A federal court in Seattle has granted class certification to an investor lawsuit against Zillow Group that alleges the company artificially inflated its stock price 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).
Class certification officially makes the securities fraud suit a class action against Zillow Group, its former CEO Spencer Rascoff and its former Chief Financial Officer and Chief Legal Officer Kathleen Philips. The plaintiffs allege violations of the Securities Exchange Act.
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 deceive customers. The investigation ended with no action from CFPB in June 2018.
According to the court’s ruling, the lawsuit’s plaintiffs allege that even though the CFPB began investigating Zillow for RESPA violations in 2015, “Zillow did not disclose that fact to investors until May 4, 2017, and even then, downplayed the seriousness of the situation.”
On Aug. 8, 2017, Zillow disclosed that the CFPB had proposed settlement discussions with Zillow and intended to “pursue further action” if a settlement was not reached. Zillow’s share price subsequently fell over the following two trading days.
The certified class includes “all persons who purchased or otherwise acquired Zillow securities between November 17, 2014 and August 8, 2017, both dates inclusive, excluding Defendants herein, 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.”
The Nov. 17, 2014 date is the first day Zillow allegedly misrepresented its compliance with RESPA in a Securities & Exchange Commission (SEC) filing.
In a March 20 filing, attorneys for Zillow, Rascoff and Philips had argued that the class definition was “dramatically overbroad,” but the court disagreed.
In an emailed statement, a Zillow spokesperson told Inman, “While we are disappointed with the court’s recent procedural decision, we continue to believe the claims in the suit to be without merit and intend to vigorously defend ourselves against the lawsuit.”
The Oct. 28 court order does not estimate how many class members there are, but indicates that “there are a substantial number of affected parties.” Plaintiffs put the number at “hundreds or thousands.”
Although the litigation began with the consolidation of two investor lawsuits filed by Stephen P. Vargosko and James Shotwell in 2017, the class representatives are investors Jo Ann Offutt, Raymond Harris and Johanna Choy, who filed a second amended complaint against Zillow after the court previously dismissed the suit. The second amended complaint survived Zillow’s attempt to have the suit dismissed.
In denying Zillow’s motion to dismiss, Judge John C. Coughenour wrote that, based on the complaint’s allegations, “the Court can draw a reasonable inference that Zillow designed the co-marketing program to allow agents to provide referrals to lenders in violation of RESPA, and that such referrals were occurring.
“The second amended complaint contains particularized facts alleging that there was an understanding between Zillow and the co-marketing participants, that in exchange for lenders paying a portion of agents’ advertising costs, lenders would receive mortgage referrals from their partnering agents.”
Coughenour wrote that the court could also draw “a reasonable inference” that Zillow designed the co-marketing program to allow lenders to pay more than fair market value for the advertising they received.
“The second amended complaint contains particularized facts demonstrating that Zillow allowed lenders to pay more for co-marketing advertising than for similar advertising products Zillow sold to lenders. Further, Plaintiffs have alleged that lenders were not only paying more than 50 percent of an agent’s advertising costs, but that Zillow, through its design of the program and inaction in enforcing the spending cap, was allowing the practice to occur,” Coughenour wrote.
Regarding the allegations against Philips and Rascoff, Coughenour said the court can infer they “were at least deliberately reckless in continuing to make statements that the co-marketing program was legally compliant.”
Read the class certification order: