Shareholder suit accuses Rocket of deceptive disclosures

A shareholder sued Rocket Mortgage, the Detroit-based mortgage behemoth, for allegedly making misleading disclosures to conceal adverse market conditions.

The class action-seeking lawsuit, which was filed in the Eastern District Of Michigan’s Southern Division, alleges that Rocket was aware of factors that were already taking a toll on its business, while touting its future performance to investors. It also accuses Rocket founder and former CEO Dan Gilbert of concealing adverse market conditions from the public when he sold $500 million in company stock in March.

The lawsuit names Rocket, as well as Jay Farner, Rocket CEO; Julie Booth, Rocket CFO; Robert Dean Walters, Rocket COO; and Gilbert as defendants. It is the second class action-seeking lawsuit in as many weeks to allege the company concealed information about adverse market effects.

The defendants, the lawsuit alleges, “presented a misleading picture of Rocket’s business, risks, and future financial prospects.”

Aaron Emerson, a spokesperson for parent firm Rocket Companies, said the case was a “work of fantasy and completely without merit.”

Emerson added that any claims that Rocket has not been transparent and truthful in all its public communications are “false and spurious.”

“Rocket Companies will hold accountable anyone who makes false statements and attempts to tarnish the name of our company or diminish the hard work of our 26,000 team members,” said Emerson.

The lawsuit, filed by Michigan-based law firm Pomerantz, argues that Rocket concealed its battle for market share in the wholesale channel, and played down the trend of tightening gain-on-sale margins.

To prove that Rocket knew more than it was letting on, plaintiff Owen Arent, who until May was a software quality engineer for the company, seized on statements Booth made during its first quarter results earnings call. Rocket’s Chief Financial Officer Julie Booth “admitted” that the decline of gain on sale margins began “at the end of Q1,” the lawsuit says.

Those trends led to a significant decline in margins for many mortgage lenders, including Rocket. In May, Rocket said it expected gain on sale margins of 2.65% to 2.95% in the second quarter. The forecast represented a nearly 100 basis point sequential drop and a dramatic 254 bps decrease year-over-year.

At the time, a Rocket mortgage official attributed the sharp decrease in margins to pressure on loan pricing, a shift in the product mix, and a compression in price spreads between the primary and secondary mortgage markets. Its share prices tumbled 16.62% to $19.01 on the news, according to the suit.

Forward-looking statements like the ones the lawsuit focuses on are typically protected by a statutory safe harbor, meant to spur companies to make such statements freely. The lawsuit argues that the safe harbor should not apply in this case, since company officials knew at the time that the statements were false.

A mortgage finance industry expert, who was not authorized to publicly discuss the lawsuit, described the legal action as puzzling, particularly because Rocket’s first quarter results were not surprising. He attributed both of the recent lawsuits to a new cohort of investors who are shunning traditional investor analyses.

Still, he said, the public disclosures the company made were in line with their reported gain on sale performance.

“If you look at [Rocket’s] disclosure on this subject it’s pretty damn clear,” the industry expert said.

The lawsuit seeks a jury trial, damages awarded for the loss in share value and court fees.

This is the second lawsuit Pomerantz has filed that targets a top-10 mortgage lender experiencing thinning margins. In June, the law firm filed a class-action-seeking lawsuit that claimed Home Point Capital’s offering documents in its IPO were “negligently prepared” and contained untrue and/or misleading statements. The law firm said that Home Point Capital failed to disclose that the expansion of its broker partner network would increase expenses dramatically.

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