In dismissing the suit, Judge John Coughenour left the option of the plaintiffs to file a revised complaint within 45 days.

A U.S. District Court Judge dismissed a class action lawsuit against Zillow on Tuesday, that alleged the real estate technology company defrauded investors by failing to disclose its agent-lender co-marketing program was in violation of real estate anti-kickback laws, specifically the Real Estate Settlement Procedures Act (RESPA).

“We are pleased that the court agreed with our motion to dismiss the claims of this lawsuit, which we believe to be without merit,” said a spokesperson for Zillow. “Our mission has always been to arm consumers with information that helps them make decisions when finding their next home, which this program does by providing consumers with an easy, transparent way to connect with agents and lenders.”

In dismissing the suit, Judge John Coughenour left the option of the plaintiffs to file a revised complaint within 45 days.

“In accordance with the Court’s rulings, if Plaintiffs choose to file a second amended complaint, they must assert particularized facts that demonstrate that Zillow designed the co-marketing program to violate RESPA, and that Zillow was instructing and encouraging third-parties to commit such violations,” the dismissal ruling states.

The program at the center of the investigation allows Zillow Premier Agents to invite lenders to share advertising costs and appear alongside them as Premier Lenders.

The Consumer Financial Protection Bureau (CFPB) began inquiring about the co-marketing program in 2015 and investigated whether it violated the anti-kickback provision of RESPA and a section of the Consumer Financial Protection Act that prohibits anyone from helping financial service providers device customers. The investigation ended with no action from CFPB in June 2018.

However, in August 2017, after the CFPB inquiry had been publicized, a plaintiff named Stephen P. Vargosko filed a lawsuit against Zillow claiming that the company artificially inflated its stock price by failing to disclose that the program did not comply with RESPA and as a result, “the Company’s public statements were materially false and misleading at all relevant times.”

In Vargosko’s suit, he claims Zillow publicly disclosed the possibility of a settlement or protracted legal fight with CPFB on August 8, 2017 and not in previous filings with the U.S. Securities and Exchange Commission (SEC). Zillow stock dropped 15 percent over the ensuing two days as a result of the disclosure, the complaint alleges.

“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 reads.

A second lawsuit, filed by investor James Shotwell, making the same allegations was filed shortly after Vargosko’s and the court consolidated the two, creating a class action lawsuit in January 2018. Zillow asked for the lawsuit to be tossed, citing that an investigation did not mean the program violated RESPA.

CFPB, according to the final ruling, began asking for information about the program in 2015, but it wasn’t until the first quarter of 2017 that it learned CFPB was considering whether to recommend legal action against Zillow. Zillow then disclosed CFPB’s investigation in its first quarter SEC filing, the dismissal states.

Zillow learned in August 2017 that CFPB had concluded its investigation and invited the company to discuss a possible settlement.

“Based on correspondence from the CFPB in August 2017, we understand that it has concluded its investigation,” the filing read. “The CFPB has invited us to discuss a possible settlement and indicated that it intends to pursue further action if those discussions do not result in further settlement. We continue to believe that our acts and practices are lawful and that our co-marketing program allows lenders and agents to comply with RESPA, and we will vigorously defend against any allegations to the contrary.”

Vargosko, appears to be vice president of Pittsburgh-based MSI Healthcare Inc., though the law firm declined to confirm this to Inman when the lawsuit was first reported, citing a fear that Vargosko would be harassed.

The Rosen Law Firm, which was representing Vargosko and seeking additional participants for the class action lawsuit, did not respond to a request for comment asking if there were plans to file an amended complaint.

Email Patrick Kearns

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