Another Zillow Group shareholder has filed a federal lawsuit against the company and it appears the real estate giant could soon face a slew of similar suits.

  • Zillow Group faces legal action from investors as it tries to settle with the CFPB over its agent-lender co-marketing program.

Another Zillow Group shareholder has filed a federal lawsuit against the company and it appears the real estate giant could soon face a slew of similar suits.

Spencer Rascoff

In the latest complaint, investor James Shotwell alleges Zillow Group and its two top executives — CEO Spencer Rascoff and CFO Kathleen Philips — defrauded investors by misrepresenting the extent to which its co-marketing program complied with a federal anti-kickback law.

According to the complaint, the company’s misrepresentation artificially inflated its stock price, causing investors to lose money after Zillow Group revealed a federal investigation could have a “material impact” on the company’s future results. Stephen P. Vargosko, another company shareholder, made the same claims in a lawsuit filed in August.

Both suits seek class-action status on behalf of other Zillow Group investors, which the plaintiffs say could include hundreds or thousands of “similarly situated” people or entities.

The lawsuits come as Zillow Group discusses a settlement with the Consumer Financial Protection Bureau. The agency 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.”

The latest lawsuit was filed jointly by Pomerantz LLP and the Law Offices of Clifford A. Cantor on Shotwell’s behalf. Vargokso’s suit was filed by The Rosen Law Firm. At least a dozen other securities litigation firms appear to be gearing up to file similar suits and are in search of plaintiffs by an Oct. 23 deadline.

The firms include RM Law; Levi & Korsinksy; Goldberg Law PC; Bronstein, Gewirtz & Grossman; Milberg LLP; Shareholders Foundation Inc.; Bragar Eagel & Squire; Glancy Prongay & Murray; The Law Offices of Vincent Wong; Law Offices of Howard G. SmithBrower Piven; and Lundin Law.

On May 4, Zillow Group disclosed that the CFPB had been investigating the company’s co-marketing program since 2015 for possible RESPA violations. 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 legal action could have a “material impact” on future operating results, shares of the company plummeted 15 percent over two days, closing at $40.50 on Aug. 10.

Source: NASDAQ

The latest shareholder complaint filed on Sep. 14,  like the previous complaint, alleges that Zillow Group, Rascoff, and 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.

Kathleen Philips

“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 in language identical to the first complaint.

Why a company’s stock falls or rises is not always clear-cut. Some analysts blamed Zillow Group’s lower-than-expected prediction for its third-quarter revenue for the August stock drop. And the company’s stock did not fall after Zillow Group’s initial disclosure of the CFPB investigation in May.

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.

Shotwell’s lawsuit is filed in Seattle’s U.S. District Court for the Western District of Washington. Vargosko’s is filed in the U.S. District Court Central District of California.

Email Andrea V. Brambila.

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