SEATTLE (CN) - Insiders at Zillow dumped $115 million of their own stock at prices inflated by the company's false and misleading financial statements, investors claim in a federal class action.
Lead plaintiff Jonathan Reinschmidt claims the online real estate services company concealed that it had lost a major advertiser, was having trouble signing up new subscribers and losing old ones.
During the class period - from Feb. 15 to Nov 6. this year - Zillow issued glowing press releases about its prospects, and the share price reached a high of $46.17, according to the complaint.
During this time, officers dumped their shares and made millions.
Zillow co-founders Richard Barton, who is executive chairman of the board, and Lloyd Frink, who is vice chairman, sold 1.1 and 1.3 million shares respectively, netting more than $80 million, according to the complaint.
Company officers "knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations being made were then materially false and misleading," the complaint states.
But when Zillow disclosed its third quarter financial results on Nov. 5, it was "hammered by massive sales," according to the complaint.
"During the class period, defendants issued materially false and misleading statements regarding the company's business practices and financial results. Specifically, defendants concealed the difficulties Zillow was having signing up new real estate agents as subscribers and the churn it was experiencing in existing subscribers. As a result of defendants' false statements, Zillow's stock traded at artificially inflated prices during the class period, reaching a high of $46.17 per share on September 20, 2012. While Zillow's stock price was inflated, company insiders sold 3.1 million shares of their own Zillow stock for proceeds of nearly $115 million, including $103 million worth of stock sold by the officers named as defendants herein. The company also was able to raise $156 million in proceeds through a follow-on offering, just eight weeks before reducing projections and just 30 days after assuring investors that the Form S-3 Registration Statement was not intended for a follow-on offering but was just part of 'good housekeeping,'" the complaint states.
A follow-on offering allows company directors and insiders to sell privately owned shares.
"On November 5, 2012, after the market closed, Zillow issued a press release announcing its third quarter 2012 financial results. Additionally, Zillow provided an update to its fourth quarter and full year 2012 revenue guidance, revealing revenue expectations in the range of $30.0 to $31.0 million for the fourth quarter of 2012 and revenue guidance for the full year 2012 of $113.0 million. This guidance fell below analysts' estimates. Furthermore, Zillow announced that its estimates of home valuation, referred to as 'Zestimates,' had lost a large display advertiser, Foreclosure.com, and therefore defendants expected weakness in the company's display advertising business," the complaint states.
"These disclosures caused Zillow stock to collapse $6.22 per share to close at $28.15 per share on November 6, 2012, a one-day decline of nearly 18% on volume of 7.4 million shares.
"As a result of defendants' false statements, Zillow stock traded at artificially inflated levels during the class period. However, after the above revelations seeped into the market, the company's shares were hammered by massive sales, sending them down 39 percent from their class period high."
Defendants include CEO Spencer Rascoff, who sold 54,500 shares for $2.1 million; CFO Chad Cohen, who sold 50,791 shares for $1.76 million, and Chief Technology Officer David Beitel, who sold 257,500 shares for $9.2 million, according to the complaint.
Investors claim Zillow has no "safe harbor" because the company knew its forward-looking financial statements were false or misleading. They say Zillow violated securities laws and want damages for purchasing Zillow stock at inflated prices.
They are represented by Steve Berman with Hagens Berman Sobol Shapiro.