(CN) – Zillow continued to run a marketing program allowing real estate agents and lenders to share advertising costs, despite having received notice from the Consumer Financial Protection Board that the program was likely illegal, shareholders claim in a derivative lawsuit.
Jeffrey Bookman filed a derivative action on behalf of Zillow Group against CEO Spencer Rascoff, CFO Kathleen Philips, and nine members of the board of directors in King County, Washington.
Zillow provides e-commerce services to real estate professionals, home buyers and sellers throughout the U.S.
In 2013, it introduced a co-marketing program that allowed real estate agents and mortgage lenders to jointly advertise on its website.
Zillow received a notice from the Consumer Financial Protection Bureau in 2015 seeking information to determine the legality of this co-marketing program under the Real Estate Settlement Procedures Act.
However, the company did not inform investors of the CFPB’s investigation until March 2017, and waited another five months to reveal that the CFPB intended to pursue further action against the company if Zillow did not reach a settlement with the agency.
When the news became public, Zillow’s share price fell 15 percent over the following two days and investors filed two securities class actions against it.
“Defendants were first put on notice over two years ago via the 2015 CID [Civil Investigative Demand] that the co-marketing program may have violated federal law, but took no action to terminate the co-marketing program or to disclose the investigation, potential liability and business risk to shareholders,” Bookman says. “Indeed, to this day the company, through the individual defendants, contends that the co-marketing program does not violate RESPA or the CFPA and despite the threat of an enforcement action continues to permit the company to engage in the misconduct.”
Bookman says CEO Rascoff and other defendant corporate executives should have known of the risks associated with Zillow’s co-marketing program, especially after the CFPB sent its initial notice, but failed to act in the company’s best interests.
He seeks damages for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and gross mismanagement, plus restitution from the defendant executives.
Bookman is represented by Beth Terrell with Terrell Marshall Law Group in Seattle.