions):

                      a. all significant deficiencies and material weaknesses in
              the design or operation of internal control over financial reporting
              which are reasonably likely to adversely affect the registrant’s
              ability to record, process, summarize and report financial
              information; and

                      b. any fraud, whether or not material, that involves
              management or other employees who have a significant role in the
              registrant’s internal control over financial reporting.
       16.    Defendant Fremed was at all relevant times, the CFO of the Company. Fremed

has served as CFO of Zoo since May, 2009 and of Games since August 2007. The Company

touts Fremed, an MBA in finance and a certified public accountant, as “a broad-based financial

executive with extensive experience in financial operations, budgeting and forecasting, and

strategic planning.” Among his prior experience was as Senior Vice President of Finance and

Chief Financial Officer of Atari, Inc.    Throughout the Class Period, like Seremet, Fremed

certified the Company’s financial statements contained in quarterly filings with the SEC. To

each of the current reports on Forms 10-Q for the first three quarters of 2010, ended March 31,

2010, June 30, 2010 and September 30, 2010, the Company attached 302 Certifications from

Fremed, stating:

              I, David Fremed, certify that:

              1. I have reviewed this Quarterly Report on Form 10-Q of Zoo
              Entertainment, Inc.;

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            2. Based on my knowledge, this report does not contain any untrue
            statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the
            circumstances under which such statements were made, not
            misleading with respect to the period covered by this report;

            3. Based on my knowledge, the financial statements, and other
            financial information included in this report, fairly present in all
            material respects the financial condition, results of operations and
            cash flows of the registrant as of, and for, the periods presented in
            this report;

            4. The registrant’s other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures
            (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
            internal control over financial reporting (as defined in Exchange
            Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

                    a. designed such disclosure controls and procedures, or
            caused such disclosure controls and procedures to be designed
            under our supervision, to ensure that material information relating
            to the registrant, including its consolidated subsidiaries, is made
            known to us by others within those entities, particularly during the
            period in which this report is being prepared;

                   b. designed such internal control over financial reporting,
            or caused such internal control over financial reporting to be
            designed under our supervision, to provide reasonable assurance
            regarding the reliability of financial reporting and the preparation
            of financial statements for external purposes in accordance with
            generally accepted accounting principles;

                   c. evaluated the effectiveness of the registrant’s disclosure
            controls and procedures and presented in this report our
            conclusions about the effectiveness of the disclosure controls and
            procedures, as of the end of the period covered by this report based
            on such evaluation; and

                    d. disclosed in this report any change in the registrant’s
            internal control over financial reporting that occurred during the
            registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
            quarter in the case of an annual report) that has materially affected,
            or is reasonably likely to materially affect, the registrant’s internal
            control over financial reporting; and



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                 5. The registrant’s other certifying officer and I have disclosed,
                based on our most recent evaluation of internal control over
                financial reporting, to the registrant’s auditors and the audit
                committee of the registrant’s board of directors (or persons
                performing the equivalent functions):

                        a. all significant deficiencies and material weaknesses in
                the design or operation of internal control over financial reporting
                which are reasonably likely to adversely affect the registrant’s
                ability to record, process, summarize and report financial
                information; and

                        b. any fraud, whether or not material, that involves
                management or other employees who have a significant role in the
                registrant’s internal control over financial reporting.
               IV. LEAD PLAINTIFF’S CLASS ACTION ALLEGATIONS

        17.     Lead Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or

otherwise acquired the common stock of Zoo from July 7, 2010, through April 15, 2011,

inclusive (the “Class”) and who were damaged thereby. Excluded from the Class are defendants,

the officers and directors of the Company, at all relevant times, members of their immediate

families and their legal representatives, heirs, successors, or assigns and any entity in which

defendants have or had a controlling interest.

        18.     The members of the Class are so numerous that joinder of all members is

impracticable. At all relevant times, Zoo common stock was actively traded on the NASDAQ
exchange. While the exact number of Class members is unknown to Lead Plaintiff at this time

and can only be ascertained through appropriate discovery, Lead Plaintiff believes that there are

hundreds or thousands of members in the Class. Record owners and other members of the Class

may be identified from records maintained by Zoo or its transfer agent and may be notified of the

pendency of this action by mail, using the form of notice similar to that customarily used in

securities class actions.




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          19.     Lead Plaintiff’s claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by defendants’ wrongful conduct in violation of

federal law that is complained of herein.

          20.     Lead Plaintiff will fairly and adequately protect the interests of the members of

the Class and has retained counsel competent and experienced in class and securities litigation.

          21.     Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:
                  (a)    whether the federal securities laws were violated by defendants’ acts as

alleged herein;

                  (b)    whether statements made by defendants in filings with the SEC, including

current reports, quarterly reports and registration statements, misrepresented material facts about

Zoo and its financial condition, business, operations, and management; and

                  (c)    to what extent the members of the Class have sustained damages and the

proper measure of damages.

          22.     A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Further, as the

damages suffered by individual Class members may be relatively small, the expense and burden

of individual litigation make it impossible for members of the Class to individually redress the

wrongs done to them. There will be no difficulty in the management of this action as a class

action.

                              V. SUBSTANTIVE ALLEGATIONS

A.        Background to the Fraud

          23.     According to the Company’s Annual Report on Form 10-K for the year ended

December 31, 2009, filed with the SEC on March 31, 2010, Games, a wholly owned subsidiary

of the Company, began operations in March 2007 as Green Screen Interactive Software, LLC.


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The strategy in which Games engaged was “partnering with and acquiring companies with

compelling intellectual property, distribution capabilities, and management with demonstrated

records of success.” After a series of acquisitions, the Company now bills itself as “a developer,

publisher and distributor of video game software for use on major platforms including

Nintendo’s Wii, DS, GBA, Sony’s PSP, PlayStation 2 and iPhone.” It also distributes “video

game software for use on Microsoft’s Xbox 360.” Zoo also disclosed its intention “to publish

packaged entertainment software titles for use on a variety of other gaming platforms including

Sony’s PlayStation 3 [and]. . . to create and sell downloadable games for Microsoft’s Xbox Live
Arcade, Sony’s PlayStation Network, Nintendo’s Virtual Console, and for use on personal

computers (PCs).”

       24.     According to the Company, Games began business in March, 2007. Thereafter,

on December 18, 2007, Zoo acquired all of the outstanding shares of Destination Software, Inc.

(“DSI”), ultimately renaming it “Zoo Publishing, Inc.” David Rosenbaum (“Rosenbaum”) was,

at all relevant times the President of Publishing. From July, 2006, through April, 2009, David

Rosenbaum (“Rosenbaum”) served as Senior Vice President of Sales for Publishing. From

April, 2009 until April 2011, Rosenbaum served as President of Publishing.        Throughout the

Class Period, Rosenbaum was the Company’s highest salaried executive, earning $375,000 in

each of 2008 and 2009 and $400,000 in 2010. By comparison, in 2009, defendants Seremet and

Fremed earned $325,000 and $328,500 respectively. According to a Current Report on Form 8-

K, filed with the SEC on May 5, 2011, Rosenbaum “is no longer with Zoo Publishing.”

       25.     A DSI legacy employee who managed the National Supply Chain for Zoo and

who left the Company in mid-2009 (“Witness 1”) reported to Dan Doughty (“Doughty”),

Executive Vice President of Operations for DSI and then Zoo. Part of Witness 1’s job had been

preparing quarterly reports on revenue, reports he drafted with full knowledge of revenue

recognition for entities that license, sell or lease computer software. Ultimately, however, prior

to his departure, Witness 1 attempted to train Tracy Hutmeier (“Hutmeier”), former

administrative assistant to Rosenbaum to prepare monthly reports on revenue recognition.

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According to Witness 1, Hutmeier “didn’t know anything” and was unable to understand high

level revenue recognition concepts.     In fact, Witness 1 recounts, Hutmeier was unable to

download information from the server.

         26.    Witness 1 stated that the accounting staff, mostly DSI legacy employees who

reported to defendant Fremed, was very frustrated with Zoo because “creative accounting” was

running the Company into the ground. According to Witness 1, Zoo had siphoned money out of

Publishing, the former DSI, because Games, had only developed one game, “Cooking Momma,”

that it has licensed to Atari, Inc. According to Witness 1, Cooking Momma only sold 100,000
copies, but that Games had expended a considerable amount in its development. Ultimately,

Witness 1 stated, Zoo showed Cooking Momma as profitable, stating that when he saw the

numbers, he was angry because he knew they were misrepresented the game’s profitability.

         27.    Another DSI legacy employee who worked at Zoo in the accounts payable

function through April, 2010 (“Witness 2”) – the Class Period’s first quarter – confirmed that

Zoo had tremendous problems. Witness 2 reported directly to and did nothing without the

permission of defendant Fremed. Witness 2 stated that defendant Fremed also prepared the

Company’s SEC filings alone, never asking for assistance from the accounting staff. In addition,

Witness 2 stated that Fremed prepared month-end reports from information he derived from the

Company’s MAS-90 accounting software system.1 According to Witness 2, defendant Fremed

also directed, reviewed and approved all journal entries.

         28.    Witness 2 stated that defendant Seremet, Rosenbaum and controller Steven

Buchanan ran the Company. Witness 2 described Seremet as young and arrogant without much

experience. Accordingly, Witness 2 stated, defendant Seremet often consulted Rosenbaum as

the two were the Company’s primary decision makers. Witness 2, who reviewed all of the

company’s financial numbers, said that Zoo was badly hurt by Rosenbaum’s selling product at

prices that would not “make money.” During Witness 2’s tenure at Zoo, the Company gave


1
    MAS-90 is widely-used accounting software for small and mid-market companies.
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considerable mark-downs to retailers both because the market was softening and Rosenbaum

focused almost entirely on sales volume without respect to price.

       29.     Another former employee in Zoo’s accounting function who remained with the

Company through the entire Class Period (“Witness 3”), confirmed that during the Class Period,

the Company suffered from material problems related to revenue recognition of which

defendants Seremet and Fremed were aware or that they recklessly disregarded and that

Rosenbaum caused. Witness 3 worked on accounts receivable (“A/R”), billing and collection.

Witness 3 reported directly to both defendant Fremed and Zoo’s Controller Kate Stump
(“Stump”). According to Witness 3, Zoo maintained no accounting policy manuals, but rather

“made it up as they went along.” Throughout her employment at Zoo, Witness 3 transmitted via

email daily sales reports titled “Year-to-Date Sales” to defendants Seremet and Fremed and to

Rosenbaum and Stump.

       30.     According to Witness 3, Doughty, the EVP of operations, worked from the

Company’s California facility, a DSI legacy facility. Each day, Doughty produced a “batch”

report on the MAS-90, the Company’s accounting software program. Witness 3 then used the

batch reports to bill customers. On a daily basis, Witness 3 produced a detailed report on what

was billed, what cash the Company received and outstanding accounts receivable. She emailed

these reports, titled “Year-to-Date Sales” to, among others, defendants Seremet and Fremed and

Rosenbaum and Stump. Witness 3 attempted to remain current and to show information relating

to sales incentives like volume rebates, discounts and payment terms. Witness 3 knew that it was

essential for her to remain current with sales incentives to project accurately the cash she

anticipated collecting and the timing of those collections. If she did not know of an incentive,

she could neither bill appropriately nor project incoming cash with any accuracy. Incentives

always reduce revenue. Failing properly to record incentives, therefore, disabled Zoo from

billing customers accurately, a key to reporting revenue with material accuracy.




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         31.    Before and during the Class Period, Zoo’s two largest accounts Jack of All Games

(“JOAG”) and Cokem International, Ltd. (“Cokem”), were Rosenbaum’s accounts.2 According

to Witness 3, Rosenbaum forbade Zoo personnel other than himself from speaking with JOAG or

Cokem. Thus, about billing, A/R and collection matters, Witness 3 who was responsible for

those issues was constantly in the dark about Zoo’s two largest customers.

         32.    Cokem, in particular, was a problem as its account was always past due.

According to Witness 3, Cokem received the single greatest sales volume rebate from Zoo.

Witness 3 also related that Cokem’s owner, Chuck Bond, was very difficult to deal with as he
and his firm never paid on time and demanded rebates and discounts well beyond at which Zoo

sold to other customers. Witness 3 sent emails to Fremed Rosenbaum and Stump, detailing these

problems.

         33.    Through Rosenbaum, Witness 3 would try to prompt Cokem to pay its bills to the

Company. Rosenbaum, however, always made a deal with Cokem that diverged materially from

the information Witness 3 possessed about sales to that account. Ultimately, Witness 3 related,

Zoo collected far less from Cokem than amounts owed. This posed a problem for Witness 3

because defendant Fremed expected her accurately to project the cash she anticipated collecting.

During the Class Period, Witness 3 was frustrated by the inaccuracies of her projections, borne

exclusively of the inability to assess if, when, or how much Cokem would pay. Witness 3

projected cash flow based on what she thought Zoo would collect only to find that Rosenbaum

had authorized some sales incentive or credit for Cokem of which Witness 3 was unaware.

According to Witness 3, defendant Fremed personally intervened with Cokem, speaking with

Scott Johnson, Cokem’s CFO. Witness 3 related that Johnson gave defendant Fremed the “run-

around.”

         34.    Defendants Fremed and Seremet were aware of the inaccuracy of Witness 3’s

cash intake projections and Witness 3 informed them of the reasons therefore. In fact, Witness 3


2
    From 1989 through 2006, Rosenbaum founded and served as President of JOAG.
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remembers a conversation in which defendant Seremet asked what accounting issues needed to

be addressed. Witness 3 told defendant Seremet to look closely at Rosenbaum and Cokem deals

because, Witness 3 related, Rosenbaum offered too many discounts and rebates and Cokem

ultimately returned unusually high amounts of product. In addition, Witness 3 told defendant

Seremet, Cokem received 90-120 days to pay, refused to pay interest, and then claimed huge

incentives and paid little of its actual outstanding bill.

        35.     According to Witness 3, Cokem engaged in several schemes with respect to sales

incentives. For example, when Cokem returned inventory it had purportedly purchased before
and during the Class Period, Witness 3 related, Zoo could never determine how Cokem came up

with the purchase price it had paid.        Witness 3 stated that Cokem’s credit memos sought

reimbursement for games returned at prices higher than the price at which Zoo had originally

sold the games to Cokem. Rather than seeking reimbursement at the price it paid, Cokem sought

reimbursement at the price at which they could have resold the inventory at the time of purchase.

Witness 3 believed that with respect to some sales, Cokem may have been selling inventory back

to Zoo at the price Cokem sold the product to retailers rather than returning it at the price Cokem

paid, or the value of the inventory at the time of the return. Rosenbaum and defendant Fremed

told Witness 3 to use Cokem’s prices.

        36.     Witness 3 further described how Zoo was to credit customers for returns. For

example, Witness 3 stated that if Zoo sold games for $10 in January 2010 and sold the same

game for $6 in June, 2010, when inventory was returned, she would credit based on the June,

2010 price. If returns exceeded the total amount of June, 2010 sales, then and only then would

Witness 3 credit the returns based on the higher, January, 2010 price. Accurate pricing was,

therefore, critical to any returns.     During 2010, Witness 3 related, Zoo could not pinpoint

accurate pricing for sales to Cokem.

        37.     During the Class Period, Witness 3 remembers hearing discussions of Company

employees, questioning whether the sales to Cokem were final, a hallmark of revenue

recognition and something of which Witness 3 was aware. According to Witness 3, these

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discussions revolved around the necessity of “mak[ing] the numbers,” forcing the Company to

push product with unusual sales enhancements. Witness 3 remembers “making numbers” and

the validity of sales to Cokem were issues throughout the Class Period and before. Witness 3

also remembers that, during the first quarter of 2010, Cokem returned an unusually high amount

of inventory.

       38.      Defendants excluded Witness 3 from the process of restating the Company’s

financial statements for the first three quarters of 2010.

       39.      Defendants allowed Rosenbaum to exert sole control over the Cokem account
during the Class Period and recklessly disregarded serious issues relating to recognizing revenue

from Cokem. This is particularly important in light of the share of Zoo’s revenues for which

Cokem accounted. For example, for the year ended December 31, 2008, Zoo’s most significant

customers were JOAG and Cokem which accounted for 30% and 14%, respectively, of Zoo’s net

revenue.     According to Zoo, both JOAG and Cokem acted as resellers of the Company’s

products to smaller retailers.      Then, on April 3, 2009, Rosenbaum was elevated from

Publishing’s Senior Vice President to President.

       40.      In 2009, JOAG contribution to Zoo’s net revenue fell to 21% while Cokem’s

contribution more than doubled to 29%. Also in 2009, in addition to Cokem’s reselling products

to small retailers it also provided “program buying for Wal-Mart, Best Buy and other larger

customers.” According to Zoo’s Annual Report on Form 10-K for the year ended December 31,

2009 (“2009 10-K”), because of a warehouse fire, Zoo “entered into a distribution agreement

with Atari.” According to the risk disclosures in the 2009 10-K, among those customers who

purchased product via Atari was JOAG but not Cokem. As such, certain external controls

existed with respect to sales to JOAG that did not exist with Cokem.

       41.      As the market for games deteriorated in 2009 and 2010, Cokem accounted for

even more of the Company’s revenues. In the 2010 10-K, the Company reported that in 2010,

Cokem accounted for 40% of Zoo’s gross revenues. At the same time, JOAG accounted for only

10% of gross revenue. Wal-Mart – which had purchased Zoo products through Cokem “program

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buying” in 2009 – began to purchase directly from Zoo. According to the 2010 10-K, during

2010, Wal-Mart accounted for 10% of Zoo’s gross revenues. Thus, in the context of Wal-Mart’s

accounting for 10% of Zoo’s revenues in 2010 – revenue that it purchased via Cokem in 2009 –

the amount of revenue for which Cokem itself was responsible during 2010 doubled from 2009.

       42.     Yet defendants Seremet and Fremed allowed Rosenbaum to maintain strict

control over the relationship and contact with Cokem, to the exclusion of all other personnel

except defendant Fremed. In the context of their knowledge of the problems that existed with

Cokem with respect to sales volumes, pricing, and sales enhancements, defendants Seremet and
Fremed should have known that revenue numbers for Cokem were highly suspect.

       43.     The circumstances surrounding Zoo’s distribution agreement with Atari provide

further evidence of accounting irregularities that affected the Company’s recognition of revenue

related to Cokem.     According to Witness 3, the accounting process relating to the Atari

arrangement was “a fiasco.” Witness 3 stated that defendant Fremed was aware of these issues

because, during the Class Period and beyond, he spoke with Shawn Green, manager of credit and

collection at Atari, to attempt to resolve outstanding issues. Fremed’s efforts failed.

       44.     On March 2, 2011, Atari sued Publishing, “d/b/a Zoo Games,” in the United

States District Court for the Southern District of New York, case number 1:11-cv-01443-LBS.

In that action, Atari alleges that the distribution agreement required Zoo’s sales team to solicit

orders but to direct customers to purchase product directly from Atari with purchase orders made

out to Atari. Zoo was still entitled to execute purchase orders with customers who preferred to

purchase directly from Zoo but was required to assign all such purchase orders to Atari and

direct customers to pay Atari. The agreement continued that “Atari in turn shall submit purchase

orders to Zoo for the Video Games ordered by the wholesalers and retailers from Atari and from

Zoo as assigned to Atari.” Atari pre-paid for orders at 90% of the price on the customer

purchase order, less a 10% reserve, with a remainder to be paid after shipment

       45.     In its Complaint, Atari states, “Zoo procured purchase orders from wholesalers

and retailers, which Section 2(d) of the Sales Agreement required Zoo to assign to Atari and as to

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which Zoo was to direct the customers to remit payment to Atari, but Zoo did not assign such

purchase orders to Atari and did not direct customers to pay Atari.” In addition, Atari accuses

Zoo of failing to deliver “units of finished, packaged video games subject to certain purchase

orders that were not assigned to Atari but as to which Zoo requested and received from Atari the

advances specified in Section 2(f) of the Sales Agreement.” In other instances, Atari alleges,

Zoo delivered product but failed to remit customer payments to Atari as required. Atari claims

that the total amount of games that Zoo failed either to manufacture or deliver and the payments

Zoo received was $1,535,800.
       46.    More specifically, in its complaint, Atari highlights the uncertainty surrounding

the Cokem revenues by reference to another arrangement that Zoo entered with Working Capital

Solutions (“WCS”) regarding the Company’s accounts receivable. In a Factoring and Security

Agreement, WCS paid Zoo to purchase and then collect upon Zoo’s accounts receivable. The

accounts receivable Zoo assigned to WCS in 2010 – during the Class Period – included those

from Cokem. In a June 15, 2010 letter agreement, however, WCS, Zoo and Atari agreed that

WCS would not purchase certain accounts, including over $1,600,000 of Cokem accounts owed

to Zoo. Instead, Cokem was to pay Atari directly. In return, Atari was to pay Zoo $2.234

million for, among others, the Cokem accounts.

       47.    In its complaint, Atari states:

              In or about June 2010, Atari and Zoo entered into an agreement
              (the “June 2010 Agreement”) whereby Atari agreed to fund Zoo’s
              manufacture of finished, packaged video games, in consideration
              of Zoo’s covenants (a) to manufacture and deliver finished,
              packaged video games to customers and (b) to pay to Atari all
              sums Zoo received from the customers for the video games for
              which Atari had paid advances, or, in the event any customer
              canceled an order, to refund to Atari all sums paid by Atari to Zoo
              for the units of video games subject to that order and pay all sums
              to which Atari would have been entitled had the order not been
              cancelled.

              The purchase orders subject to the June 2010 Agreement
              correspond to the Sales Orders set forth in the attachment dated

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              June 15, 2010 by and among Working Capital Solutions, Inc.,
              Atari, and Zoo, a copy of which, including said attachment, is
              annexed hereto as Exhibit B.

              Atari funded Zoo’s manufacture of the aforesaid finished,
              packaged video games.

              Zoo delivered the video games to the customers but, in breach of
              the June 2010 Agreement, never remitted the payments that the
              customers made to Zoo for those video games.

              Alternatively, one or more customers canceled some of the
              purchase orders subject to the June 2010 Agreement, and, in
              breach of the June 2010 Agreement, Zoo never refunded to Atari
              all sums it paid to Zoo for the units of video games subject to those
              orders and never paid all sums to which Atari would have been
              entitled had the orders not been cancelled.
       48.    In other words, the sales orders listed on Schedule 1 to the June 15, 2010 WCS

letter agreement were purchase orders subject to Atari’s June, 2010, agreement with Zoo. Those

purchase orders included the $1.6 million of purchase orders from Cokem. According to Atari,

Zoo either failed to remit payments from those customers to Atari or, alternatively, one or more

customers canceled the purchase orders in question and Zoo failed to refund Atari the sums it

paid to Zoo for Atari’s advance. In other words, having received advance payments from Atari

for the Cokem accounts, among others, defendants recorded revenue when they knew or

recklessly disregarded that material amounts of those accounts did not have the indicia of

recognizable revenue under generally accepted accounting principles.         Atari’s allegations,
therefore, further support the notion that material sales to Cokem during the Class Period were

not recognizable revenue and led to the Company’s false and misleading financial statements.

B.     False and Misleading Statements

       False Financial Results – First Quarter 2010

       49.    On May 17, 2010, Zoo issued a press release, summarizing its financial results for

the first quarter of 2010, ended March 31, 2010. Compared to the first quarter of 2009, Zoo

reported a 23.4 percent increase in revenue from $13.9 million to $17.1 million with net income

increasing from a loss of $1.4 million to $290,000 or $0.10 per diluted common share. In

                                               18
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addition, Zoo reported expanded gross margins from 17.3% to 21.1% in the first quarter of 2010.

Earnings before income tax, depreciation and amortization (“EBITDA”) for the quarter rose to

$1.2 million from $64,000, “reflecting strong revenue growth and operating leverage.”

Adjusting EBITDA to exclude non-cash compensation expenses of $246,000 yielded $1.4

million compared with $86,000 in the first quarter of 2009.

       50.     Regarding its operations, the Company disclosed that it had released 7 new SKUs

during the quarter. In addition, the Company reported the growing contribution to sales of

“games bundled with accessories” and that its “[t]ransition to direct-to-retail sales strategy is on
track and driving margin expansion.”

       51.     In the May 17, 2010, press release, Defendant Seremet commented that “[b]y

every measure, we had an excellent first quarter and importantly, this marks our second quarter

of profitability.” Seremet continued:

               Zoo Entertainment is a very different company today than it was a
               year ago. Our strategy of delivering value to our customers by
               developing new and innovative content is working. Our sales and
               profit margins are beginning to benefit from our transition to a
               direct-to-retail sales model. We are also realizing improved
               operating leverage due to our 2009 turnaround initiatives. Our first
               quarter EBITDA increased significantly to $1.2 million from
               $64,000 in the first quarter of 2009. We believe these results
               reflect the success of our newly implemented product development
               strategy which is creating value for our customers and shareholders
               alike.

               We are excited about the opportunity we see to lead the large and
               high-growth casual gaming sector. We have an experienced senior
               management team with a track record of industry success, a
               diverse content library of approximately 100 titles, and strong
               distribution partners ranging from large retailers to specialty stores.
               Looking ahead, we will continue to focus on our portfolio
               approach to product development which drives our powerful and
               diversified content library, thereby mitigating operational risk.
               Web connectivity is creating significant new digital opportunities
               for our industry and we are working to position Zoo Entertainment
               to capitalize on them. As our new licensing deals and digital
               strategy unfold, we believe our scaleable business model will result
               in further margin expansion.
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               We are pleased with the progress we've made in the first quarter.
               It's still early, however, and we expect the bulk of our sales to
               occur during our peak selling season in the second half of 2010.
               Based on our strong first quarter results and our outlook for
               continued growth, we have every reason to believe that 2010 will
               be an excellent year.
       52.     On May 17, 2010, Defendants caused Zoo to file with the SEC a quarterly report

on Form 10-Q for the period ended March 31, 2010. In that Form 10-Q, the Company reiterated

the financial results it had reported in its May 17, 2010 press release. The Company appended to

this Form 10-Q 302 Certifications from both Defendants Seremet and Fremed. Also in this Form
10-Q, defendants briefly discussed the Company’s weaknesses in its internal controls, stating:

               Our management has determined that we have a material weakness
               in our internal control over financial reporting related to not having
               a sufficient number of personnel with the appropriate level of
               experience and technical expertise to appropriately resolve non-
               routine and complex accounting matters or to evaluate the impact
               of new and existing accounting pronouncements on our
               consolidated financial statements while completing the financial
               statements close process. We are committed to addressing this in
               2010 and we will reassess our accounting and finance staffing
               levels to determine and seek the appropriate accounting resources
               to be added to our staff to handle the existing workload.
       53.     On June 3, 2010, the Company filed with the SEC a Registration Statement on

Form S-1 (“June S-1”), detailing the terms of an offering of Zoo common stock with aggregate
value up to $26,000,000 and the intention of the Company to apply to list the shares of its

common stock on the NASDAQ Global Market. The Company designated Roth Capital Partners

and ThinkEquity, LLC as the underwriters of the offering.            The June S-1 included the

Company’s financial results for the first quarter of 2010 as stated in its May 17, 2010 press

release and Form 10-Q. The June S-1 is Registration No. 333-167294.

       54.     The Company amended the June S-1 on June 15, 2010, June 17, 2010 and June

25, 2010. In each amendment, the Company included its financial results for the first quarter of

2010 as stated in its May 17, 2010 press release and Form 10-Q.



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       55.     On June 25, 2010, the Company filed with the SEC an amended Registration

Statement on Form S-1, registering for sale 2,625,000 shares of its common stock for public sale

through underwriters Roth Capital Partners and ThinkEquity LLC. Defendants incorporated in

their Registration Statement the Company’s financial results for the quarter ended March 31,

2010. On June 30, 2010, the Company filed with the SEC “Notices of Effectiveness” for the

June S-1.

       56.     On July 7, 2010, the start of the Class Period, the Company issued a press release,

announcing that it had priced its public offering of 1.6 million shares of common stock at $6.00
per share for total proceeds before underwriting discounts and commissions of $9.6 million

pursuant to the June S-1 or $8.928 million after underwriting discounts. The Company further

disclosed that its shares would trade on the NASDAQ Capital Market under the symbol ZOO

and begin trading that day.

       57.     On that same day, the Company filed with the SEC a final June S-1 and

Prospectus. The Company included in the final S-1 its financial results for the first quarter of

2010, as disseminated through its May 17, 2010 press release and Quarterly Report. Following

its July equity offering, Zoo had 6,230,741 shares of common stock outstanding, and, if all

options and warrants outstanding had been exercised, fully diluted shares outstanding of

8,535,682. Thus, based in part on false and misleading financial statements for the first quarter

of 2010, defendants raised over $8.5 million for Zoo

       58.     The foregoing statements in the Company’s May 17, 2010 press release, May 17,

2010 Quarterly Report on Form 10-Q and June 25, 2011 Registration Statement were false and

misleading. Defendants knew or were reckless in not knowing that for the quarter ended March

31, 2010, they overstated total stockholders’ equity by $252,000 or 1.6%. In addition, for the

three months ended March 31, 2010, defendants knew or recklessly disregarded that they

overstated the Company’s revenue by $470,000 or 2.8%, understated selling and marketing costs

by $280,000 or 25%, understated the interest expense by $203,000 or 44.5%, overstated net

income by $252,000 or 663% and overstated diluted net income per share by $0.09 or 900%.

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       False Financial Results – Second Quarter 2010

       59.    On August 4, 2010 Zoo issued a press release, summarizing its financial results

for the second quarter of 2010, ended June 30, 2010. Compared to the second quarter of 2009,

Zoo reported a 37% increase in revenue from $7.7 million to $10.5 million. The Company’s net

loss was $476,000 or $0.11 per diluted common shared. Zoo reported expanded gross margins

from (1)% in 2009 to 24% in the second quarter of 2010.

       60.    Regarding its operations, the Company disclosed that it successfully sold shares in

a public offering, reaping proceeds of $9.6 million and achieving a listing on the NASDAQ
Capital Market. In addition, the Company reported “[e]xpanded direct distribution relationships

with mass retailers Wal-Mart and Best Buy, and television direct response networks QVC and

Home Shopping Network, [i]ncreased licensing partnerships with addition of Einstein brand,”

and the launch of indiePubGames.com, “a new digital initiative.

       61.    In the August 4, 2010, press release, Defendant Seremet stated that he was

“pleased to report that Zoo increased revenues by 37% to $10.5 million and generated positive

EBITDA during the industry's seasonally slowest quarter.” Seremet continued:

              We believe that we have an advantage as a rising player in the
              industry. Leveraging our management team's considerable
              expertise in this space, we analyzed growth trends in the business
              and developed a low risk, high leverage model. Zoo's scalable
              business model is based on delivering a diverse, steady stream of
              products to market rather than relying on blockbuster hits. We
              believe that we have a powerful platform that scales to meet the
              growing demand for value-seeking customers and are poised to
              lead the rapidly growing casual game sector.

              Our strong second quarter reflects the progress we are making on
              executing our retail strategy.

              We continue to expand our direct to retail partnerships and we
              added mass market retailers Wal-Mart and Best Buy, and
              television direct response networks QVC and Home Shopping
              Network. All of these new channels are beginning to drive higher
              sales and profits.



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                In May, we launched indiePub Games, our innovative digital
                initiative. indiePubGames.com is an on-line community that
                enables Zoo to partner with independent developers to jointly bring
                innovative content to market. Zoo has already signed five new
                games for publication, including the award-winning Auditorium,
                which is slated for a fourth quarter release.

                We also achieved two noteworthy milestones subsequent to the
                end of the second quarter. First, we raised $9.6 million of gross
                proceeds in our July equity offering, significantly improving our
                financial flexibility. And second, we listed our common stock on
                The NASDAQ Capital Market. The net proceeds of the offering
                provide Zoo with the working capital necessary to fund its growth
                initiatives."

                In line with our industry, the bulk of our sales occur in the third
                and fourth quarters. We are excited about the many opportunities
                we see ahead and believe we are poised to capitalize on the
                growing demand for casual games - delivered at retail or digitally.
                We look forward to continued growth in the balance of 2010 and
                beyond.
        62.     In addition, in the August 4, 2010 press release, the Company described its near

term outlook, stating, “Zoo expects the bulk of its 2010 sales to occur during its peak selling

season in the second half of the year. Zoo targets releasing approximately 30 new SKUs in the

second half of 2010 including a growing number of titles based on popular consumer brands,

such as Minute to Win It, Shawn Johnson Gymnastics Challenge, Deal or No Deal 2011

Anniversary Edition, Matthews Bow Hunting, Kevin Van Dam Fishing and Hello Kitty

Seasons.”

        63.     On August 6, 2010, Defendants caused Zoo to file with the SEC a Quarterly

Report on Form 10-Q for the period ended June 30, 2010. In that Form 10-Q, the Company

reiterated the financial results it had reported in its August 4, 2010 press release. The Company

appended to this Form 10-Q 302 Certifications from both Defendants Seremet and Fremed. Also

in this Form 10-Q, defendants again briefly discussed weaknesses in the Company’s internal

controls, stating:

                Our management has determined that we have a material weakness
                in our internal control over financial reporting related to not having

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              a sufficient number of personnel with the appropriate level of
              experience and technical expertise to appropriately resolve non-
              routine and complex accounting matters or to evaluate the impact
              of new and existing accounting pronouncements on our
              consolidated financial statements while completing the financial
              statements close process.

              Until this deficiency in our internal control over financial reporting
              is remediated, there is a reasonable possibility that a material
              misstatement to our annual or interim consolidated financial
              statements could occur and not be prevented or detected by our
              internal controls in a timely manner.

              We are committed to appropriately addressing this matter in 2010
              and we have engaged additional qualified personnel to assist in
              these areas. We will continue to reassess our accounting and
              finance staffing levels to ensure that we have the appropriate
              accounting resources to handle the existing workload.
       64.    The foregoing statements in the August 4, 2010 press release and the Form 10-Q

were false and misleading. Defendants knew or were reckless in not knowing that for the quarter

ended June 30, 2010, they overstated total stockholders’ equity by $764,000 or 5.1%.          In

addition, for the three months ended June 30, 2010, defendants knew or recklessly disregarded

that they overstated the Company’s revenue by 694,000 or 7.1%, understated the interest expense

by $149,000 or 28.8%, understated net loss by $511,000 or 51.8% and understated diluted net

loss per common share by $0.11 or 50%. In addition, for the six months ended June 30, 2011,

defendants knew or recklessly disregarded that they overstated the Company’s revenue by

$1,164 or 4.4%, understated the interest expense by $352,000 or 36%, understated net loss by

$764,000 or 80% and understated diluted net loss per common share by $0.27 or 79%.

False Financial Results – Third Quarter 2010

       65.    On November 11, 2010, Zoo issued a press release, summarizing its financial

results for the third quarter of 2010, ended September 30, 2010. Compared to the third quarter of

2009, Zoo reported a 105% increase in revenue from $8.6 million to $17.6 million with net

income increasing from a loss of $15.3 million to $314,000 or $0.04 per diluted common share.

In addition, Zoo reported expanded gross margins from 21% to 22% in the third quarter of 2010.


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Adjusted EBITDA for the quarter rose to $1.5 million from ($55,000), “reflecting strong revenue

growth and operating leverage.”

       66.    About these results, Defendant Seremet stated:

              We believe we have generated industry leading growth and solid
              results in the third quarter. Our year-over-year revenue doubled to
              $17.6 million and we reported net income of $314,000.

              Our strong third quarter performance reflects solid execution of
              our strategy and plan. Relative to 2009, we are well positioned for
              the 2010 holiday selling season with a broader offering of high
              quality titles and more shelf space across our retailers, including
              dedicated space for our popular bundled titles. Sell-in is where we
              expected it to be and we are optimistic that, similar to last year,
              Zoo will attract its fair share of holiday spending from value
              oriented consumers.

              Our digital initiative, indiePub Games, is going well. We believe
              we are generating great new content and building new
              relationships with independent game developers through the site.
              We expect to release the award-winning Auditorium this month on
              PlayStation Network. Moreover, we are ahead of plan, having
              already slated 12 digital releases for expected launch in 2011
              across numerous platforms. We expect indiePub Games will begin
              contributing to revenue in the fourth quarter of 2010 and make a
              meaningful contribution to revenue and profitability in 2011 and
              beyond.
       67.    On November 12, 2010, Defendants caused Zoo to file with the SEC a Quarterly

Report on Form 10-Q for the period ended September 30, 2010. In that Form 10-Q, the

Company reiterated the financial results it had reported in its November 11, 2010 press release.

The Company appended to this Form 10-Q 302 Certifications from both Defendants Seremet and

Fremed. Also in this Form 10-Q, yet again, defendants briefly discussed weaknesses in the

Company’s internal controls, stating:

              Based on the evaluation of the effectiveness of our disclosure
              controls and procedures as of the end of the period covered by this
              report, our Chief Executive Officer and Chief Financial Officer
              concluded that our disclosure controls and procedures (as defined
              in Exchange Act Rules 13a-15(e) and 15d-15(e)) were not
              effective at a reasonable assurance level.

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               Our management has determined that we have a material weakness
               in our internal control over financial reporting related to not having
               a sufficient number of personnel with the appropriate level of
               experience and technical expertise to appropriately resolve non-
               routine and complex accounting matters or to evaluate the impact
               of new and existing accounting pronouncements on our
               consolidated financial statements while completing the financial
               statements close process.

               Until this deficiency in our internal control over financial reporting
               is remediated, there is a reasonable possibility that a material
               misstatement to our annual or interim consolidated financial
               statements could occur and not be prevented or detected by our
               internal controls in a timely manner.

               We are committed to appropriately addressing this matter in 2010
               and we have engaged additional qualified personnel to assist in
               these areas. We will continue to reassess our accounting and
               finance staffing levels to ensure that we have the appropriate
               accounting resources to handle the existing workload.
        68.    The foregoing statements in the November 11, 2010 press release and the Form

10-Q were false and misleading. Defendants knew or were reckless in not knowing that for the

quarter ended September 30, 2010, they overstated total stockholders’ equity by $979,000 or

4.3%.    In addition, for the three months ended September 30, 2010, defendants knew or

recklessly disregarded that they overstated the Company’s revenue by 6.6%, understated the

interest expense by $315,000 or 48%, overstated net income by$215,000 or 217% and overstated

diluted net income per common share by $0.03 or 300%. In addition, for the nine months ended

September 30, 2011, defendants knew or recklessly disregarded that they overstated the

Company’s revenue by $1,492 or 3.4%, understated the interest expense by $667,000 or 41%,

stated as net income $128,000 when the Company actually suffered a net loss of $851,000, and

stated as diluted income per share $0.02 when it suffered a net loss per diluted share of $0.22.

                     VI. THE TRUTH ABOUT ZOO’S FRAUDULENT
                          FINANCIAL STATEMENT EMERGES
        69.    On Friday, April 15, 2011, after the close of trading, the Company filed with the

SEC a Current Report on Form 8-K, signed by Fremed, alerting investors that they should not

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rely on its interim financial reports for the three quarters ending March 31, June 30 and

September 30, 2010. Defendant Fremed signed this Current Report. The Company disclosed:

              On April 13, 2011, Management of Zoo Entertainment, Inc. (the
              “Company”), in consultation with the Audit Committee of the
              Board of Directors (the “Audit Committee”), concluded that there
              were errors in recording certain transactions in the Company’s
              previously filed unaudited consolidated financial statements for
              each of the following periods, the three months ended March 31,
              2010, the three and six months ended June 30, 2010 and the three
              and nine months ended September 30, 2010, and that such
              statements should no longer be relied upon.

              Management and the Audit Committee has determined that the
              effect of such errors are material per Staff Accounting Bulletin No.
              108, and as a result, the Company has determined that it will
              amend and restate its previously filed unaudited consolidated
              financial statements for the three months ended March 31, 2010,
              the three and six months ended June 30, 2010 and the three and
              nine months ended September 30, 2010 to correct these errors as
              soon as practicable.

              As previously reported, the Company has identified material
              weaknesses in its internal control over financial reporting related to
              not having a sufficient number of personnel with the appropriate
              level of experience and technical expertise to appropriately resolve
              non-routine and complex accounting matters or to evaluate the
              impact of new and existing accounting pronouncements on the
              Company’s consolidated financial statements while completing the
              financial statement close process.

              Management and the Audit Committee have discussed the matters
              disclosed in this Current Report on Form 8-K with EisnerAmper
              LLP.
       70.    In that April 15, 2008 8-K, as amended in a Form 8-K/A on April 27, 2011, the

Company disclosed its restatement for the first three quarters of 2010. For the first quarter of

2010, ended March 31, 2010, in addition to reporting that it inflated shareholder equity by over

$250,000, the Company reported that it had inflated net income by 660% and diluted net income

per common share by 900%. Zoo’s adjusted first quarter, 2010, results follow:




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              MARCH 31, 2010                        AS STATED               AS ADJUSTED
Revenue                                         17,132                   16,662
Cost of Goods Sold                              13,515                   12,930
Gross Profit                                    3,617                    3,732
Selling and marketing                           836                      1,116
Total operating expenses                        2,941                    3,221
Income from operations                          676                      511
Interest expense                                (253)                    (456)
Income from operations before income taxes      423                      55
Income tax expense                              133                      (17)
Net income                                      290                      38
Basic net income per common share               0.26                     0.03
Diluted net income per common share             0.10                     0.01

       71.     For the second quarter of 2010, ended June 30, 2010, in addition to reporting that
it had inflated shareholder equity by $764,000, the Company reported that it had understated its

net loss by 107% and its basic and diluted net loss per common share by 100%. Zoo’s adjusted

second quarter, 2010, results follow:

               JUNE 30, 2010                        AS STATED                AS ADJUSTED
Revenue                                         10,470                   9,776
Cost of Goods Sold                              7,957                    7,907
Gross Profit                                    2,513                    1,869
Selling and marketing                           1,217                    1,233
Total operating expenses                        2,898                    2,914
Loss from operations                            (385)                    (1,045)
Interest expense                                (368)                    (517)
Loss from operations before income taxes        (753)                    (1,562)
Income tax expense                              277                      575
Net loss                                        (476)                    (987)
Basic and diluted net loss per common share     (0.11)                   (0.22)

       72.     For the third quarter of 2010, ended September 30, 2010, in addition to reporting

that it inflated shareholder equity by $979,000, the Company reported that it had inflated net

income by 217% and diluted net income per common share by 300%. Zoo’s adjusted third

quarter, 2010, results follow:




                                               28
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           SEPTEMBER 30, 2010                       AS STATED               AS ADJUSTED
Revenue                                        17,581                    17,253
Cost of Goods Sold                             13,894                    13,579
Gross Profit                                   3,687                     3,674
Selling and marketing                          1,307                     1,307
Total operating expenses                       2,865                     2,865
Income from operations                         822                       809
Interest expense                               (343)                     (658)
Income from operations before income taxes     479                       151
Income tax (expense) benefit                   (165)                     (52)
Net income                                     314                       99
Basic net income per common share              0.05                      0.02
Diluted net income per common share            0.04                      0.01

       73.    On the announcement of these revised results, the price of Zoo common stock
plummeted 34.3% from an April 15, 2010 close of $4.40 per share to an April 18, 2010 close of

$2.89 on unusually high volume of 1.045 million shares traded.

       74.    On April 15, 2011, the Company issued a press release, summarizing its reported

financial results for the fiscal year ended December 31, 2010. Of these results, Defendant

Seremet stated:

              Our 2010 results reflect solid execution of most of our strategic
              plans to expand our game offerings and market reach. We were
              able to achieve record revenue and utilize our resources to move
              forward more quickly than anticipated on our digital strategy.

              We achieved much of what we set out to accomplish: strong top-
              line growth, and the transition to a digital model with the launch of
              indiePub, our innovative online ecosystem for independent game
              developers. This end-to-end digital distribution model of user-
              generated intellectual property and crowd-sourced game ideas not
              only lowers the cost of game development and publication while
              simultaneously delivering great innovation, but allows for valuable
              pre-production consumer testing and feedback.

              Although we were able to grow revenues to an all-time high, we
              were challenged to deliver Q4 profits, as the DS and Wii markets
              eroded beyond our expectations. However, we anticipated this
              industry shift to digital content and consumer preferences that are
              increasingly Internet and mobile device focused. We proactively
              leveraged these market opportunities by launching our indiePub
              platform, which was tested during 2009, and the indiePub Mobile

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              division, which has continued to demonstrate its ability to generate
              excellent Smartphone and tablet content.

                                              *****

              Finally, I should note that we are addressing with several
              initiatives the ‘going concern’ opinion issued by our auditors that
              was included in our Form 10-K that will be filed later today. Our
              transition to a digital model has allowed us to cut expenses
              substantially by reducing overhead associated with the creation and
              distribution of physical goods. We are also converting our
              inventories to cash, as well as evaluating opportunities to form a
              master distributor agreement on some or all of our catalog and
              front-line games, and this typically includes cash advances. Our
              audit committee and management are also evaluating the
              procedures and issues that gave rise to the restatement of our
              financials for those periods in 2010, and we plan to implement
              processes and procedures to prevent any recurrence.
       75.    Also on April 15, 2011, the Company filed with the SEC its Annual Report on

Form 10-K for the year ended December 31, 2010 (“2010 10-K”). In that annual report, in

addition to stating the Company’s financial results for the 2010 fiscal year, the Company stated,

“We are unable to predict whether we will be successful in our efforts to achieve or maintain

profitability. If we are not successful, we may not be able to continue as a going concern. The

report of our independent registered public accounting firm on our financial statements for the

fiscal year ended December 31, 2010, included an explanatory paragraph raising substantial

doubt about our ability to continue as a going concern.” No such going concern warning

appeared in the Company’s 2009 Annual Report.

       76.    In its 2010 10-K, the Company stated:

              We are unable to predict whether we will be successful in our
              efforts to achieve or maintain profitability. If we are not successful,
              we may not be able to continue as a going concern. The report of
              our independent registered public accounting firm on our financial
              statements for the fiscal year ended December 31, 2010, included
              an explanatory paragraph raising substantial doubt about our
              ability to continue as a going concern.
       77.    Also in the 2010 10-K, in its Report, Zoo’s Independent Registered Public

Accounting Firm, EisnerAmper, LLP stated:

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               The accompanying consolidated financial statements have been
               prepared assuming the Company will continue as a going
               concern. As more fully described in Note 2 to the consolidated
               financial statements, the Company has both incurred losses and
               experienced net cash outflows from operations since inception.
               These conditions raise substantial doubt about the Company’s
               ability to continue as a going concern. Management’s plans in
               regard to these matters are also described in Note 2 to the
               consolidated financial statements. The consolidated financial
               statements do not include any adjustments that may result from the
               outcome of this uncertainty.
         78.   In a Current Report on Form 8-K, filed with the SEC on May 5, 2011, in a terse

announcement, the Company disclosed that Rosenbaum was “no longer with Zoo Publishing.”

According to Witness 3, Rosenbaum left because he knew the Company was about to ask him to

leave.

         79.   On May 16, 2011, defendants caused the Company to file with the SEC Amended

Quarterly Reports on Forms 10-Q/A for the periods ended March 31, 2010, June 30, 2010 and

September 30, 2010. About the need to amend its previous disclosures, in the 10-Q/A for the

first quarter of 2010, defendants stated:

               This Quarterly Report on Form 10-Q/A (this “Form 10-Q/A”) of
               Zoo Entertainment, Inc. (the “Company”) is being filed to
               incorporate changes to the Quarterly Report on Form 10-Q filed by
               the Company on May 17, 2010 (the “Form 10-Q”) because the
               Company has identified certain transactions that were not
               originally recorded properly for the period ended March 31, 2010;
               specifically, transactions relating to revenue recognition, including
               royalty income, certain sales volume rebates earned by one
               customer and revenue recorded in connection with sales to one
               distributor. As part of the restatement process, the Company
               recorded adjustments for items that were previously considered
               insignificant and were either not recorded or recorded in the
               incorrect reporting period. In addition, the Company is correcting
               certain freight charges included in cost of goods sold that were
               recorded in the wrong quarter. Also, the Company is reclassifying
               certain selling costs from cost of goods sold to selling and
               marketing expense, as well as reclassifying certain product
               financing costs from cost of goods sold to interest expense. This
               Form 10-Q/A amends and restates the Form 10-Q in its entirety.


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       80.     Also on May 16, 2011, the Company filed Forms 10-Q/A for the quarters ended

June 30, 2010 and September 30, 2010, repeating the same incantation about changes to the

financial statements for those quarters.

       81.     On June 13, 2011, the Company announced that at the June 8, 2011 annual

meeting of Zoo stockholders, the stockholders overwhelmingly voted to retain director John

Bendheim through 2012. On June 16, 2011, however, the Company filed a Current Report on

Form 8-K, stating that “[o]n June 13, 2011, John Bendheim resigned as director of Zoo

Entertainment, Inc. (the “Company”), effective June 13, 2011.” During his service to Zoo,
Bendheim has served as a member of the Zoo Board’s Audit Committee.

       82.     In a July 19, 2011 Current Report on Form 8-K, Zoo disclosed that chief

operating officer Steve Buchanan was “no longer with Zoo Publishing.”

       83.     On August 31, 2011, the Company filed a Current Report on Form 8-K with the

SEC, summarizing a notification the Company had received from the NASDAQ Listing

Qualifications. According to the filing:

               On August 25, 2011, Zoo Entertainment, Inc. (the “Company”)
               received a notification from the NASDAQ Listing Qualifications
               (“NASDAQ”) indicating that the Company does not satisfy the
               minimum $2.5 million stockholders’ equity requirement for
               continued listing on The NASDAQ Capital Market, as set forth in
               NASDAQ Listing Rule 5550(b)(1) (the “Rule”). The NASDAQ
               letter was based on a review of the Company’s Quarterly Report
               on Form 10-Q for the period ended June 30, 2011, which reported
               a stockholders’ equity of $(5,196,000). In addition, the letter
               stated that as of August 24, 2011, the Company does not meet the
               alternatives of market value of listed securities or net income from
               continuing operations. The NASDAQ letter has no immediate
               effect on the listing of the Company’s common stock.
       84.     The Company noted that it had 45 days to regain compliance with NASDAQ

rules and that it was preparing a plan that, if accepted, would extend its time to regain

compliance by 180 days. Subsequently, in a Current Report on Form 8-K, filed with the SEC on

November 8, 2011, the Company announced that on November 2, 2011, NASDAQ denied its


                                               32
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request for continued listing, advising the Company “that unless the Company requests an appeal

of this determination, trading of the Company’s common stock will be suspended at the opening

of business on November 11, 2011 and a Form 25-NSE will be filed with the Securities and

Exchange Commission, which will remove the Company’s securities from listing and

registration on NASDAQ.”

       85.     On November 21, 2011, the Company filed with the SEC its Quarterly Report on

Form 10-Q for the period ended September 30, 2011. In that filing, the Company noted that

effective November 21, 2011, its common stock would trade on the OTC Bulletin Board, with no
indication that the Company intended to appeal NASDAQ’s delisting determination. Further, in

addition to disclosing the existence of this action without denying the allegations thereof, the

Company disclosed that it had “received a subpoena from the Securities and Exchange

Commission requesting certain information in connection with the restatement of the Company’s

financial statements referred to above.”

       86.     As of the filing of this Amended Complaint, Zoo common stock trades on the

pink sheets under the symbol ZOOG.PK.

                     VII.    DEFENDANTS VIOLATED GENERALLY
                             ACCEPTED ACCOUNTING PRINCIPLES

       Defendants Knew of Material Weaknesses in
       Internal Controls throughout the Class Period
       87.     Zoo was required by the SEC but failed to maintain books and records in

sufficient detail to reflect the transactions of the Company and prepare financial statements in

accordance with generally accepted accounting principles (“GAAP”).3      Section 13(b) 2 of the


3
 GAAP are those principles recognized by the accounting profession as the conventions, rules
and procedures necessary to define accepted accounting practice at a particular time. Regulation
S-X (17 C.F.R. § 210.4-01(a)(1)) states that financial statements filed with the SEC which are
not prepared in compliance with GAAP are presumed to be misleading and inaccurate.
Regulation S-X requires that interim financial statements must also comply with GAAP, with the
exception that interim financial statements need not include disclosure which would be
duplicative of disclosures accompanying annual financial statements. 17 C.F.R. § 210.10-01(a).
                                              33
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Exchange Act entitled Periodical and Other Reports states the following with respect to books

and records and internal controls:

               Every issuer which has a class of securities registered pursuant to
               section 12 and every issuer which is required to file reports
               pursuant to section 15(d) shall:

               A.      Make and keep books, records, and accounts, which, in
               reasonable detail, accurately and fairly reflect the transactions and
               dispositions of the assets of the issuer;

               B.     devise and maintain a system of internal accounting
               controls sufficient to provide reasonable assurances that –

                     i.     transactions are executed in accordance with
               management's general or specific authorization;

                       ii.   transactions are recorded as necessary (I) to permit
               preparation of financial statements in conformity with generally
               accepted accounting principles or any other criteria applicable to
               such statements, and (II) to maintain accountability for assets;

                     iii.   access to assets is permitted only in accordance with
               management's general or specific authorization; and

                       iv.     the recorded accountability for assets is compared
               with the existing assets at reasonable intervals and appropriate
               action is taken with respect to any differences
       88.     A good system of internal controls helps management achieve its objectives

related to the effectiveness and efficiency of its operations, the reliability of its financial

reporting, and compliance with applicable laws and regulations.              It is management’s

responsibility to develop and implement internal controls necessary to ensure that it maintains

adequate books and records. This is made clear in SEC regulations and in a report prepared by

the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), Internal

Control – Integrated Framework (the “COSO Report”).4

4
  Generally accepted auditing standards codified in AU §319, Consideration of Internal Control
in a Financial Statement Audit, is based on the internal control framework described in the
COSO Report. The COSO report was issued in September 1992 as a four-volume set. An
Addendum to Reporting to External Parties was issued in May 1994.
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       89.     The COSO Report defines internal control as a process that is “designed to

provide reasonable assurance regarding the achievement of objectives” related to the

effectiveness and efficiency of operations, the reliability of financial reporting, and compliance

with applicable laws and regulations. More broadly, however, a system of internal control

encompasses more than the policies governing the objectives related to operations, financial

reporting, and compliance; namely, it includes the actions taken by a company’s board of

directors, management at all levels, and employees in running the business.

       90.     The COSO Report requires that financial statements prepared for external
purposes be fairly presented in conformity with GAAP and regulatory requirements. Borrowing

from generally accepted auditing standards, the COSO Report defines fair presentation as the

following:

                  the accounting principles selected and applied have general
                   acceptance;

                  the accounting principles are appropriate in the circumstances;

                  the financial statements are informative of matters that may
                   affect their use, understanding and interpretation; and

                  the financial statements reflect the underlying transactions and
                   events in a manner that presents the financial position, results
                   of operations and cash flows stated within a range of
                   acceptable limits, that is, limits that are reasonable and
                   practical to attain in financial statements.5
       91.     The COSO Report describes internal control within a certain framework that

consists of five separate components. It requires that financial statements prepared for external

use are fairly presented in conformity with generally accepted accounting principles and

regulatory requirements. The COSO Report defines five components of an internal control



5
  See COSO Report, Chapter 3; see also Statement on Auditing Standards No. 69, The Meaning
of “Present Fairly in Conformity With Generally Accepted Accounting Principles” in the
Independent Auditor’s Report (New York: AICPA, 1992).

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framework that are needed to enable a business to achieve its objectives: (1) the control

environment, (2) risk assessment, (3) control activities, (4) information and communications and

(5) monitoring.

         92.    Everyone in an organization has responsibility for internal control. The CEO,

however, sets the “tone at the top” that affects integrity, ethics, and other factors of a positive

control environment. “In any organization, ‘the buck stops’ with the chief executive. He or she

has ultimate ownership responsibility for the internal control system. The influence of the CEO

on an entire organization cannot be overstated.”6 The chief executive fulfills this duty by
providing leadership and direction to senior managers and reviewing the way they are controlling

the business. The Addendum to the COSO Report makes it clear that the Chief Accounting

Officer, who in the case of Zoo was defendant Fremed, plays a critical role with respect to the

internal control system.

         93.    Specifically, the CEO, defendant Seremet and the CFO, defendant Fremed failed

to comply with SEC regulations and the requirements of COSO. As described herein there were

material weaknesses in internal control at Zoo over its accounting for revenue recognition,

among other things. Zoo’s internal control system failed to live up to the standards as set forth in

the five elements of an internal control framework described above. Defendants Seremet and

Fremed failed to maintain a proper tone and control awareness that focused on achieving

consistent application of accounting policies and procedures and strict adherence to GAAP.

         94.    In its public filings throughout the calendar year 2010, Zoo’s management

disclosed that the Company had material internal control weaknesses in its internal control over

financial reporting.   A material weakness is defined by the SEC as “a deficiency, or a

combination of deficiencies, in internal control over financial reporting, such that there is a




6
    COSO Report, Chapter 8, p. 84.
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reasonable possibility that a material misstatement of the registrant’s annual or interim financial

statements will not be prevented or detected on a timely basis.”7

       95.     Throughout the Class Period and in its 2010 10-K, Zoo disclosed that the material

weaknesses in its internal controls related to:

               (i) not having a sufficient number of personnel with the appropriate
               level of experience and technical expertise to appropriately resolve
               non-routine and complex accounting matters or to evaluate the
               impact of new and existing accounting pronouncements on our
               consolidated financial statements while completing the financial
               statement close process, (ii) an insufficient level of monitoring and
               oversight, (iii) ineffective controls over accounting for revenue
               recognition and allowances for returns and other items, (iv)
               insufficient analysis of certain key account balances at interim
               reporting cycles and (v) timely recognition of changes within the
               Company’s business plan and the related impact on the financial
               statements.
       96.     The existence of these material weaknesses enabled the Defendants to circumvent

the Company’s accounting policies over revenue recognition in order to manage the company’s

earnings throughout the class period.

       97.     The 2010 Form 10-K as well as the originally filed Forms 10-Q for the first three

quarters of 2010 disclosed that “there were no changes in … internal control over financial

reporting” during each of the four quarters of 2010, meaning that the material weaknesses

disclosed in the 2010 Form 10-K existed throughout 2010 but were not disclosed in the

Company’s periodic filings on Forms 10-Q made during the class period.

       98.     As a result of the material internal control weaknesses described above, Zoo

failed to comply with SEC regulation and the requirements of COSO. Zoo had a poor tone at the

top, they were unable to perform the necessary levels of monitoring and oversight and were



7
  The Public Company Accounting Oversight Board’s (“PCAOB”) definition is identical, except
is replaces the word “registrant’s” with “company’s” and notes that “There is a reasonable
possibility of an event, as used in this standard, when the likelihood of the event is either
‘reasonably possible’ or ‘probable,’ as those terms are used in Financial Accounting Standards
Board Statement No. 5, Accounting for Contingencies (‘FAS 5’).” AS 5 ¶A7.
                                                  37
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unable to resolve complex accounting issues. This was all the more important given that Zoo

had an insufficient number of personnel with the appropriate levels of experience.

       99.     Thus, defendants knew that these material internal control weaknesses existed

throughout the Class Period.

       Defendants Violated GAAP by Reporting Materially
       False Financial Statements for the Company
       100.    The Company represented its financial results and statements in a manner which

materially violated GAAP, including the following fundamental accounting principles:

               (a) The principle that financial reporting should provide
               information that is useful to present and potential investors and
               creditors and other users in making rational investment, credit and
               similar decisions was violated (FASB Statement of Concepts No.
               1, ¶34);

               (b) The principle that financial reporting should provide
               information about the economic resources of an enterprise, the
               claims to those resources, and effects of transactions, events and
               circumstances that change resources and claims to those resources
               was violated (FASB Statement of Concepts No. 1, ¶40);

               (c) The principle that financial reporting should provide
               information about how management of an enterprise has
               discharged its stewardship responsibility to owners (stockholders)
               for the use of enterprise resources entrusted to it was violated. To
               the extent that management offers securities of the enterprise to the
               public, it voluntarily accepts wider responsibility for accountability
               to prospective investors and to the public in general (FASB
               Statement of Concepts No. 1, ¶50);

               (d) The principle that financial reporting should provide
               information about an enterprise’s financial performance during a
               period was violated. Investors and creditors often use information
               about the past to help in assessing the prospects of an enterprise.
               Thus, although investment and credit decisions reflect investors’
               expectations about future enterprise performance, those
               expectations are commonly based at least partly on evaluations of
               past enterprise performance (FASB Statement of Concepts No. 1,
               ¶42);



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               (e) The principle that financial reporting should be reliable in that
               it represents what it purports to represent was violated. That
               information should be reliable as well as relevant is a notion that is
               central to accounting (FASB Statement of Concepts No. 2, ¶¶58-
               59);

               (f) The principle of completeness, which means that nothing is left
               out of the information that may be necessary to ensure that it
               validly represents underlying events and conditions, was violated
               (FASB Statement of Concepts No. 2, ¶79); and

               (g) The principle that conservatism be used as a prudent reaction to
               uncertainty to try to ensure that uncertainties and risks inherent in
               business situations are adequately considered was violated. The
               best way to avoid injury to investors is to try to ensure that what is
               reported represents what it purports to represent (FASB Statement
               of Concepts No. 2 ¶¶95, 97).
       101.    The basic principle of revenue recognition is set forth in the Financial Accounting

Standard Board’s (“FASB”) Statement of Financial Accounting Concepts No. 5 (“CON 5”),

which states that revenue recognition “involves consideration of two factors, (a) being realized or

realizable and (b) being earned, with sometimes one and sometimes the other being the more

important consideration.” CON 5, ¶83(a). The two concepts – earned and realized or realizable

– are meant to ensure that a company does not recognize revenue until it has performed under the

terms of the arrangement and will receive payment for that performance. Both of the conditions

are typically met when a product has been delivered to the buyer. CON 5, ¶84(a).

       102.    In connection with the sale of software the GAAP Codification requires that the
following criteria be met in order for a company to record revenue:

                  Persuasive evidence of an arrangement exists,

                  Delivery has occurred,

                  The vendor’s fee is fixed or determinable; and




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                    Collectability is probable. ASC 985-605-25-3.
       103.      A similar requirement exists in the SEC Staff Accounting Bulletin (“SAB”) No.

104, Revenue Recognition in Financial Statements (“SAB 104”).8 Under SAB 104, revenue is

generally realized or realizable and earned when all of the following four conditions are met:

                Persuasive evidence of an arrangement exists,

                Delivery has occurred or services have been rendered,

                The seller’s price to the buyer is fixed or determinable, and

                Collectability is reasonably assured. SAB Topic 13.A.1.
       104.      If any of the above conditions are not met, revenue for a particular transaction

cannot be recognized and must be deferred until all of the prerequisites have been achieved.

       105.      The Company’s revenue recognition policy, as stated in its Forms 10-Q filed

during the Class Period, conforms to the aforementioned GAAP requirements. Specifically, the

policy states:

                 We earn our revenue from the sale of internally developed
                 interactive software titles and from the sale of titles developed by
                 and/or licensed from third party developers ("Publishing
                 Revenue").

                 We recognize Publishing Revenue upon the transfer of title and
                 risk of loss to our customers. Accordingly, we recognize revenue
                 for software titles when there is (1) persuasive evidence that an
                 arrangement with the customer exists, which is generally a
                 customer purchase order, (2) the product is delivered, (3) the
                 selling price is fixed or determinable and (4) collection of the
                 customer receivable is deemed probable. Our payment
                 arrangements with customers typically provide net 30 and 60-day
                 terms. Advances received from customers are reported on the
                 consolidated balance sheet as customer advances and are included



8
 Topic 13: Revenue Recognition was modified under SAB 104 effective December 17, 2003.
Staff Accounting Bulletins reflect the SEC staff's views regarding accounting-related disclosure
practices. They represent interpretations and policies followed by the SEC in administering the
disclosure requirements of the federal securities laws.

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               in current liabilities until we meet our performance obligations, at
               which point we recognize the revenue.

               Revenue is presented net of estimated reserves for returns, price
               concessions and other allowances. In circumstances when we do
               not have a reliable basis to estimate returns and price concessions
               or are unable to determine that collection of a receivable is
               probable, we defer the revenue until such time as we can reliably
               estimate any related returns and allowances and determine that
               collection of the receivable is probable.
       106.    Consequently, the Company’s accounting policy acknowledges that its

management was aware of GAAP requirements for revenue recognition and the restatement

corrects the Company’s violation of GAAP and its own accounting policy.
                       VIII. ADITIONAL SCIENTER ALLEGATIONS

       107.    Defendants knew or were reckless in not knowing that the financial results that

the Company reported during the Class Period were false and misleading. Prior to their issuing

their financial statements during the Class Period and filing the finals of the December S-1 and

the June S-1 and a previous issued registration statement for selling stockholders, Defendants

knew of the likelihood of material misstatements as a direct result of weak internal controls over

financial reporting.

       108.    For example, in the Company’s 2009 10-K – filed with the SEC before the

Company filed either the May 17, 2010 Quarterly Report or the June S-1 – Zoo disclosed

“weaknesses” in its internal controls over financial reporting. The Company stated:

               Effective internal controls are necessary for us to provide reliable
               financial reports and prevent fraud. In addition, Section 404 of the
               Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires
               us to evaluate and report on our internal control over financial
               reporting for all our current operations and have our independent
               registered public accounting firm attest to our evaluation beginning
               with our Annual Report on Form 10-K for the year ending
               December 31, 2010. Our management has determined that we
               have a material weakness in our internal control over financial
               reporting related to not having a sufficient number of personnel
               with the appropriate level of experience and technical expertise to
               appropriately resolve non-routine and complex accounting matters
               or to evaluate the impact of new and existing accounting
               pronouncements on our consolidated financial statements while
               completing the financial statements close process. Until this

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              deficiency in our internal control over financial reporting is
              remediated, there is a reasonable possibility that a material
              misstatement to our annual or interim consolidated financial
              statements could occur and not be prevented or detected by our
              internal controls in a timely manner. We are committed to
              appropriately addressing this matter and we have engaged
              additional qualified personnel to assist in these areas. We will
              continue to reassess our accounting and finance staffing levels to
              ensure that we have the appropriate accounting resources to handle
              the existing workload. We are in the process of preparing and
              implementing an internal plan of action for compliance with
              Section 404 and strengthening and testing our system of internal
              controls to provide the basis for our report. The process of
              implementing our internal controls and complying with Section
              404 will be expensive and time - consuming, and will require
              significant attention of management. We cannot be certain that
              these measures will ensure that we implement and maintain
              adequate controls over our financial processes and reporting in the
              future. Even if we conclude, and our independent registered public
              accounting firm concurs, that our internal control over financial
              reporting provides reasonable assurance regarding the reliability of
              financial reporting and the preparation of financial statements for
              external purposes in accordance with generally accepted
              accounting principles, because of its inherent limitations, internal
              control over financial reporting may not prevent or detect fraud or
              misstatements. Failure to implement required new or improved
              controls, or difficulties encountered in their implementation, could
              harm our operating results or cause us to fail to meet our reporting
              obligations. If we or our independent registered public accounting
              firm discover a material weakness or a significant deficiency in our
              internal control, the disclosure of that fact, even if quickly
              remedied, could reduce the market’s confidence in our financial
              statements and harm our stock price. In addition, a delay in
              compliance with Section 404 could subject us to a variety of
              administrative sanctions, including ineligibility for short form
              resale registration, action by the Securities and Exchange
              Commission, and the inability of registered broker-dealers to make
              a market in our common stock, which could further reduce our
              stock price and harm our business. (Emphasis added).
       109.   Indeed, defendants reiterated this theme of material weaknesses in internal

controls in each of the Quarterly Reports on Forms 10-Q that they filed during the Class Period.

For example, in the 10-Q for the quarter ended March 31, 2010, the Company stated:

              Our management, with the participation of our Chief Executive
              Officer and Chief Financial Officer, has evaluated the
              effectiveness of our disclosure controls and procedures, as defined
              in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of
              the period covered by this report.


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                                             *****

              Based on the evaluation of the effectiveness of our disclosure
              controls and procedures, our Chief Executive Officer and Chief
              Financial Officer concluded that our disclosure controls and
              procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-
              15(e)) were not effective at a reasonable assurance level.

              Our management has determined that we have a material weakness
              in our internal control over financial reporting related to not having
              a sufficient number of personnel with the appropriate level of
              experience and technical expertise to appropriately resolve non-
              routine and complex accounting matters or to evaluate the impact
              of new and existing accounting pronouncements on our
              consolidated financial statements while completing the financial
              statements close process. We are committed to addressing this in
              2010 and we will reassess our accounting and finance staffing
              levels to determine and seek the appropriate accounting resources
              to be added to our staff to handle the existing workload.

              Changes in Controls and Procedures

              There were no changes in our internal control over financial
              reporting identified in connection with the evaluation of such
              internal control that occurred during the period covered by this
              report that have materially affected, or that are reasonably likely to
              materially affect, our internal control over financial reporting.
       110.   In the Company’s 10-Q for the period ended June 30, 2010, it reiterated that the

Company’s disclosure controls and procedures “were not effective at a reasonable level,” adding:

              Our management has determined that we have a material weakness
              in our internal control over financial reporting related to not having
              a sufficient number of personnel with the appropriate level of
              experience and technical expertise to appropriately resolve non-
              routine and complex accounting matters or to evaluate the impact
              of new and existing accounting pronouncements on our
              consolidated financial statements while completing the financial
              statements close process.

              Until this deficiency in our internal control over financial reporting
              is remediated, there is a reasonable possibility that a material
              misstatement to our annual or interim consolidated financial
              statements could occur and not be prevented or detected by our
              internal controls in a timely manner.


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               We are committed to appropriately addressing this matter in 2010
               and we have engaged additional qualified personnel to assist in
               these areas. We will continue to reassess our accounting and
               finance staffing levels to ensure that we have the appropriate
               accounting resources to handle the existing workload.

               Changes in Controls and Procedures

               There were no changes in our internal controls over financial
               reporting identified in connection with the evaluation of such
               internal control that occurred during the period covered by this
               report that have materially affected, or are reasonably likely to
               materially affect, our internal control over financial reporting.
       111.    Defendants reiterated the ineffectiveness of Zoo’s internal controls once again in

the 10-Q for the period ended September 30, 2010, once again noting that “[u]ntil this deficiency

in our internal control over financial reporting is remediated, there is a reasonable possibility that

a material misstatement to our annual or interim consolidated financial statements could occur

and not be prevented or detected by our internal controls in a timely manner.”

       112.    More, on June 4, 2010, the Company filed with the SEC a Current Report on

Form 8-K, informing investors that they should no longer rely on the Company financial

statement for the third quarter of 2009, ended September 30, 2009. The Company amended this

Form 8-K on June 14, 2010. The amended Form 8-K stated:

               In the course of reviewing the financial statements for the fiscal
               quarter ended September 30, 2009, as set forth in Zoo
               Entertainment, Inc.’s (the “Company”) Quarterly Report on Form
               10-Q filed with the Securities and Exchange Commission on
               November 23, 2009 (the “Form 10-Q”), management identified an
               error in the impairment of other intangible assets and total
               impairment charge. In the Form 10-Q, the Company estimated
               impairment of goodwill to be $14.7 million and impairment of
               other intangible assets to be $7.3 million, for a total impairment
               charge of $22.0 million. After performing a formal impairment
               analysis, the Company concluded that the resulting impairment of
               goodwill is $14.7 million and that there should be no impairment
               of other intangible assets. On June 4, 2010, the audit committee
               concluded that the financial statements of the Company for the
               fiscal quarter ended September 30, 2009, should no longer be
               relied upon. The Company will restate its financial statements for
               this period to correct the errors discussed above. The Company has

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               determined that these errors relate only to the period ended
               September 30, 2009.

               The Company’s audit committee has discussed this matter with the
               Company’s independent registered public accounting firm. The
               Company is completing the restatement of its financial statements
               for the fiscal quarter ended September 30, 2009 and will file its
               restated financial statements on Form 10-Q/A as soon as possible.
       113.    Thus, prior to and just after defendants caused the Company to issue its March 31,

2010 financial statements, defendants knew of material weaknesses in its internal controls that

would likely yield false financial statements. In an effort to raise capital for the Company

through the June S-1 and the offering based thereon and to allow certain “selling shareholders”

to liquidate large holdings of the Company’s common stock through the registration of their

shares through another registration process in 2010,9 defendants recklessly issued the false

financial statements.

                                 IX.     LOSS CAUSATION

       114.    During the Class Period, as detailed herein, defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated the prices of Zoo common

stock and operated as a fraud or deceit on Class Period purchasers of Zoo common stock by

failing to disclose and misrepresenting the adverse facts detailed herein. When defendants’ prior

misrepresentations and fraudulent conduct were disclosed and became apparent to the market,

the price of Zoo common stock fell precipitously as the prior artificial inflation came out. As a

result of their purchases of Zoo common stock during the Class Period, Lead Plaintiff and the

other Class members suffered economic loss, i.e., damages, under the federal securities laws

when the truth about Zoo was revealed, removing the artificial inflation from the price of Zoo

common stock


9
 On December 22, 2009, Zoo filed a Registration Statement on Form S-1, registering for sale
certain shares of “selling stockholders.” Ultimately, that Registration Statement, No. 333-
163937, became effective on June 30, 2010, enabling the selling stockholders to dispose of over
1.5 million shares of Zoo common stock. The company received none of the proceeds from that
sale.
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       115.    By failing to disclose to investors the adverse facts detailed herein, defendants

presented a misleading picture of Zoo’s financial results and business prospects. Defendants’

false and misleading statements had the intended effect and caused Zoo common stock to trade at

artificially inflated levels throughout the Class Period.

       116.    As a direct result of the disclosures on April 15, 2011, Zoo common stock fell

precipitously. The drop in price removed the artificial inflation from the price of Zoo common

stock, causing real economic loss to investors who had purchased Zoo common stock at

artificially inflated prices during the Class Period.
       117.    The declines in Zoo’s stock price were a direct result of the nature and extent of

defendants’ fraud finally being revealed to investors and the market. The timing and magnitude

of the price declines in Zoo common stock negates any inference that the loss suffered by Lead

Plaintiff and the other Class members was caused by changed market conditions,

macroeconomic or industry factors or Company-specific facts unrelated to defendants' fraudulent

conduct. The economic loss, i.e., damages, suffered by Lead Plaintiff and the other Class

members was a direct result of defendants’ fraudulent scheme to artificially inflate the prices of

Zoo common stock and the subsequent significant declines in the value of Zoo common stock

when defendants’ prior misrepresentations and other fraudulent conduct were revealed.

                 X. APPLICATION OF A PRESUMPTION OF RELIANCE

       118.    At all relevant times, the market for Zoo’s common stock was an efficient market.

According to the Company, Zoo common stock was “listed for trading on the NASDAQ Capital

Market under the symbol ZOOG. Prior to the July 7, 2010 beginning of the Class Period, our

common stock was listed for trading on the OTC Bulletin Board under the symbol ‘ZOOE.OB.’”

       119.    The NASDAQ market on which Zoo’s common stock traded during the Class

Period is a highly efficient and automated market. As a regulated issuer, Zoo filed periodic

public reports with the SEC and with the NASDAQ. Further, Zoo regularly communicated with

public investors by means of established communications mechanisms, including through regular

disseminations of press releases on the national circuits of major newswire services and through

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other wide-ranging public disclosures, such as communications with the financial press and other

similar reporting services. Last, during the Class Period, at least two securities analysts followed

Zoo and disseminated research reports, reports that ultimately were made publicly available

through yahoofinance.com and Thompson Reuters.

       120.    Most importantly, information about the Company that is important to

shareholders was immediately incorporated into Zoo’s common stock price. For example, on

January 31, 2011, the stock price closed at $5.46 per share. On February 1, 2011, Midnight

Trader disclosed that Zoo’s common stock had declined significantly after the Company
disclosed late on January 31, 2011 via a press release that it would report sales of $67-69 million

for fiscal 2010, “sharply below the Thompson Reuters mean for $80.83 million.” On February 1,

shares hit a 52 week low of $3.58 per share, rebounding to close at $4.10 per share – a one day

decline of 25% on relatively heavy volume of 702,600 shares traded.

       121.    Similarly, the Company disclosed the restatements that form the basis of this

complaint after the close of trading on April 15, 2011. On that day, Zoo common stock closed at

$4.40 per share. The next trading day, Monday, April 18, 2011, saw Zoo’s stock price fall to an

intra-day low of $2.60 and close at $2.89, off over 34% from the close on April 15, 2010. As

such, material information was immediately incorporated into Zoo’s price.

       122.    As a result of the foregoing, the market for Zoo’s common stock promptly

absorbed current information regarding the Company from all publicly available sources and

reflected such information in Zoo’s common stock price.           Under these circumstances, all

purchasers of Zoo’s common stock during the Class Period suffered similar injury through their

purchases of Zoo’s common stock at artificially inflated prices and a presumption of reliance

applies.

                                  XI.     NO SAFE HARBOR

       123.    The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Amended

Complaint. Many of the specific statements pleaded herein involved historical financial results

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that the Company ultimately restated. Defendants did not identify the statements in question as

“forward-looking statements” when made.        To the extent there were any forward-looking

statements, there were no meaningful cautionary statements identifying important factors that

could cause actual results to differ materially from those in the purportedly forward-looking

statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-

looking statements pleaded herein, defendants are liable for those false forward-looking

statements because at the time each of those forward-looking statements were made, the

particular speaker knew that the particular forward-looking statement was false, and/or the
forward-looking statement was authorized and/or approved by an executive officer of Zoo who

knew that those statements were false when made.

                                 XII. BASIS OF ALLEGATIONS

        124.    Lead Plaintiff alleges the foregoing based upon the investigation of his counsel,

which included interviews with former employees of Zoo, a review of Zoo’s SEC filings, as well

as regulatory filings and reports, securities analysts’ reports and advisories about the Company,

press releases and other public statements issued by the Company, media reports about the

Company and other complaints filed against the Company.             Lead Plaintiff believes that

substantial additional evidentiary support will exist for the allegations set forth herein after a

reasonable opportunity for discovery.

                                   XIII. CAUSES OF ACTION

                                            COUNT I

                                 Violation of Section 10(b) Of the
                             Exchange Act and Rule 10b-5 Promulgated
                                Thereunder Against All Defendants
        125.    Lead Plaintiff repeats and realleges each and every allegation contained above as

if fully set forth herein.

        126.    During the Class Period, Defendants disseminated or approved the materially

false and misleading statements specified above. Defendants knew or were reckless in not


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knowing that that those statements were materially false or failed to disclose material

information necessary to render the statements made, in light of the circumstances under which

they were made, not misleading.

          127.   Defendants violated § 10(b) of the Exchange Act and Rule 10b-5.               They

employed devices, schemes, and artifices to defraud. They made untrue statements of material

fact and/or omitted to state material facts necessary to make the statements not misleading. In

addition they engaged in acts, practices, and course of business which operated as a fraud and

deceit upon the purchasers of the Company’s common stock during the Class Period.
          128.   Defendants individually or in concert, directly and indirectly, by the use, means or

instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal the truth and/or adverse material information about the

business, operations and financial performance of Zoo, as related above.

          129.   Defendants employed devices, schemes and artifices to defraud, while in

possession of material, adverse, non-public information and engaged in acts, practices, and a

course of conduct as alleged herein, by, among other things, participating in the making of untrue

statements of material fact and omitting to state material facts necessary in order to make the

statements made about Zoo and its operating and financial performance and future prospects, in

the light of the circumstances under which they were made, not misleading, as set forth more

particularly above, and engaged in transactions, practices and a course of business which

operated as a fraud and deceit upon the purchasers of Zoo common stock during the Class

Period.

          130.   Defendants possessed actual knowledge or recklessly disregarded that their

statements during the Class Period were false and misleading or omitted material facts they had a

duty to disclose. Defendants’ engaged in violations of Section 10(b) and Rule 10b-5, knowingly

or recklessly disregarding the truth for the purpose and effect of concealing Zoo’s true financial

and operating condition from the investing public and supporting the artificially inflated price of

its publicly traded common stock.

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       131.    As a result of defendants’ disseminating false and misleading statements about

Zoo, as set forth above, the market price of Zoo’s publicly traded securities was artificially

inflated during the Class Period. In ignorance of that artificial inflate in the price of Zoo

securities and relying directly or indirectly on the false and misleading statements, or upon the

integrity of the market in which the securities traded, and/or on the absence of material adverse

information that was known to or recklessly disregarded by defendants, but not disclosed in

public statements during the Class Period, Lead Plaintiff and members of the Class paid

artificially high prices for Zoo securities and were damaged thereby as demonstrated, in part, by
the declines in the price of the Company’s stock following the April 15, 2011disclosure.

       132.    At the time of defendants’ misrepresentations and omissions, Lead Plaintiff and

the members of the Class were ignorant of their falsity, and believed them to be true. Had Lead

Plaintiff, members of the Class, and the market known the truth regarding defendants’ false and

misleading statements, Lead Plaintiff and the members of the Class would not have purchased or

otherwise acquired Zoo common stock, or, if they had, would not have done so at the artificially

inflated prices which they paid.

       133.    As a the time of defendants’ misrepresentations and omissions, Lead Plaintiff and

the members of the Class were ignorant of their falsity, and believed them to be true. Had Lead

Plaintiff, members of the Class, and the market known the truth regarding defendants’ false and

misleading statements, Lead Plaintiff and the members of the Class would not have purchased or

otherwise acquired Zoo securities, or, if they had, would not have done so at the artificially

inflated prices which they paid.

       134.    By virtue of the foregoing, defendants have violated §10(b) of the Exchange Act

and Rule 10b-5 promulgated thereunder.




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                                            COUNT II

                             Violation of Section 20(a) of the Exchange
                            Act against Defendants Fremed and Seremet
        135.    Lead Plaintiff repeats and realleges each and every allegation contained above as

if fully set forth herein

        136.    Defendants Seremet and Fremed acted as controlling persons of Zoo within the

meaning of §20(a) of the Exchange Act, as alleged herein. By reason of their high-level,

controlling positions with the Company and their ownership and contractual rights, participation

in and awareness of the Company’s operations and intimate knowledge of the false statements

and omissions made by the Company and disseminated to the investing public, these defendants

had the power to influence and control and did influence and control, directly or indirectly, the

decision making of the Company, including the content and dissemination of the various

statements which Lead Plaintiff contend are false and misleading. Zoo provided Seremet and

Fremed with unlimited access to copies of the Company’s reports, press releases, public filings,

and other statements, that Lead Plaintiff allege to be misleading, prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or to

cause Zoo to correct the statements in question..

        137.    In particular, defendants Seremet and Fremed had direct and supervisory

involvement in the day-to-day operations and financial reporting of the Company and, therefore,
are presumed to have had the power to control or influence the particular transactions giving rise

to the securities violations as alleged herein, and exercised the same.

        138.    As set forth above, defendants each violated Section 10(b) of the Exchange Act

and Rule 10b-5 promulgated thereunder by their acts and omissions as alleged in this Amended

Complaint. By virtue of their positions as controlling persons, defendants Seremet and Fremed

are liable pursuant to Section 20(a) of the Securities Act.




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                                XIV. PRAYER FOR RELIEF

       WHEREFORE, Lead Plaintiff prays for relief and judgment, as follows:

       A.      Determining that this action is a proper class action and certifying Lead Plaintiff

as a class representative under Rule 23 of the Federal Rules of Civil Procedure;

       B.      Awarding compensatory damages in favor of Lead Plaintiff and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

       C.      Awarding Lead Plaintiff and the Class their reasonable costs and expenses
incurred in this action, including counsel fees and expert fees; and

       D.      Such other and further relief as the Court may deem just and proper.

                              XV.     JURY TRIAL DEMANDED

       Lead Plaintiff hereby demands a trial by jury.



DATED: December 12, 2011                      Respectfully Submitted,

                                              /s/ Richard S. Wayne
                                              Richard S. Wayne Attorney Bar No. 0022390
                                              /s/ Thomas P. Glass
                                              Thomas P. Glass Attorney Bar No. 0062382
                                              /s/ Joseph J. Braun
                                              Joseph J. Braun Attorney Bar No. 0069757
                                              STRAUSS & TROY
                                              150 East Fourth Street
                                              Cincinnati, OH 45202-4018
                                              (513) 621-2120 – Telephone
                                              (513) 629-9426 – Facsimile
                                              Email: rswayne@strausstroy.com
                                              Email: tpglass@strasstroy.com
                                              Email: jjbraun@strausstroy.com

                                              Attorneys for Lead Plaintiff Bruce E. Ricker




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OF COUNSEL:

FARUQI & FARUQI, LLP
Antonio Vozzolo
Richard Gonnello
369 Lexington Ave., Tenth Floor
New York, NY 10017
Telephone: (212) 983-9330
Facsimile: (212) 983-9331
Email: avozzolo@faruqilaw.com

FARUQI & FARUQI, LLP
Jacob A. Goldberg
Sandra G. Smith
101 Greenwood Avenue, Suite 600
Jenkintown, PA 19012
Telephone: (215) 277-5770
Facsimile: (215) 277-5770
Email: jgoldberg@faruqilaw.com
Email: ssmith@faruqilaw.com




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                                CERTIFICATE OF SERVICE

        I hereby certify that a copy of the foregoing has been filed electronically with the Court
this 12th day of December, 2011. Notice of this filing will be sent to all parties by operation of
the Court’s electronic filing system. Parties may access this filing through the Court’s system. If
a party is not given notice electronically through the Court’s system a copy will be served by
ordinary United States mail, first class postage prepaid, this 12th day of December, 2011.


                                             /s/Richard S. Wayne________________________
                                             Richard S. Wayne (0022390)


045688.951.2771614_1.DOC




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