Judge upholds investor claims against Rocket

A lawsuit accusing Rocket Cos. executives of misleading investors during the refinance boom will move forward despite Rocket's pleas, a federal judge ordered.

Class action plaintiffs say Rocket leaders in early 2021 propped up the company's stock price with deceptive statements about interest rates, company growth and market share. They also claim founder and chairman Dan Gilbert made $500 million from an insider trade with information ahead of an earnings report.

The complaint in the U.S. District Court for the Eastern District of Michigan points to seven alleged deceiving statements from company bosses between February and May of 2021. U.S. District Judge Thomas L. Ludington in March dismissed two statements from the lawsuit, and Rocket asked the judge to reconsider his decision on three others.

"Defendants are essentially rehashing the same arguments they made in their motion to dismiss, seeking a different outcome based on the same facts and the same laws," wrote Ludington in a June 30 order denying Rocket's request.

The company in a statement Friday morning said it remains confident the law and the facts of the case are on its side.

"We stand by the fact that our leadership and company remained in compliance with legal requirements related to our processes, releases, disclosures and statements – and we look forward to proving that once we have the benefit of a full discovery record," a company spokesperson wrote.

The complaint, which presumes a class of thousands of shareholders, was filed in June 2021 and consolidated last April. Plaintiffs cite public comments in March 2021 by then-CEO Jay Farner, in which he said all origination channels were growing and interest rate rises would be a benefit to the firm. 

"Yet, unbeknownst to investors – but known to Defendants – all relevant metrics were actually on the decline, indicating that volume, as a whole and broken out by channel segments, was in fact not growing, and that demand was much lower due to less loan applications being completed," wrote counsel for shareholders. 

The 151-page amended complaint includes many details about mortgage accounting and Rocket's record performance amid ultra-low interest rates, before the lender began to revise its outlook in spring 2021. Plaintiffs cite information from nine unnamed witnesses, who worked in various production and analytics roles at the company during 2021.

The lawsuit also calls into question the veracity of a March 2021 tweet by Farner and a subsequent retweet by Gilbert, in which Farner wrote Rocket had increased its market share. The comment came in response to rival United Wholesale Mortgage's broker ultimatum, and plaintiffs claim Rocket's broker loan volume and broker market share had fallen during that time.

Ludington in his March order ruled that Farner and Gilbert's statements were actionable, while tossing other comments made by executives in a 1Q 2021 earnings call in which they touted "strong consumer demand."

An insider trading accusation also remains pending against GIlbert, who sold 20,200,000 shares of Rocket stock at $24.75 a unit in a private sale for a $499.95 million gain. Shareholders claim Gilbert sold the stock on March 29, 2021 after receiving nonpublic information six days earlier about the company's upcoming revised guidance of lower gain on sale margins.

"While Company rules barred this sale because it was outside of the allowed trading window, Gilbert convinced the Board to change their own rules and open the trading window so he could make this sale," the suit said.

Gilbert planned to use a portion of those proceeds to fund a $500 million philanthropic effort to revitalize Detroit neighborhoods, according to a Securities and Exchange Commission filing. The founder and his wife retained a 93% stake in the company following the transaction.

Rocket's stock fell 17% following its Q1 2021 report on May 5, 2021, and sat at $16.48 per share a week later. The megalender's stock price, like other publicly traded mortgage players, has steadily declined in the past year and was $8.69 per share before market open Friday. The industry leader also recently posted two consecutive quarters with a nine-figure net loss.

Plaintiffs have a September deadline to attain class certification, while a trial date, likely to occur next year, has yet to be scheduled. Rocket meanwhile is seeking to decertify a separate federal class action case questioning its appraisal practices, while also fending off a group of telemarketing complaints.