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Zillow Concealed Problems with Home-Flipping Business, Lawsuit Says

Zillow Group 'made misleading statements' regarding its home flipping business, a lawsuit says.

Zillow  (ZG) - Get Zillow Group, Inc. Class A Report allegedly concealed problems with its home flipping business, Zillow Offers from shareholders, which resulted in the digital real estate company shutting down the business, according to a federal lawsuit.

Shares of the Seattle company were down 4.3% to $60.08 at last check.

Zillow "made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects," according to the complaint filed in the U.S. District Court for Western District of Washington in Seattle. 

The suit, seeking class-action status, was filed Tuesday on behalf of shareholder Dibakar Barua. It names Zillow's co-founder and chief executive Rich Barton, and Chief Operating Officer Jeremy Wacksman as defendants.

Zillow said last month that it would wind down Zillow Offers and reduce its workforce by 25%. The company also said it would take up to $569 million in write-downs on home inventory in the third and fourth quarters.

"We've determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to transaction scale Zillow Offers would result in too much earnings and balance-sheet volatility," Barton said in a company statement. That statement also reported the company's third-quarter financial results.

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As a result of the announcement, the complaint said, Zillow's Class share price fell 23% to close at $65.86 a share on Nov. 3 on unusually heavy trading volume. The Class C shares fell 25%.

The complaint said defendants failed to disclose to investors "that, despite operational improvements, the Company experienced significant unpredictability in forecasting home prices for its Zillow Offers business."

That unpredictability, as well as labor and supply shortages, led to a backlog of inventory, the complaint said. The company "was reasonably likely to wind-down its Zillow Offers business, which would have a material adverse impact on its financial results," the complaint says. 

As a result, the lawsuit said, the defendants’ "positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis."

"We are aware of the lawsuit filed yesterday and are currently reviewing it," a Zillow spokesperson said. "As a general practice, we do not discuss pending litigation." 

Other law firms have asked shareholders to come forward as they investigate similar suits.

Last week, Zillow reportedly reached an agreement to sell roughly 2,000 homes to Pretium Partners, a New York investment firm, as it winds down Zillow Offers.