Zillow Offers Securities Suit to Proceed After One Claim Dismissed

Judge Thomas Zilly has denied Zillow Group, Inc.’s motion to dismiss a securities lawsuit, except for one claim, clearing the way for the lawsuit alleging the company has misled investors. The lead plaintiff, Jeremy Jaeger, alleges the company deceived investors about Zillow Offers’ underperformance.

Founded in 2006, Zillow is a housing market tracking app that allows users to monitor the values of homes for sale. Per the order, until 2018, Zillow made the lion’s share of its revenue through advertising and referral fees for matching prospective buyers with and sellers with real estate agents and brokers.

In April 2018, Zillow entered the “iBuyer” market, in which companies use algorithms and machine learning to buy and resell homes quickly, with the goal of accelerating their growth. They called this offshoot Zillow Offers. 

When Zillow Offers entered the market, they were behind some of their competitors who had entered the iBuyer market years earlier, according to the court; however, returning CEO and defendant Richard Barton set an aggressive goal of $20 billion in revenue over five years through buying and selling 5,000 homes per month. In February 2021, they announced a new Zestimate offer program, in which algorithms would generate an initial purchase offer from Zillow to homeowners. 

Things did not go according to plan, court documents allege. In June 2021, Zillow missed their inventory-acquisition targets due to the algorithms “under-modeling” the level of home appreciation. As a result, they issued a press release stating algorithmic improvements to Zestimate promising quicker and more accurate predictions of value. Jaeger alleges this was a lie to cover up Project Ketchup, a campaign in which Zillow offered significantly more than Zestimate would suggest in order to rapidly acquire new houses.

But, according to court filings, Zillow could not keep up – statements from financial executives cited by the plaintiff describe how this massive purchasing spree cut into Zillow’s profits, so to make up the difference they attempted to reduce spending on their renovating contractors. As a result, contractors deprioritized Zillow’s projects and even refused to take them on. Thus Zillow acquired more homes than they could sell.

Between October 18, 2021, and November 3, 2021, Zillow issued corrective statements on their underperforming expectations, and their stock value plummeted. 

Jaeger, on behalf of his proposed class, alleges Zillow and its executives misled the public about the actual goings-on of Zillow Offers leading investors to lose value when this underperformance was revealed. Zillow then moved to dismiss all charges. 

Judge Zilly, of the Western District of Washington, denied this motion excepting one statement. He found that all the other challenged statements met the plausibility standard, were not protected by the safe harbor clause, and sufficiently demonstrated scienter, and loss causation.

The one statement that was dismissed concerns an interaction between Piper Sandler analyst Thomas Steven Champion and Zillow’s Chief Operating Officer Jeremy Wacksman. The court objected to Zillow’s arguments that certain key phrases like “we expect” or “going to be” automatically render a statement within the purview of safe harbor, yet Judge Zilly did find the interaction as a whole was forward-looking and protected by the safe harbor clause. The order provides leave to amend, though doubts the plaintiffs can successfully do so.

The lead plaintiff is represented by Hagens Berman Sobol Shapiro LLP and Kessler Topaz Meltzer & Check, LLP. The defendants are represented by Skadden, Arps, Slate, Meagher & Flom LLP and Perkins Coie LLP.