A Zillow Group shareholder has filed a lawsuit alleging the company and its two top executives defrauded investors by misrepresenting its co-marketing program’s compliance with an anti-kickback law, thereby artificially inflating the real estate giant’s stock price.

  • A lawsuit alleges Zillow Group defrauded hundreds or thousands of investors by not disclosing that its agent-lender co-marketing program is not compliant with RESPA.
  • Zillow Group maintains that its acts and practices are lawful and that its co-marketing program allows agents and lenders to comply with RESPA.
  • The outcome of settlement talks between Zillow Group and the CFPB is pending.

A Zillow Group shareholder has filed a lawsuit alleging the company and its two top executives defrauded investors by misrepresenting its co-marketing program’s compliance with an anti-kickback law, thereby artificially inflating the real estate giant’s stock price.

The lawsuit seeks class-action status on behalf of other Zillow Group investors and comes as Zillow Group heads into settlement talks with the Consumer Financial Protection Bureau, which recently concluded a two-year federal investigation of the company’s co-marketing program for compliance with the Real Estate Settlement Procedures Act (RESPA).

Zillow Group declined to comment for this story, citing pending litigation. The company has consistently maintained that it believes its “acts and practices are lawful” and that its “co-marketing program allows lenders and agents to comply with RESPA.”

On Aug. 8, Zillow Group revealed that the CFPB had “invited” the company to discuss a settlement and had threatened legal action if a settlement was not reached. In a public filing, the company said there was a “reasonable possibility” that legal action from the CFPB could result in a loss for the company, but that it could not estimate the size of the loss.

When the company publicly disclosed that its co-marketing program was under scrutiny, and that legal action could have a “material impact” on future operating results, shares of the company plummeted 15 percent over two days.

Source: NASDAQ

The shareholder complaint, filed on Aug. 22, alleges that Zillow Group, CEO Spencer Rascoff and CFO Kathleen Philips failed to disclose that the co-marketing program did not comply with RESPA and made “materially false and misleading” public statements attesting to the company’s compliance with government regulations. (The CFPB’s inquiry into the co-marketing program began in 2015).

“As a result of defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the company’s securities, plaintiff and other class members have suffered significant losses and damages,” the complaint alleges.

The Rosen Law Firm, exclusively dedicated to recovering investors’ losses, is representing the plaintiff on a contingent-fee basis (meaning the law firm only gets paid if it wins the suit) and advancing all costs and expenses. Two other firms specializing in securities litigation, Brower Piven and Levi & Korsinsky, appear to be gearing up to file similar class-action complaints.

Court documents do not indicate how much the Rosen plaintiff seeks in damages.

Co-marketing program in CFPB crosshairs

The co-marketing program in question, launched in June 2013, allows “Premier Agents” who pay for advertising on Zillow Group’s apps and websites to invite lenders to share marketing costs by paying Zillow Group to appear as “Premier Lenders” in advertising alongside the agent.

RESPA experts say portal co-marketing programs such as Zillow Group’s could expose agents to legal liability under state and federal laws if regulators find that agents are not paying their fair share of advertising spend.

The CFPB has demonstrated an increasing willingness to go after those accepting payments for mortgage referrals — as evidenced by fines leveled at real estate brokerages in February — which will likely impact more real estate brokers in the future.

According to a public filing from Zillow Group, the CFPB alleges that the company violated an anti-kickback provision of RESPA and a part of the Consumer Financial Protection Act that prohibits anyone from helping financial service providers deceive consumers.

Spencer Rascoff

‘Artificially inflated’

The shareholder complaint alleges that, as a result of the company’s misleading statements, the market price of its stock was “artificially inflated” in the year and a half before the August disclosure.

“Had plaintiff and the other members of the class been aware that the market price of the company’s securities had been artificially and falsely inflated by the company’s and the individual defendants’ misleading statements and by the material adverse information which the company’s and the individual defendants did not disclose, they would not have purchased the company’s securities at the artificially inflated prices that they did, or at all,” the complaint said.

Kathleen Philips

The complaint alleges Zillow Group, Rascoff and Philips violated the antifraud provision of The Securities Exchange Act  — Section 10(b) and Rule 10b-5 — and that Rascoff and Philips violated a provision in the law — Section 20(a) — that makes them liable as “controlling persons” for aiding and abetting securities violations.

“Because of their positions of control and authority as senior officers, the individual defendants were able to, and did, control the contents of the various reports, press releases and public filings which the company disseminated in the marketplace during the class period,” the complaint said.

Some analysts blamed Zillow Group’s lower-than-expected prediction for its third-quarter revenue for the stock drop earlier this month.

When Inman asked the law firm that lodged the complaint, The Rosen Law Firm, why it attributed the Zillow Group stock decline to the CFPB news and not the third-quarter revenue guidance and why the stock did not drop in May after the company first disclosed the CFPB investigation, the law firm said the causes for the stock price decline “will be resolved in court.”

The plaintiff behind the suit

The plaintiff named in the suit is Stephen P. Vargosko, who appears to be vice president of Pittsburgh-based MSI Healthcare Inc., though the law firm declined to confirm this to Inman, citing a fear that Vargosko would be harrassed.

Phillip Kim, one of the firm’s attorneys, also told Inman that the lawsuit “is not on behalf of one investor but all Zillow investors” that purchased stock from Feb. 12, 2016 through Aug. 8, 2017, which the complaint says could include hundreds or thousands of people or entities. Kim said he expects that, as a result of the lawsuit, investors with larger losses will step forward and be appointed as lead plaintiffs.

Kim declined to state Vargosko’s specific damages or the damages allegedly incurred by the proposed class overall, saying that would also be resolved in court with the aid of experts.

Email Andrea V. Brambila.

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