Jonathan Reinschmidt , et al. v. Zillow, Inc., et al. 12...

Case 2:12-cv-02084-RSM Document 52 Filed 06/24/13 of 71

1 THE HONORABLE RICARDO S. MARTINEZ

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11 JONATHAN REINSCHMIDT, Individually

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and on Behalf of All Others Similarly Situated,

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Plaintiff,

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vs.

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ZILLOW, INC., et al.,

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Defendants.

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No. 2:12-cv-02084-RSM

CLASS ACTION

CONSOLIDATED CLASS ACTION AMENDED COMPLAINT

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT SEATTLE

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CONSOLIDATED CLASS ACTION AMENDED

I E. COMPLAINT (2:12-CV-02084-RSM)

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V.

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VII

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II.

III.

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NATURE OF THE ACTION ..............................................................................................1

JURISDICTION AND VENUE ..........................................................................................7

THEPARTIES.....................................................................................................................8

A. Lead Plaintiffs ..........................................................................................................8

B. Defendant Zillow .....................................................................................................9

C. Individual Defendants ..............................................................................................9

ZILLOW’S BUSINESS MODEL AND SWITCH IN PRICING .....................................11

A. Zillow’s IPO and Profitability Plan .......................................................................11

B. Zillow’s Limited Revenue Sources ........................................................................13

C. Zillow’s Shift to Impression-Based Pricing for Agent Advertising ......................14

D. Customers Were Cancelling or Downsizing Their Subscriptions, and Churn Was Increasing ............................................................................................16

E. Further Resistance to Zillow’s Business Practices ................................................21

F. Zillow’s Increased Expenses in Connection with Attracting and Maintaining Agent Subscriptions ..........................................................................23

G. Zillow’s Static Average Revenue Per Customer ...................................................24

H. Zillow’s Downward Trending Revenue Growth ...................................................26

I. Zillow Further Concealed the Loss of High Margin Display Advertising Business.................................................................................................................27

DEFENDANTS CONDUCT A SECONDARY OFFERING ...........................................28

DEFENDANTS’ MASSIVE INSIDER SELLING AT ARTIFICIALLY INFLATEDPRICES .........................................................................................................30

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ....................................32

A. Fourth Quarter and Full Year 2011 Misstatements ................................................32

B. First Quarter 2012 Misstatements ..........................................................................36

C. Second Quarter Misstatements ..............................................................................41

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VIII. THE TRUTH IS FINALLY REVEALED .........................................................................52

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A. Disclosures that ARPU Levels Were Flat ..............................................................53

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B. Disclosures Regarding Loss of Display Advertising Business ..............................57

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IX. ADDITIONAL SCIENTER ALLEGATIONS ..................................................................59

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X. FRAUDULENT SCHEME AND COURSE OF BUSINESS ...........................................61

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XI. LOSS CAUSATION/ECONOMIC LOSS ........................................................................62

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XII. CLASS ACTION ALLEGATIONS ..................................................................................62

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XIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE .....................................................................................................64

9 XIV. NO SAFE HARBOR .........................................................................................................64

10 XV. CAUSES OF ACTION ......................................................................................................65

11 COUNTI ...........................................................................................................................65

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For Violation of Section 10(b) of the Exchange Act and Rule 10b-5(a), (b) & (c) Promulgated Thereunder Against All Defendants

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For Violation of Section 20(a) of the Exchange Act Against the Individual Defendants

15 XVI. PRAYER FOR RELIEF ....................................................................................................67

16 JURY TRIAL DEMANDED .........................................................................................................67

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Lead plaintiffs Oklahoma Firefighters Pension and Retirement System (“Oklahoma

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Firefighters”), State-Boston Retirement System (“State-Boston”) and James Atkinson (“Atkinson”)

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(collectively, “Lead Plaintiffs”), individually and on behalf of all other persons and entities who

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purchased or acquired the common stock of Zillow, Inc. (“Zillow”) during the period between

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February 15, 2012 and November 6, 2012, inclusive (the “Class Period”) and who were damaged

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thereby, allege the following based upon personal knowledge as to themselves and their own acts,

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and upon information and belief as to all other matters.

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Lead Plaintiffs’ allegations are based on Lead Counsel’s investigation, which included,

among other things: (i) a review of Zillow’s public filings with the U.S. Securities and Exchange

Commission (“SEC”); (ii) a review and analysis of research reports issued by financial analysts

concerning Zillow; (iii) a review and analysis of other publicly available information concerning

Zillow and its senior officers and directors, including Spencer M. Rascoff, Lloyd D. Frink, Chad M.

Cohen and Richard N. Barton (collectively, the “Individual Defendants”); and (iv) interviews with

former Zillow employees on a confidential basis (“Confidential Witnesses” or “CWs”), each of

whom has specific, personal knowledge of the facts alleged herein. Lead Plaintiffs believe that

substantial additional evidentiary support exists for the allegations set forth in this Complaint that

will be revealed after a reasonable opportunity for discovery.

I. NATURE OF THE ACTION

1. This is a securities class action arising from Defendants’ material misstatements and

omissions regarding the Company’s business during the Class Period.

2. Zillow is an online company that purports to offer various services to assist

consumers with real estate needs, including the buying and selling of homes, renting, borrowing and

I remodeling. Zillow operates through its website and various mobile applications, and gives

consumers access to a database of real estate listings. Zillow also offers a service called a

I “Zestimate” that estimates the value of a property based on various sources of data.

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3. Zillow is free to consumers and generates the majority of its revenue in two ways:

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selling advertising on its website (“Display Advertising”) and selling subscription services to real

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estate agents and mortgage lenders nationwide (“Marketplace Advertising”), whereby real estate

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agents can get their name and contact information displayed on Zillow’s website next to a potential

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buyer’s real estate search results. Since Zillow’s initial public offering in July 2011, Marketplace

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Advertising has become the Company’s largest line of business and continues to grow.

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4. Zillow’s Marketplace Advertising business includes the Premier Agent program,

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through which real estate agents purchase subscription-based advertising at three levels of

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participation. The most basic is Silver, more enhanced being Gold, and the premium, most

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expensive and profitable level to Zillow is Platinum. Defendants publicly portrayed the market

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opportunity for the Premier Agent program as vast ($6 billion) and largely untapped, and suggested

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that demand for its Platinum-level of service far exceeded its capacity to deliver that service.

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5. At the start of the Class Period, Defendants announced a change to Zillow’s business

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purportedly to take advantage of that vast, untapped market, which included transitioning from

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selling a finite number of Platinum subscription spaces (a maximum of 12) per zip code, to charging

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Platinum subscribers based on the number of web site impressions Zillow delivered. Zillow

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purportedly did this to broaden the availability of the Premier Agent program to agents who were

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demanding the Platinum level of service, and more important to investors, so that Zillow could

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increase the prices charged to agents. This new business model was designed to fundamentally

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change the way in which Zillow charged for and priced subscriptions to its Premier Agent program.

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Because Zillow generated the majority of its revenue from selling subscriptions to its Premier Agent

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program, the status of this new development was highly material to investors.

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6. Throughout the Class Period, Defendants represented to investors that this new

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I impressions-based pricing for real estate agent subscriptions gave Zillow the ability to sell more

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subscriptions at higher prices. Defendants also represented that Zillow was making good progress

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introducing its new impressions-based pricing model, because existing customers were happy with

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I the new program and were willing to pay higher prices for the advertising features that were Zillow’s

main source of revenue within the Premier Agent program.

7. Investors were focused on whether the new pricing model allowed Zillow to raise

prices, because it was a direct indicator of Zillow’s ability to grow revenue and become more

profitable. The most important information that would allow investors to accurately evaluate

whether Zillow was successfully raising prices was an internal metric called Average Revenue per

Subscriber (“ARPU”). However, Zillow did not disclose the key ARPU metric to investors during

the Class Period. As a result, investors had no quantitatively accurate means of gauging the truth of

Defendants’ Class Period representations that Zillow was successfully raising prices under to the

new pricing model.

8. Unbeknownst to investors, and directly contrary to Defendants’ Class Period

representations, Zillow was experiencing great difficulty in raising subscription prices to its Premier

Agent program, and the rollout of the new impressions-based pricing model was being resisted by

existing Platinum Premier Agents. Additionally, a number of other factors were also negatively

impacting Zillow’s Marketplace Advertising business. Zillow’s best, most profitable markets were

becoming saturated. Zillow was facing stiff competition from other online providers, and a number

of Zillow’s business practices angered and alienated customers. Those included the widespread

inaccuracy of Zestimates, Zillow’s inferior listing information, and the fact that many real estate

agents resented Zillow for how it did business (Zillow essentially takes an agent’s proprietary listing

and resells it back to the agent). Moreover, many of Zillow’s customers did not believe they were

getting a sufficient return on investment (“ROI”) from the dollars they spent advertising on Zillow.

9. All of these factors were causing Zillow serious problems in its efforts to implement

I the new pricing plan for Premier Agent subscriptions. As explained by numerous confidential

witnesses, when faced with a substantially higher price for Zillow’s new cost-per-impression based

service, many of Zillow’s Premier Agents cancelled their subscriptions causing significant churn. In

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I addition to ARPU, churn is another important measure of subscriber health in any subscription-based

I business, and was also a metric that Zillow consistently refused to disclose.

10. In order to continue to increase its subscriber base and revenues in light of the

negative factors it faced, Zillow significantly ramped up its sales efforts during the Class Period,

which Defendants portrayed as positive for Zillow’s business. Unbeknownst to investors, however,

as Platinum-level subscribers became harder and harder to find , Zillow was forced to sell more

subscriptions at lower levels and price points. While this allowed Zillow to show an increase in the

number of reported subscribers and revenue when it reported its financial results, it also resulted in a

substantial increase in the cost of sales, and at a lower ARPU. Defendants were concealing ARPU

and churn numbers during the Class Period, because they would have revealed that Zillow was not

having success with its new pricing model.

11. In fact, had Zillow disclosed its ARPU numbers during the Class Period, investors

would have seen that as soon as Zillow began rolling out its new impressions-based pricing model, it

lost the ability to continue raising prices. In the quarters prior to the start of the Class Period, Zillow

had been able to dramatically increase its ARPU under the old pricing model, but under the new

pricing program ARPU was no longer increasing and it had become essentially flat due to churn and

agents resisting the higher pricing. A higher ARPU would signal strong demand because it would

mean that overall customers were subscribing to and paying for Zillow’s more expensive higher-tier

Platinum service. A lower ARPU, on the other hand, would mean lower demand for the higher

priced product and that subscribers were only willing to pay for Zillow’s less expensive tiers.

12. In August 2012, towards the end of the Class Period, the SEC issued comment letters

to Defendants and asked why Zillow was not disclosing ARPU. Defendants tried to persuade the

SEC that Zillow did not need to disclose its ARPU, but the SEC did not find Zillow’s arguments

persuasive. The SEC viewed the ARPU information as highly material to investors’ decision

making process, because it provided fundamentally important information regarding the trends and

conditions surrounding Zillow’s pricing of its primary product—subscriptions sold to real estate

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I agents. Because the SEC continued to press for disclosure of this key information, Defendants

I eventually told the SEC in late August 2012 that Zillow would begin disclosing this information.

13. However, after Defendants told the SEC that Zillow would disclose the highly

material ARPU numbers, they delayed doing so until after they had sold over $165 million in Zillow

stock in a secondary offering. Specifically, shortly after telling the SEC that Zillow would begin

disclose ARPU, Defendants filed a prospectus with the SEC for a secondary public offering of

Zillow stock that still did not disclose that key information.

14. Because Zillow was refusing to disclose its ARPU numbers during the Class Period

and reported only its total subscriber number, and not the make-up of Platinum, Gold or Silver

subscriptions, analysts were forced to calculate their own estimates of ARPU based on the total

reported subscriber numbers and statements by management about strong demand for Zillow’s

Premier Agent products. Analysts consistently overestimated ARPU based on the belief that

demand for high-tiered services was strong, whereas Zillow’s true ARPU numbers were much lower,

reflecting the undisclosed negative factors impacting Zillow’s business described herein.

15. As a result of analysts’ attempts to calculate Zillow’s ARPU, investors had begun to

I question whether Zillow was experiencing slowing or declining ARPU growth late in the Class

Period. In particular, in early August 2012, certain stock analysts made calculations that suggested

there might be an issue with Zillow ability to increase pricing in the 2Q12.

16. In response to these concerns, Defendants made public statements that attempted to

reassure investors that Zillow was continuing to successfully roll out the new pricing model and it

was generating increased pricing. As a result of these misrepresentations, Zillow’s stock price

reached a Class Period high of over $46 per share on September 20, 2012—shortly after the

secondary stock offering where Zillow had again chosen not to disclose its ARPU numbers.

17. Defendants’ false and misleading statements during the Class Period failed to disclose

a known trend—that the new impressions-based pricing model had not allowed Zillow to materially

increase its pricing. Moreover, Zillow’s increased prices resulted in low ROI for subscribers and

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resulted in significant churn. Defendants failed to disclose that it was only able to report increases in

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subscriber numbers and revenues through high-pressure sales tactics that resulted in subscribers

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being signed at lower tiers and at lower ARPU than analysts were estimating. Defendants also failed

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to disclose that by the start of the Class Period, Zillow decided to drop Foreclosure.com , a major

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advertiser and contributor to its Display Advertising business, as a customer.

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18. Then, on October 1, 2012, the SEC’s inquiry into Zillow’s financial reporting was

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reported by news outlets. Once investors learned that Zillow failed to disclose the ARPU numbers in

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its most recent SEC filings in connection with the September 7, 2012 secondary offering, even after

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the SEC had insisted on disclosure, and even after Defendants had expressly acknowledged to the

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SEC that “the average monthly Premier Agent revenue per Premier Agent subscriber may be

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meaningful to investors and also meaningful as a performance indicator in managing the Company’s

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business,” investors became concerned that the Zillow was concealing its ARPU numbers because

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of what those numbers might reveal to investors. As a result of those concerns, Zillow’s stock price

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immediately declined in value. On October 2, 2012, following the widespread dissemination of the

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SEC’s comment letters, Zillow’s stock price dropped sharply, initially falling 10.2% and eventually

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closing down 4.2% for the day.

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19. Finally, on November 5, 2012, Zillow issued a press release and held a conference

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call after the market closed announcing significantly reduced financial guidance for the coming

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quarter, and finally revealing what Defendants knew since the start of the Class Period: Zillow’s

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revenues would be further impacted during the quarter by the loss of Foreclosure.com . During the

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conference call with analysts Defendants also revealed the existence of churn that had been caused

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by real estate agents whose ROI was insufficient to justify the higher pricing that Zillow was

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attempting to impose on its customers.

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20. Zillow filed its 3Q 2012 Form 10-Q with the SEC the next day in which Zillow

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I reported ARPU for the first time. Those numbers revealed, contrary to Defendants’ prior

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representations, that the new impressions-based pricing model had not allowed Zillow to materially

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increase its pricing. Rather, ARPU had been essentially flat during the Class Period. It also showed

that while ARPU had been substantially increasing during 2011, it stopped increasing once the new

impression based pricing was introduced in 1Q12, and had remained stuck in the $258 to $270

range. Moreover, those disclosures showed that actual ARPU during the Class Period was far lower

than analysts’ estimates caused by Defendants’ misstatements regarding and concealment of this

highly material information.

21. Zillow’s stock price reacted strongly to the news falling $6.22 per share on

November 6, 2012, a one-day decline of almost 18% on very heavy volume of 7.4 million shares

traded. Lead Plaintiffs have brought this case to recover their losses caused by purchasing Zillow

stock at artificially inflated prices during the Class Period as a result of Defendants material

misstatements and omissions.

22. Indeed, Defendants had a duty to disclose its actual ARPU during the Class Period

because: (i) it was highly material to investors, as the SEC told Defendants in August 2012;

(ii) Defendants acknowledged the materiality of ARPU when they told the SEC that “the average

monthly Premier Agent revenue per Premier Agent subscriber may be meaningful to investors and

also meaningful as a performance indicator in managing the Company’s business,” and told the SEC

that Zillow would begin disclosing it; (iii) Defendants were publicly speaking about purported price

increases in Premier Agent subscriptions throughout the Class Period and thus needed to disclose the

ARPU numbers in order to make their statements not misleading; and (iv) Defendants sold millions

of dollars in Zillow stock during this time period, thus they needed to disclose the ARPU before

trading on the inside information that showed Zillow had not and could increase subscription prices

under its new impressions-based pricing model.

II. JURISDICTION AND VENUE

23. The federal law claims asserted herein arise under Section 10(b) and Section 20(a) of

the Exchange Act, 15 U.S.C. §78j(b) and §78t(a), and Rule 10b-5 promulgated thereunder by the

SEC, 17 C.F.R. §240.10b-5.

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24. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.

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I §1331 and §27 of the Exchange Act, 15 U.S.C. §78aa.

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25. This Court has jurisdiction over each defendant named herein because each defendant

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I is an individual who has sufficient minimum contacts with this District so as to render the exercise of

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I jurisdiction by the District Court permissible under traditional notions of fair play and substantial

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I justice.

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26. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C.

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§1391(b). Many of the false and misleading statements were made in or issued from this District.

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Zillow is headquartered in this District, with its principal place of business located at 1301 Second

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Avenue, Floor 31, Seattle, Washington 98101.

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III. THE PARTIES

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A. Lead Plaintiffs

13 27. On April 24, 2013, this Court appointed James Atkinson, Oklahoma Firefighters and

14 State-Boston to serve as Lead Plaintiffs for the Class in this consolidated class action pursuant to the

15 Private Securities Litigation Reform Act of 1995 (the “PSLRA”)

16 28. Atkinson purchased Zillow common stock in reliance on Defendants’ false and

17 misleading statements and omissions of material facts and/or the integrity of the market for Zillow

18 securities at artificially inflated prices during the Class Period and suffered economic loss and

19 damages when the truth about Zillow that was misrepresented and omitted during the Class Period

20 was revealed to the market. The certification for Atkinson with a detailed listing of transactions was

21 filed with this Court on January 28, 2013 and is adopted by reference herein. (Dkt. No. 24-1.)

22 29. Oklahoma Firefighters is a qualified governmental retirement plan that provides

23 retirement benefits to firefighters in the State of Oklahoma. Oklahoma Firefighters purchased

24 Zillow common stock in reliance on Defendants’ false and misleading statements and omissions of

25 material facts and/or the integrity of the market for Zillow securities at artificially inflated prices

26 during the Class Period and suffered economic loss and damages when the truth about Zillow that

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was misrepresented and omitted during the Class Period was revealed to the market. The

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certification for Oklahoma Firefighters with a detailed listing of transactions was filed with this

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Court on January 28, 2013 and is adopted by reference herein. (Dkt. No. 26-2.)

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30. State-Boston is an institutional investor that provides retirement benefits for the

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employees of the City of Boston, Massachusetts. State-Boston purchased Zillow common stock in

reliance on Defendants’ false and misleading statements and omissions of material facts and/or the

integrity of the market for Zillow securities at artificially inflated prices during the Class Period and

suffered economic loss and damages when the truth about Zillow that was misrepresented and

omitted during the Class Period was revealed to the market. The certification for State-Boston with

a detailed listing of transactions was filed with this Court on January 28, 2013 and is adopted by

reference herein. (Dkt. No. 26-2.)

B. Defendant Zillow

31. Zillow purports to operate the leading real estate information marketplace through its

website and mobile applications. Zillow is a Washington corporation with its principal place of

I business located at 1301 Second Avenue, Floor 31, Seattle, Washington 98101.

C. Individual Defendants

32. Spencer M. Rascoff (“Rascoff”) was one of Zillow’s founding employees. He joined

the Company in 2005, has been the CEO since September 2010 and a Director since July 2011.

Rascoff previously served as the Company’s Vice President of Marketing, Chief Financial Officer

(“CFO”) and Chief Operating Officer. During the Class Period, Rascoff sold 54,500 shares of his

Zillow stock for proceeds of over $2.1 million.

33. Lloyd D. Frink (“Frink”) co-founded Zillow and is, and at all relevant times has been,

the Company’s Vice Chairman, a position he has held since March 2011. Frink has been a member

of the Board since the Company’s inception in December 2004, and served as President since

February 2005. Frink previously served as the Company’s Vice President from December 2004 to

February 2005, as Treasurer from December 2009 to March 2011, and as Chief Strategy Officer


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from September 2010 to March 2011. As of April 5, 2012, Frink owned or controlled approximately

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4,841,227 shares of Zillow Class A common stock, and 3,781,222 shares of Zillow Class B common

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stock, representing 35.3% of the total voting power of the Company. During the Class Period, Frink

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sold over 1.3 million shares of his Zillow stock for proceeds of over $48.0 million.

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34. Chad M. Cohen (“Cohen”) is and at all relevant times has been the Company’s CFO,

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a position he has held since March 2011. Cohen previously served as Zillow’s Controller from June

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2006 to March 2011, and as Vice President of Finance from September 2010 to March 2011. During

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I the Class Period, Cohen sold 50,791 shares of his Zillow stock for proceeds of over $1.76 million.

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35. Richard N. Barton (“Barton”) co-founded Zillow and is, and at all relevant times has

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been, the Company’s Executive Chairman of the Board, a position he has held since September

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2010. Barton has been a member of the Board since its inception in December 2004 and served as

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Company’s Chief Executive Officer (“CEO”) until September 2010. As of April 5, 2012, Barton

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owned or controlled approximately 5,487,333 shares of Zillow Class A common stock, and

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4,910,404 shares of Zillow Class B common stock, representing 45.9% of the total voting power of

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the Company. During the Class Period, Barton sold over 1.1 million shares of his Zillow stock for

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proceeds of over $42.2 million.

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36. Rascoff, Frink, Cohen and Barton are collectively referred to hereinafter as the

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I “Individual Defendants.”

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37. The Individual Defendants were involved in drafting, producing, reviewing and/or

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disseminating the false and misleading statements, information and omissions alleged herein, were

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aware of, or recklessly disregarded, the fact that the false and misleading statements and omissions

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were being issued by the Company, and approved or ratified these statements, in violation of the

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federal securities laws

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38. Moreover, facts critical to Zillow’s “core operations” are presumably known by its

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I key officers, including the Individual Defendants. Further, the Individual Defendants, because of

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I their senior management positions within the Company, and as to Barton and Frink, their substantial

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stock ownership, possessed the power and authority to control the contents of Zillow’s quarterly

reports, press releases, and presentations to securities analysts, money and portfolio managers, and

institutional investors, i.e. , the market. They were provided with copies of the Company’s reports

and press releases alleged herein to be misleading prior to or shortly after their issuance and had the

ability and opportunity to prevent their issuance or cause them to be corrected. Because of their

positions with the Company, and their access to material, non-public information available to them

but not to the public, the Individual Defendants 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 Individual Defendants are liable for the

false and misleading statements alleged herein.

39. As officers and/or controlling persons of a publicly-held company whose shares are

registered with the SEC and traded on NASDAQ, the Individual Defendants also had a duty to

disseminate prompt, accurate and truthful information with respect to Zillow, and to correct any

previously issued statements that had become materially misleading or untrue, so that the market

price of the Company’s common stock would be based upon truthful and accurate information. The

Individual Defendants each violated these specific requirements and obligations during the Class

Period.

IV. ZILLOW’S BUSINESS MODEL AND SWITCH IN PRICING

A. Zillow’s IPO and Profitability Plan

40. Barton and Frink co-founded Zillow in December 2004. The Company’s stated

mission was “to build the most trusted and vibrant home-related marketplace to empower consumers

with information and tools to make smart decisions about homes.” The Company operates a

website, Zillow.com, and Zillow Mobile, a suite of mobile applications, through which it purports to

offer various online services to assist consumers with their real estate needs, including Zillow

Mortgage Marketplace, where borrowers connect with lenders to find loans and get competitive

mortgage rates, Zillow Digs, a home improvement marketplace where consumers can find visual

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I inspiration and local cost estimates, and Zillow Rentals, a marketplace for rental professionals.

Zillow also offers services and applications to real estate professionals including Postlets, Diverse

Solutions, Buyfolio, Mortech and HotPads.

41. Zillow purportedly maintains a “living” database of over 110 million U.S. homes,

whether for rent or for sale, and includes homes that are not even on the market. This database

includes properties that have been listed by real estate agents representing sellers on various multiple

listing services (“MLS”) around the country. Zillow also obtains information regarding homes

offered for sale from a number of other sources, including third party syndicators who compile and

aggregate real estate listings from MLS around the country. Zillow offers a free valuation service

known as “Zestimates,” whereby the Company calculates the estimated value of the properties listed

in the database based on the properties’ physical attributes, tax assessments, prior sales prices and

other factors.

42. Initially, Zillow’s business model and marketing efforts were largely based around its

Zestimates service, which allowed visitors to its website to obtain property value estimates by

entering a property address. More recently, however, Zillow’s primary source of revenue has come

from selling “subscriptions” to real estate agents, which Zillow markets as a vehicle for agents to

advertise their services to potential home buyers. Zillow’s business model has been subject to

criticism because the Company essentially acts as a middleman, collecting the valuable property

listings of real estate agents, obscuring the identity of the original listing agent, and then attempting

to sell back to agents advertising space, alongside with the listings that were originally generated by

the agents themselves.

43. After operating as a start-up business for about six years, Zillow had its initial public

offering (“IPO”) in July 2011 at a price of $20 a share. At the time of its IPO, Zillow had never

turned a profit. Defendants told investors that Zillow’s relatively near-term plan was to become a

profitable business with over $200-$250 million in annual revenue and profit margins of 30-35%. In

order to generate such profitability, Zillow needed to dramatically increase its sales, while

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I controlling costs. As alleged below, Zillow faced numerous undisclosed obstacles standing in the

I way of its business plan.

B. Zillow’s Limited Revenue Sources

44. Because the online services offered by Zillow are free to the consumer looking to

buy, sell or rent a property, the Company derives its revenue from online advertisements by real

estate agents, housing and mortgage professionals, and brand advertisers. Most of the Company’s

advertising revenue is generated primarily on a subscription basis from local real estate professionals

(the “Premier Agent subscribers” or “subscribers”).

45. Zillow categorizes its advertising revenue into two lines of business—Marketplace

Advertising and Display Advertising. Marketplace Advertising consists of subscriptions sold to real

estate agents under the Company’s Premier Agent program and cost-per-click (CPC) advertising

sold to mortgage lenders under the Zillow Mortgage Marketplace program. According to the

Company’s Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”), Marketplace

Advertising revenue comprised 64% of total revenue in 2011, and increased to 74% of revenue for

2012.

46. Zillow’s second line of business, Display Advertising, primarily consists of graphical

mobile and web advertising sold on a cost per thousand impressions (“CPM”) basis to advertisers in

the real estate industry, including real estate brokerages, home builders, mortgage lenders and home

services providers. Such revenue is recognized according to the number of impressions made and

delivered to users interacting with the website or mobile applications. According to the Company’s

2012 Form 10-K, display advertising revenue comprised 36% of total revenue in 2011, and

decreased to 26% in 2012.

47. Because the majority of Zillow’s revenue is derived from its Premier Agent program,

Zillow’s existing and future profitability depended on its ongoing ability to sell Premier Agent

I subscriptions. Defendants conveyed to investors that the market for its Premier Agent program was

vast and largely untapped, as only a fraction of the total number of real estate agents in the United


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States were subscribers to the program. For instance, during a February 15, 2012 analyst conference

call, Rascoff represented that Zillow was trying to “capture” the 1.8 million real estate agents in the

United States and the $6 billion spent by them on marketing services. Rascoff explained:

We see agents in the United States collecting about $60 billion in commissions and turning around and spending 10% of that, or $6 billion or so, advertising themselves in their listings. Much of that $6 billion spend is still offline. What we’re doing is, through the Premier Agent program, we’re going after that $6 billion TAM [total aggregate market], but then they actually spend a bunch of other money on other services such as CRM and agent websites and a number of other technology things. By moving in a direction of providing a full suite of services to these agents, we’re trying to become more relevant to those agents and therefore garner a greater portion of that $6 billion TAM, of which today we have a less than 1% wallet share. It’s a little bit mind boggling, if you think about it. As the largest real estate Company on the Web, we have less than 1% wallet share of what all agents spend on advertising. It’s a bit of an embarrassment, quite frankly. Despite, our massive revenue growth, we’ve just scratched the surface of the opportunity in terms of how big this market is.

48. Unbeknownst to investors, Zillow was experiencing great difficulty in capturing and

retaining the market for real estate agents, due to the Company’s transition to a new, more expensive

impressions-based pricing system for the Premier Agent program, along with various competitive

factors and concerns about Zillow’s business practices.

C. Zillow’s Shift to Impression-Based Pricing for Agent Advertising

49. Under the Premier Agent program, real estate agents purchase ad listings on the

Company’s web and mobile platforms, whereby the agent’s contact information appears next to the

search results for homes in the purchased zip code. The Premier Agent program was previously

offered at a single “Platinum” level, but Zillow eventually transitioned the Program into three

escalating levels of agent participation—Silver, Gold and Platinum—thus offering agents more

purported features and more listing exposure at increasing price points.

50. The Company charges different rates to agent subscribers based on the zip code in

which they operate according to market forces in the relevant market. For example, a subscriber

operating in higher demand, higher price areas such as Manhattan or San Francisco would pay

substantially higher rates than a subscriber who was operating in areas like upstate New York,

Tennessee, or other parts of the country where housing prices are less competitive. Therefore, it was

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I critical that Zillow focus its marketing and sales efforts on retaining agents in high-end, major

I metropolitan markets with high housing prices.

51. Prior to the Class Period, Zillow sold advertising based on a percentage of all viewers

within a given zip code (which it calls “percentage of voice” or “share of voice”). Under the

percentage of voice pricing model, Zillow offered real estate agents 25%, 50%, 75%, or 100% of all

web traffic for the search results on its website and mobile platforms for homes in a given zip code.

Due to space limitations, however, no more than three advertisements could be displayed on

Zillow’s website. Thus, there was a theoretical limit of 12 on the number of subscriptions that

Zillow could sell within any zip code; if each agent purchased 25% of the voice, there would be a

total of 12 agents advertising within a given zip code (4 agents each with 25% of the voice times 3

advertising slots on the website).

52. In an effort to overcome this limitation, Zillow implemented a new pricing model in

which advertising would no longer be sold based on percentage of views, but rather upon the number

of impressions ( i.e. , the number of times potential home buyers viewed the webpage for a given zip

code) that occurred within any given month. Thus, Zillow’s existing Premier Agents who had

Platinum subscriptions would no longer receive 25% to 100% of the impressions within a given zip

code (depending on what percentage they had purchased). Rather, they would be transitioned to the

new pricing model where they would pay for the number of impressions delivered each month.

53. This new impressions-based pricing model could allow Zillow to expand the number

of agents who were purchasing advertising within any given zip code, for as long as traffic to

Zillow’s website grew, there would be more product to sell. By the start of the Class Period, Zillow

was in the process of rolling out this new impressions-based pricing model, and investors were most

interested in whether or not Zillow was having success with its new pricing plan. Investors wanted

to know whether existing Platinum subscribers were renewing their subscriptions and whether

Zillow was obtaining greater revenue per subscriber. Zillow tracked this performance metric in the

form of ARPU, but did not disclose ARPU to investors until the end of the Class Period, and only at

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the behest of the SEC. As alleged below, Defendants publicly represented that Zillow was having

great success during the Class Period with its new impression-based pricing model, when in fact

large numbers of existing Platinum subscribers were objecting to the new plan, and either renewing

their subscriptions at a lower tier or cancelling their subscriptions. The high rate of existing-

subscriber turnover was forcing Zillow to incur greater costs to replace, retain and expand

subscription membership. This had the effect of reducing Zillow profitability at the same time

Zillow’s revenue growth rate was slowing (as was its ARPU), which meant Zillow’s earnings would

be at risk and, in fact, the Company would soon be incurring losses.

D. Customers Were Cancelling or Downsizing Their Subscriptions, and Churn Was Increasing

54. Zillow’s new impression-based pricing model was not popular with existing

subscribers, because it gave them less advertising exposure, was considerably more expensive, and

increased competition on the website. As a result, Zillow was experiencing problems with its rollout

of impression-based pricing, as a large number of existing agents, who had already purchased

subscriptions to its Premier Agent program, were cancelling these subscriptions. Also, other existing

agents with subscriptions that were up for renewal were refusing to renew at the new pricing and

were subscribing at a lower price point. As a result, contrary to the Company’s public disclosures

during the Class Period, Zillow was experiencing waning subscriber retention throughout the Class

Period, resulting in significant “churn.” Churn is the rate of attrition, or rate at which Zillow’s

subscribers leave during a given period of time. The Company was losing customers at a rapid rate,

which put pressure on its sales force to begin aggressively attracting new customers from less

competitive, untapped markets.

55. The shift in Platinum pricing was not well-received by subscribers who were up for

renewal of their subscriptions. As more subscriptions came up for renewal, more and more

subscribers were shocked by the drastically increased cost, causing a large number of them to

terminate their Premier Agent subscriptions altogether, or switch to the lower-cost Gold and Silver

subscriptions. During the Class Period, the rate of agents who were cancelling their subscriptions, or

CONSOLIDATED CLASS ACTION AMENDED COMPLAINT (2:12-cv-02084-RSM)

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E L . HAGENS BERMAN


I churn, reached very high levels as the Company attempted to promote its switch to the new Platinum

I subscriber model. The Company was forced to increase its sales efforts to rapidly replace the steady

stream of outgoing subscribers.

56. The CWs, former sales consultants and back office administrators at Zillow’s Seattle

and Irvine offices, confirm that Zillow was having problems rolling out its new pricing plan and the

resulting churn in agent subscriptions. CW1 is a former marketing and sales consultant who worked

at Zillow’s Seattle headquarters from February through June 2012. CW1’s supervisor reported to

Doug Slotkin (“Slotkin”), Vice President of Local Advertising Sales. CW1 was responsible for

selling Zillow subscriptions to real estate agents. CW1 indicated that due to the switch to the new

pricing plan, agents who had been clients of Zillow for 2-3 years were ending their subscriptions.

CW2 is a former employee of Zillow who worked as a sales consultant in the Seattle office from

July 2010 to March 2013. CW2’s primary responsibilities included signing contracts with “big

money” agents and real estate companies to place their listings on Zillow’s website. CW2 stated that

existing agent customers were “freaking out” at the pricing increase, and that Zillow’s churn rate

was high. CW3 is a former inside sales consultant who worked at Zillow’s Irvine office from June

2012 through September 2012. CW3 reported to Jon Boller, Sales Director, and then Cody Fagnant,

Sales Manager, who in turn both reported to Slotkin. CW3’s responsibilities included selling

Premier Agent subscriptions to real estate agents. CW3 stated that several sales consultant’s

customers were similarly “furious” about the switch, in large part because they believed it

diminished their exposure and ROI.

57. With the transition to the more expensive impression-based pricing plan, many

existing real estate agents expressed their dissatisfaction with the ROI on their purchase of Platinum-

level ad listings. These agents either discontinued their Platinum subscriptions altogether, or opted

to purchase less page views (at the same or lower price), or switched to less costly Silver or Gold

subscriptions. CW4 is a former account executive who worked at Zillow’s Seattle office from June

2010 through July 2012. CW4 reported to Team Manager Jeremiah Flocchini, who in turn reported

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to Slotkin. Slotkin reported to Chief Revenue Officer, Greg Schwartz (“Schwartz”), who in turn

reported to Rascoff. CW4’s responsibilities included selling Zillow’s services to new subscribers

(real estate agents and agencies) and maintaining existing relationships. CW4 confirmed that many

Premier agents were renewing at the least expensive Silver rate because they did not feel that Gold

and Platinum subscriptions met their ROI requirement. CW5 is a former inside sales a consultant

who worked at Zillow’s Seattle office from February 2012 through June 2012. CW5 stated that

some agents felt that they were paying a lot of money for the new pricing structure and not getting

enough return on investment.

58. CW4 confirmed that there was a trend towards lower tier subscribers throughout

CW4’s tenure, both when selling share of voice and selling impressions. CW4 noticed this trend

when Zillow added the Silver and Gold tiers to the Premier Agent program. CW4 explained that

even when the impressions model was instituted, many subscribers who wanted to remain as

Platinum Agents did so, but would buy fewer impressions because they deemed it too expensive and

did not recognize enough ROI to keep up the same percentage of the zip code that they had when

buying shares of the zip code. CW4 added that many other customers switched to the Silver and

Gold programs after the impressions model was instituted.

59. Zillow’s management, including the Individual Defendants, was well aware of

Zillow’s churn rate. CW6 is a former executive assistant who worked for Zillow from July 2012

through March 2013. CW6 worked as an executive assistant for certain executives including

defendant Cohen. CW6 also assisted in preparing Cohen and Raymond “RJ” Jones for investor

presentations and analyst calls. According to CW6, Rascoff held monthly company-wide meetings

where churn was regularly discussed. During these meetings, Rascoff provided an “executive

overview,” which always includes churn rate data. CW7 is a former inside sales representative who

worked at Zillow from August 2012 through February 2013. CW7 reported to Blake Lester, Sales

Manager, who in turn reported to Slotkin. CW7 was responsible for selling advertising. CW7

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I attended meetings with Zillow’s executive management, including Rascoff, during which they would

I brainstorm ideas on how to decrease churn.

60. CW1 stated that churn rate got “really bad” during his time at Zillow. Based on

conversations he had with friends still employed at Zillow, CW1 attributed the churn rate to the

changes in billing practices from a percentage-based plan to a page-use plan. CW1’s description of

the billing practices demonstrated the difficulty sales consultants faced when attempting to renew

subscribers under the new plan. CW1 provided the following example: Suppose a zip code has

10,000 page uses, or impressions. Under the percentage plan, if a realtor paid for 25% of that zip

code, that realtor would be guaranteed to be viewed 2,500 per month for that particular zip code.

Under the impression-based plan, the realtor pays based on the total monthly impressions, or the

amount of times a zip code was viewed per month. So a realtor that was previously paying for 25%

of a zip code now has to pay more due to increased impressions. To reflect this cost, Zillow told its

customers that if their impressions went from 10,000 to 40,000, their fee to advertise on Zillow

would increase 400%, directly proportional to the increased views of their ads.

61. CW1 stated that by the time he left Zillow in early July 2012, Zillow had upset its

I client base and that realtors began leaving Zillow. CW1 stated: “ There are not that many agents in

high-end markets, and when Zillow screws over one of them, they all talk about it .” 1

62. CW2 described Zillow’s churn rate as “high” based on the level of turnover not only

in his accounts, but also based on meetings where subscriber metrics were a topic. CW2 stated that

I subscriber “metrics were getting worse in 2012,” and notes that it was discussed in internal meetings

I with department managers.

63. For example, CW2 mentioned one meeting held sometime between June and

I September 2012 where Rascoff stated that retention was down, as was the signing up of new

I subscribers. According to CW2, other meetings held by department managers throughout 2012 were

1 All emphasis is added.

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I held to discuss how to deal with the problem of sagging demand and how to bring in new

I subscribers. In order to retain the subscribers and reduce churn, the Company resorted to offering

I significant discounts.

64. CW2 stated that due in large part to the “churn aspect,” subscription contracts were

reduced from 12 months to six months to blunt the total price increase over the term of the contract.

CW2 noted that these six-month subscriptions still came at significantly higher monthly prices,

however. According to CW2, a subscriber who was grandfathered in at a rate of $150 per month

prior to the switch would still have to pay $500 per month after the switch. Observing that it was a

“battle” to convince subscribers to accept more than double their prior monthly rates, CW2 stated

that the Company hired an entire new team in 2012 dedicated to calling subscribers when their six-

month contract was up and informing them of the price increase. Even so, CW2 noted that

customers were “freaking out” at the increased pricing.

65. CW8 is a former inside sales representative at Zillow in its Irvine, California office,

employed from October 2012 to March 2013. CW8 reported to Cody Fagnant, Sales Manager, who

reported to a floor manager that in turn reported to Slotkin. CW8 stated that when a subscriber from

highly desirable areas such as Malibu, Laguna Beach, Santa Monica and Silicon Valley left, it was

very hard to replace them because the costs were much greater, sometimes as much as $2,000 per

month per zip code. CW2 was also responsible for the larger accounts and corroborated CW8’s

account, noting the difficulty with which he kept his large customers satisfied and that “it was taking

everything that I had to keep them onboard, including discounts.” CW2, CW8 and CW9 corroborate

that the Company replaced these Premier Agents during the Class Period with agents from smaller

markets at greatly reduced subscription rates. Hence, even if the Company was able to renew the

large customers during the Class Period it was forced to offer greatly reduced rates, and the more

expensive contracts were replaced with customers from less expensive locales.

66. CW9 is a former real estate marketing specialist with Zillow, was employed by the

I Company from June 2010 to June 2012 ,and was one of the top 15 out of 180 sales representatives at

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the Company. CW9 reported to Robert Dietz, who in turn reported to Doug Slotkin. CW9’s

responsibilities included selling Zillow’s services to new subscribers (real estate agents and

agencies) and maintaining existing relationships. According to CW9, due to the increase in pricing,

Zillow was having trouble selling Platinum-level listings for high profile, expensive residential

areas. To make up for the high rate of churn in these areas, Zillow’s sales staff had to aggressively

sell subscriptions to agents in new areas that were less in demand and did not generate high margins.

Zillow’s expansion into these new, lower demand areas, while it increased the number of new

Premier Agent subscribers, also drove down the ARPU, as revealed at the end of the Class Period.

67. CW9 also noted that it was very difficult to retain old customers due to a low ROI.

CW9 advised that for every 10 new clients that were added per month, Zillow would probably lose

8 or 9 of them in a few months . CW9 stated that while the customer base at Zillow was expanding,

it was moving to less profitable areas and away from more profitable areas such as Manhattan and

northern and southern California.

68. Faced with an increasing rate of churn that was being exacerbated by the transition to

the more expensive impression-based pricing plan, Zillow was forced to aggressively sell lower

priced Silver and Gold subscriptions to make up for agents who were cancelling their Platinum

subscriptions. Thus, while Defendants represented a significant increase in the number of new

Premier Agent subscribers each successive quarter in 2012, they did not disclose that a substantial

portion of these new subscribers were lower margin Silver and Gold-level agents. Moreover, Zillow

did not disclose ARPU until the end of the Class Period after being compelled by the SEC, so

investors and analysts had no way of determining if the new pricing plan allowed the Company to

increase pricing or of knowing the composition of Zillow’s Premier Agent subscriber base during the

Class Period.

E. Further Resistance to Zillow’s Business Practices

69. In addition to real estate agents’ resistance to the roll out of the new impression-based

I pricing model, Zillow was facing a number of other challenges that were interfering with the success


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I of this new program. Zillow was facing increased competition from other online real estate portals

I offering similar services such as Realtor.com , Housevalues.com, Move.com, Redfin.com, and

Trulia.com, which filed for its initial public offering during the Class Period.

70. Moreover, many in the real estate industry held the view that Zillow simply wanted to

charge agents for their own intellectual property and hard work in creating property listings. Zillow

was seen as disruptive to the traditional real estate brokerage business model because it provided

potential buyers and sellers with many of the same services that agents provided. Accordingly, there

were agents that viewed Zillow as a direct competitor and were not interested in the ad subscriptions

or other services the Company offered.

71. Zillow further alienated agents by offering a “Make Me Move” service on its website,

through which homeowners could post on Zillow’s website the offer price they would accept to sell

their homes. Thus, through the Make Me Move service, potential sellers could effectively cut agents

out of the sales transaction, thereby giving agents even less of an incentive to advertise through

Zillow.

72. Certain agents also considered Zillow’s listing information to be inferior and

inaccurate compared to the listing information provided by more traditional MLS sources, and they

therefore did not want to be affiliated with Zillow. A study published by the WAV Group in

October 2012 confirmed a number of deficiencies in Zillow’s home listings. The study revealed that

about 36% of the listings shown as “active” on Zillow were in fact no longer for sale, compared with

zero percent or near-zero percentage for the listings on brokerage websites using traditional MLS

information. Also, the brokerage websites surveyed contained 100% of the homes listed for sale by

MLS, while Zillow only featured 79% of the MLS listings. Further, the study found that home

listings were slower to make their way to Zillow’s website, as newly listed homes showed up a

median of seven days earlier on brokerage websites using MLS.

73. Additionally, agents, along with consumers, did not trust Zillow’s proprietary

I valuation system, Zestimates, because it was notoriously inaccurate and failed to provide a

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reasonable assessment of a home’s fair market value. In boom times, Zestimates overvalued home

prices, and during the recovery time ( i.e. , the Class Period), it undervalued homes in relation to

listing prices, which undercut the ability of real estate agents to close transactions based on the listed

price. It was reported that the Zestimates system was so flawed that 35 million homeowners

submitted corrections to their home estimates to Zillow.

74. In addition to the growing competition for web-based advertising, Zillow had been

marketing its Premier Agent subscriptions for years prior to the start of the Class Period and a large

percentage of real estate agents who were interested in purchasing advertising on Zillow’s website

had already done so. While Zillow was able to grow its total number of subscribers during the Class

Period, it was only able to do so at greatly increased cost, as alleged below. In addition, Zillow’s

revenue growth rate was slowing during the Class Period, and Defendants understood that this trend

was likely to continue as the market for Zillow’s product was becoming saturated.

75. All of these forces were in direct opposition to Zillow’s business model, and they

were further reasons why Zillow was experiencing problems in rolling out its new price model and

unable to raise pricing during the Class Period.

F. Zillow’s Increased Expenses in Connection with Attracting and Maintaining Agent Subscriptions

76. Zillow announced on May 2, 2012 that it would open a new sales office in Irvine,

California in the summer with 80 sales associates, in addition to the office it already operated out of

its Seattle headquarters. This increase in expenses related to sales was necessary in order to make up

for the large number of cancelling subscribers.

77. Although the Company stated the goal of the new sales force was to focus on selling

Premier Agent subscriptions across the country, as demonstrated by the chart below, the increase in

costs attributable to the new sales team did not bring a commensurate increase in marketplace

revenue. Over the Class Period, the Company increased its sales and marketing expenses by 86%—

from $7.58 million during the fourth quarter of 2011 to $14.12 million during the third quarter of

2012—whereas the Company’s marketplace revenues only increased by 71% over the same period.

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I The following chart shows that sales and marketing expenses nearly doubled during the Class

I Period, and further demonstrates the diminishing revenue returns throughout the Class Period

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Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

Marketplace Revenue 13,746 16,593 19,623 23,616 26,838

Sales and Marketing Expenses 7,576 8,315 12,153 14,118 14,519

G. Zillow’s Static Average Revenue Per Customer

78. ARPU, or average revenue per user, is a performance metric used by web-based

companies like Zillow to track and measure the revenue generated by single, average customer per

quarter. Prior to and throughout the Class Period, investors and analysts wanted Zillow to disclose

ARPU because it would show the average subscription revenue generated by each Premier Agent,

and thus whether Zillow was successfully implementing its new Premier Agent pricing plan.

Because Zillow did not disclose ARPU during the Class Period, investors had no real insight into the

“mix” of agents in the Premier Agent program ( i.e. , whether they skewed toward higher price

Platinum subscriptions or lower price Silver/Gold subscriptions) and could not accurately determine

the profitability of the Premier Agent program. Zillow further obfuscated the profitability of the

Premier Agent program because it only reported Marketplace Advertising revenue, which combined

both Premier Agent subscription revenue and Zillow Mortgage Marketplace revenue.

79. Because ARPU was an important indicator of Zillow’s revenue mix, revenue growth

and profitability, analysts tried to calculate ARPU themselves, but with little success. For example,

the day after the August 7, 2012 analyst conference call, an analyst from PAA Research issued a

report on Zillow’s financial performance in 2Q12, in which he estimated ARPU for that quarter, as

well as future quarters. The PAA analyst calculated ARPU in 2Q12 as $316.70 and estimated

ARPU for 3Q12 as $307.20. Similarly, an analyst with ThinkEquity issued a report on August 8,

2012, which estimated ARPU in 2Q12 as $317. As would be revealed at the end of the Class Period,

these analyst calculations were far off base, as Zillow disclosed that ARPU in 2Q12 and 3Q12 were

$263 and $270, respectively.


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80. Although ARPU was a material performance metric, the Company adamantly refused

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to disclose the numbers to investors. It was only after the SEC sought disclosure of Zillow’s ARPU

in the third quarter of 2012 that the Company finally decided to disclose the metric. On August 20,

2012, Kathleen Collins, Accounting Branch Chief at the SEC, wrote to Rascoff and requested

additional disclosure of financial information for Zillow’s 2012 Form 10-K, filed with the SEC on

March 2, 2012. In response to the SEC’s inquiry, Cohen stated in a letter dated August 23, 2012,

that Zillow did not disclose ARPU because it was not “meaningful” to investors: “[T]he average

subscription price per Premier Agent subscriber is not meaningful because Premier Agent

subscribers are not limited in the amount or nature of inventory they may purchase ( i.e. , agents may

purchase multiple zip codes).”

81. In a subsequent letter dated August 30, 2012, the SEC disagreed with Cohen’s

assessment and indicated that ARPU was indeed meaningful to investors:

Your current MD&A disclosures attribute the increase in marketplace revenue to the increase in the number of subscribers, which you quantify, and an increase in the average price paid for Premier Agent subscriptions sold during the period, which you do not quantify. We understand from your response to prior comment 1 that subscription prices vary significantly across zip codes. However, it is unclear why that would preclude you from discussing, at a minimum, the percentage increase in the average price paid for Premier Agent subscriptions. Further, to the extent that the average price paid per subscription is being impacted by sales in certain regions, it would seem that such information would also be meaningful to investors. Please explain further why you cannot quantify this information and tell us your consideration to include a discussion regarding how the various regions (zip codes) impact your results of operations . Lastly, please clarify whether management uses average price information in any form (either on a company-wide basis or by region) as a performance indicator in managing your business.

82. As a result of the SEC’s prodding, Cohen reversed course, conceding in an

August 31, 2012 letter that “disclosure of the average monthly Premier Agent revenue per Premier

Agent subscriber may be meaningful to investors and also meaningful as a performance indicator in

managing the Company’s business.” Cohen stated that the Company would begin to “disclose the

average monthly Premier Agent revenue per Premier Agent subscriber on a company-wide basis” in

its future quarterly and annual reports.

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83. The SEC inquiry into Zillow’s financial reporting was widely reported by multiple

news outlets on October 1, 2012. The market reacted negatively to the disclosure, as Zillow’s stock

I price fell as low as 10.2% on October 2, 2012, ultimately closing to a drop of 4.2% that day, as

investors questioned what Zillow’s ARPU numbers might be hiding.

84. Zillow finally disclosed its ARPU for the first three quarters of 2012 at the end of the

Class Period. In its 3Q12 Form 10-Q, filed with the SEC on November 6, 2012, Zillow reported that

ARPU for 1Q12, 2Q12 and 3Q12 was $263, $263 and $270, respectively, which indicated that

ARPU was essentially flat during this period. The ARPU information disclosed at the end of the

Class Period also revealed that Zillow had been experiencing rapid growth in pricing until it

implemented the new pricing model, when ARPU growth went essentially flat quarter-over-quarter.

In its post-Class Period 2012 Form 10-K, Zillow reported that ARPU had decreased to $267 in the

4Q12.

H. Zillow’s Downward Trending Revenue Growth

85. Zillow’s static ARPU numbers also show that Zillow was experiencing negative

trends in revenue growth during the Class Period due to cancellations and churn in subscriptions to

I the Premier Agent program, as well as real estate agents’ resistance to purchasing more expensive

I subscriptions.

86. As a result of these undisclosed conditions, Zillow’s rate of revenue growth was

trending downward during the Class Period. In 4Q11, Zillow’s revenue grew 108% year over year;

in 1Q12 Zillow’s revenue grew 103% year over year; in 2Q12 Zillow’s revenue grew 75% year over

year; and in 3Q12 Zillow’s revenue growth year over year was 67%. The decline in the growth rate

of Marketplace revenue was equally steep during the Class Period. Marketplace revenue increased

169% year over year in 4Q11. The rate of growth declined to 141% year over year in 1Q12,

declined to 102% year over year in 2Q12, and declined further to 99% year over year in 3Q12.

87. Based on their inside knowledge of the conditions surrounding Zillow’s Premier

I Agent program, Defendants understood that this negative trend would continue as revenue growth

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slowed because the available market of receptive real estate agents was becoming saturated with

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Zillow product and those real estate agents were not increasing the dollar amount of their advertising

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purchases on Zillow. At the end of the Class Period, Defendants essentially acknowledged the

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existence of churn in subscription memberships and that growth had slowed and would continue to

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do so in the following quarter.

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88. Due to increased costs associated with Zillow’s new business model, combined with

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I the slowing rate of revenue growth, the Company was on track to experience declining earnings and

I losses in the near future.

I. Zillow Further Concealed the Loss of High Margin Display Advertising Business

89. Defendants were also aware during the Class Period that Zillow would be losing other

I profitable business that would further reduce revenue and profitability going forward.

90. Foreclosure.com is a separate website that lists foreclosure, pre-foreclosure,

bankruptcy and tax lien listings across the United States. It advertises itself as the largest provider of

distressed properties, with more than 1.8 million properties available to peruse on its website.

Foreclosure.com advertised listings on Zillow’s website for these properties. Due to its size and

access to unique visitors of its own, Foreclosure.com added a substantial number of available

properties to Zillow’s website in addition to display advertising revenue. Not only did

Foreclosure.com confer a direct benefit through the revenue generated, it also brought the website

more exposure by generating leads on its website that brought visitors to Zillow’s website and

services.

91. Defendants concealed throughout the Class Period their intention to discontinue the

valuable relationship with Foreclosure.com . Rascoff’s own admissions are supported by CW

statements that conclusively show that Zillow knew it was planning to cancel Foreclosure.com ’s

I subscription for months, yet concealed it from the public.

92. According to CW9, Zillow planned on discontinuing its business relationship with

I Foreslosure.com near the start of the Class Period. CW9 was told this by Doug Slotkin, Vice


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I President of Advertising Sales, in March 2012 during a meeting with sales representatives, who

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I Foreclosure.com .

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93. CW4 recalled that around February 2012, he first learned from Chief Revenue Officer

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I Greg Schwartz that Zillow would be losing Foreclosure.com ’s advertising business.

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94. CW2 participated in meetings with Rascoff and department managers where, among

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other topics, the Company’s metrics and churn were discussed. CW2 was responsible for signing up

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high wealth agents and real estate companies to subscriptions in the Premier Agent program. CW2

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corroborates CW9 and CW4’s account as well, stating that discontinuing Foreclosure.com was “in

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the works for a long time and everybody knew about it.”

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95. Finally, Rascoff himself explicitly stated on a November 6, 2012 analyst conference

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call that the plan to drop Foreclosure.com had been in the works for some time. In response to a

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question from an analyst as to when the Company decided to drop Foreclosure.com and roll out its

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own “in-house” product, Rascoff stated that performing all of the necessary data collection and back-

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end development work “ took nearly a year of coordinated analytics, engineering and software

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development .”

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96. The Company concealed this information, all while Rascoff was making positive

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statements about display advertising, whereas Defendants knew that the loss of Foreclosure.com

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would have a material negative impact on the Company’s Display Advertising revenue. Rather than

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alert the market, their solution was to say and do nothing, waiting until the end of the Class Period to

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make the announcement.

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I V. DEFENDANTS CONDUCT A SECONDARY OFFERING

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97. During the August 7, 2012 analyst conference call, Rascoff and Cohen mentioned that

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the Company became eligible on August 1, 2012 to file a shelf registration with the SEC in the event

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it decided to offer additional shares. They also went to great lengths to reassure the markets that

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the SEC to offer up to 3,425,000 shares of common stock at $43.00 per share. In addition to the

shares offered by the Company, 575,000 shares were being sold by defendants Frink, Barton, and

director Erik Blanchford. The Company raised $156 million in proceeds in the secondary offering,

and the offering conferred a substantial windfall on Barton and Frink. Barton and Frink each sold

250,000 shares of Class A common stock in the offering, each receiving proceeds of $10,750,000

from the sales .

E L . HAGENS BERMAN


although they were able to conduct a secondary offering, they had no plans of accessing the shelf

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registration anytime soon. Cohen stated:

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On August 1st, we became S-3 eligible, and today filed a shelf with the SEC as a matter of good housekeeping and to provide ourselves a flexibility in our capital

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structure in order to remain prepared for future considerations of both their operational needs and potential strategic opportunities in the marketplace.

5 98. On the same call, Rascoff likewise dismissed Zillow’s shelf registration as nothing

6 more than “good housekeeping”:

7 So basically our perspective is, after a year after being public as a matter of good

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housekeeping , we filed the shelf which is pretty customary for companies at this stage. We haven’t made any decisions about a follow-on at the time. So just to be

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clear for those on the call who maybe don’t know that we’re using a shelf in the follow-on. What we filed today is not a follow-on offering. It’s a shelf statement with

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the SEC, which says it basically registers shares. So if we decide to do a follow-on later, then the shares can be sold more rapidly basically we can complete a follow-on

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more expeditiously.

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We’re always speaking about the optimal capital structure for the company and the shelf gives us more flexibility. The size of the shelf, we registered 150 million shares

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and the way shelf offerings work is they expire after three years and you’re supposed to register kind of what you think is reasonable to sell over a two-year period

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potentially. And so that explains why we chose 150 million. Again it’s a pre- customary thing for company on the one-year anniversary post-IPO to do this so

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you can do a follow-on if you choose more expeditiously and we have not decided whether or not to do a follow-on.

16 99. Despite these statements, the Company commenced a secondary public offering of

17 Zillow stock almost as soon as it was able to. On August 24, 2012, Zillow filed a Registration

18 Statement with the SEC on Form S-3/A to sell approximately $150 million of shares of Zillow

19 common stock to the public.

20 100. On September 7, 2013, the Company filed its definitive Prospectus Supplement with

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101. Despite Defendants’ recent back and forth with the SEC regarding ARPU, and

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Defendants’ eventual concession that ARPU “may be meaningful to investors and also meaningful

as a performance indicator in managing the Company’s business,” Zillow’s Registration Statement

and Prospectus Supplement still did not disclose its ARPU numbers. Had they done so, the offering

might not have been successful at the price at which Zillow’s shares were sold. Moreover, the

Registration Statement and Prospectus contained information about the Company’s Marketplace and

Display revenue streams, but were false and misleading because they fail to disclose that the

Company was experiencing significant churn and dissatisfaction with its Premier Agent subscribers,

and because they fail to disclose that the Company had planned for months to cancel its agreement

with Foreclosure.com, a major display advertiser, which would result in decreased display revenue

in the fourth quarter of 2012 and beyond.

102. Although the Defendants attempted to downplay the secondary offering, their

decision to promptly commence the secondary offering suggests the Company was fueled by

concerns that it was losing market share, and concerns that with the new shift in subscriber pricing

the Company would have less growth as ARPU had leveled off. Defendants knew that it had

become more difficult to retain existing subscribers due to the price increases, and that the Company

was spending considerably more money to attract new business.

VI. DEFENDANTS’ MASSIVE INSIDER SELLING AT ARTIFICIALLY INFLATED PRICES

103. In addition to the shares sold in the secondary offering, the Individual Defendants

made enormous sums of money during the Class Period on sales of shares of Zillow in the open

market and pursuant to a 10b5-1 plan. In total the Individual Defendants alone pocketed an

astounding $94.4 million . Below are the dates of trades where the Individual Defendants sold shares

in the open market:

E L . HAGENS BERMAN

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1 Richard Barton

Chad Cohen

104. In total, during the Class Period, the Individual Defendants earned the following:

• Barton: $42.2 million

• Frink: $48.3 million

• Rascoff: $2.1 million

• Cohen: $1.8 million

105. The Individual Defendants had an affirmative duty to disclose their insider

information regarding static ARPU levels and difficulties with the new subscription pricing plan

during the Class Period instead of trading on that information. The Individual Defendants continued

to sell dozens of times during the Class Period, knowing that the stock price was artificially inflated

by omitting ARPU and the loss of Foreclosure.com , which had been planned since the start of the

Class Period.

852878_1


I E. COMPLAINT (2:12-cv-02084-RSM)


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VII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS

2 A. Fourth Quarter and Full Year 2011 Misstatements

3 106

The Class Period begins on February 15, 2012, when Zillow announced its fourth

4 quarter and full year 2011 earnings results. In a press release attached to the Form 8-K filed with the

5 SEC that day, the Company announced that Marketplace Revenue increased to $42.2 million in

6 2011, up from $13.2 million in 2010. The Company also announced that Display Revenue increased

7 to $23.9 million in 2011 from $17.2 million in 2010.

8 107. During an analyst conference call the same day, Defendants discussed Zillow’s

9 transition to a Premier Agent program with varying subscription levels and higher price points.

10 Rascoff announced that the Company had added two tiers to the Company’s Premier Agent program

11 in October 2011, and that “ [i]t’s only been a few months, but initial reaction to the new tiers has

12 been positive and we’re introducing more agents to the value of Zillow . ” Cohen also indicated that

13 existing Premier Agent subscribers in the Premier Agent program were beginning to pay higher

14 prices under the new pricing plan:

15 Traffic growth across our platform helped increase contact volume to our Premier

16 Platinum Premier Agent contracts during the year. Existing Premier Agents, who Agents, which in turn contributed to an increase in the average price for new

are no longer in contract, [are] also starting to pay new and generally higher 17

prices in order to renew their subscriptions for additional six-month terms . Most of these price increases impact Premier Agents who are currently paying rates from

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2009 and 2010 and are in those markets where we have healthy backlogs of prospective Premier Agents looking to join our platform.

19 During the quarter, we increased pricing on only a subset of our existing Premier

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Agents whose contracts expired, so we continue to have considerable pricing power as below market subscriptions come up for renewal .

21 108. Rascoff’s and Cohen’s statements in ¶107 were materially false and misleading

22 because they failed to disclose that: (i) many new and existing subscribers were resisting Zillow’s

23 attempt to increase pricing for Premier Agent subscriptions; (ii) Platinum Premier packages were

24 cost-prohibitive for many subscribers and did not generate significant ROI; (iii) the new pricing

25 model was causing increased churn in Premier Agent subscriptions due to the increase in pricing and

26 other agent concerns with the Zillow’s business; (iv) Zillow was struggling to stem the flow of

852878_1

E L . HAGENS BERMAN CONSOLIDATED CLASS ACTION AMENDED COMPLAINT (2:12-cv-02084-RSM)

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Premier Agent cancellations; and (v) Zillow faced substantially increased costs in an effort to gain

and/or renew subscribers and remedy these problems. It was also misleading to discuss increased

prices from Platinum Premier Agents without revealing that, as the ARPU numbers disclosed at the

end of the Class period showed, because of those increased prices, Zillow was seeing a significant

portion of its existing and new subscribers transition to Silver and Gold tiers who paid significantly

less for their subscriptions than Platinum subscribers. Thus, Zillow’s profitability would be

negatively impacted because of the lower revenues those customers generated, while at the same

time Zillow was incurring higher sales costs.

109. During the same call, Cohen also highlighted the Company’s Display Advertising,

stating that “[t]he rising demand for Zillow display placement is a testament to our leadership

position on the web and mobile, attractive user base and the bespoke ad targeting available across

our database of all homes that allows us to command higher CPMs because of the significant ROI

we deliver to these brand advertisers.” Cohen further stated: “[W]e do expect the display category

to contribute nicely to the top line, as we continue to lead the category in traffic and mobile

engagement. ”

110. Cohen’s statements in ¶109 were materially false and misleading because they failed

to disclose that the Company had already decided that Foreclosure.com , a significant display

advertiser, would not be renewing its advertising contract and that the Company had already begun

engineering an in-house alternative for foreclosure and pre-foreclosure listings.

111. Later, on the same call, Rascoff was asked what the reaction to the change to a six-

month term and to the increased pricing structure for the Premier Agent program.

<Q - Mark Stephen Mahaney> : Thank you. I’d like to start with two questions please. Could you provide, Spencer, maybe a little bit more color on the reaction to the pricing changes that you’ve seen to-date? When people – when you’ve had Premier Agents come up for renewals, is there a typical response they’ve had, have they normally traded up, held where they are? Just any more color on that . . . .

<A - Spencer M. Rascoff> : Thanks, Mark. So first on Premier Agent pricing, what you’re referring to, of course, is when agents come off contract we – because we sell a fixed price over a period of time, as traffic grows and as contact volume grows and as the benefits that we deliver to the Premier Agent grow, the ROI increases and the

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value increases , but their price stays flat. And so at the end of contract we have an opportunity to call them and do one of three things. We can either tell them that if

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they want to maintain their share of the percent exposure that they purchased, then their price will go up . We can tell them they can keep the same out of pocket and be

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shown less of the time, or we can instead sell the inventory to somebody on the wait- list at a higher price point .

4 112. Rascoff’s statements in ¶111 were materially false and misleading because many

5 existing Premier Agents were not experiencing ROI increases as a result of added web traffic, and

6 Zillow was not selling subscriptions at a higher price point, as the numbers revealed by Defendants

7 at the end of the Class Period in response to SEC pressure indicated that ARPU was essentially

8 static.

9 113. The Company filed the 2011 Form 10-K—its first-ever annual report – with the SEC

10 on March 2, 2012. The 2011 Form 10-K was signed by each of the Individual Defendants. In

11 addition, as CEO and CFO, Rascoff and Cohen each certified pursuant to §302 of the Sarbanes

12 Oxley Act of 2002, that: (i) they reviewed the Annual Report; (ii) based on their knowledge, the

13 Report “does not contain any untrue statement of a material fact or omit to state a material fact

14 necessary to make the statements made, in light of the circumstances under which such statements

15 were made, not misleading with respect to the period covered by [the Report];” and (iii) each has

16 “disclosed, based on our most recent evaluation of internal control over financial reporting, to the

17 registrant’s auditors and the audit committee of the registrant’s board of directors: . . [a]ny fraud,

18 whether or not material, that involves management or other employees who have a significant role in

19 the registrant’s internal control over financial reporting.” Rascoff and Cohen further certified,

20 pursuant to §906 of the Sarbanes Oxley Act, that “[t]he information contained in the Report fairly

21 presents, in all material respects, the financial condition and results of operations of the Company.”

22 114. In the 2011 Form 10-K, the Company described the purported success in increasing

23 pricing for its Premier Agent program, stating in relevant part:

24 The increase in marketplace revenue was primarily attributable to growth in the

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number of subscribers in our Premier Agent program to 15,799 as of December 31, 2011 from 8,102 as of December 31, 2010, an increase of 95%, as well as an

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increase in the average price for new Premier Agents and for existing Premier Agents who renewed their subscriptions for additional six-month terms. We

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believe the increase in subscribers and the increase in the average price in our Premier Agent program was driven by our increased development of our

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marketplace program with the support of our sales team and the overall growth in the number of unique users of our websites and mobile applications.

3 115. Defendants’ statements in ¶¶113-114 were materially false and misleading because

4 they failed to disclose that (i) many new and existing subscribers were resisting Zillow’s attempt to

5 increase pricing for Premier Agent subscriptions; (ii) Platinum Premier packages were cost-

6 prohibitive for many subscribers and did not generate significant ROI; (iii) the new pricing model

7 was causing increased churn in Premier Agent subscriptions due to the increase in pricing and other

8 agent concerns with the Zillow’s business; (iv) Zillow was struggling to stem the flow of Premier

9 Agent cancellations; and (v) Zillow faced substantially increased costs in an effort to gain and/or

10 renew subscribers and remedy these problems. It was also misleading to discuss increased prices

11 from the Premier Agent program without revealing that, as the ARPU numbers disclosed at the end

12 of the Class Period showed, because of those increased prices, Zillow was seeing a significant

13 portion of its existing and new subscribers transition to Silver and Gold tiers who paid significantly

14 less for their subscriptions than Platinum subscribers, and were not generating increased prices.

15 116. The 2011 Form 10-K further stated in discussing its Display Advertisement revenue:

16 Display revenue primarily consists of graphical web and mobile advertising sold on

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a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers.

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Our advertising customers also include telecommunications, automotive, insurance and consumer products companies . We recognize display revenue as

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impressions are delivered to users interacting with our websites or mobile applications. Growth in display revenue depends on continuing growth in traffic to

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our websites and mobile applications and migration of advertising spend online from traditional broadcast and print media .

21 117. Defendants’ statements in ¶116 were materially false and misleading because they

22 failed to disclose that the Company was aware that Foreclosure.com , a significant display advertiser,

23 would not be renewing its advertising contract and that the Company had already begun engineering

24 an in-house alternative for foreclosure and pre-foreclosure listings.

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1 B. First Quarter 2012 Misstatements

2 118

On May 2, 2012, Defendants issued a press release announcing its first quarter 2012

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financial results, stating that Marketplace Revenue increased 141% over the first quarter 2011 to

$16.6 million, and Display Revenue increased 42% over the first quarter 2011 to $6.2 million. In the

press release, the Company also announced that it would open a new office in Irvine, California to

expand its sales team. The press release also stated that the “Southern California sales team will

focus on selling Premier Agent subscriptions to local real estate professionals throughout the country

across the Yahoo!-Zillow Real Estate Network.”

119. Defendants represented in the press release that Premier Agent subscribers totaled

18,616 at March 31, 2012, up 74% year over year. During the analyst conference call the same day,

Rascoff reiterated that “ [o]ur Premier Agent count in the first quarter reached 18,616, compared to

10,710 this time last year .” Cohen also stated during the call, “ We added over 2,800 Premier

Agents in the quarter, the most in any quarter thus far, representing a net increase of over 7,900

Premier Agents from this time last year . ”

120. Defendants’ statements in ¶¶118-119 concerning the growth in Premier Agent

subscriptions in 1Q12 were materially false and misleading because they failed to disclose that:

(i) Zillow was struggling to stem the flow of Premier Agent cancellations; (ii) both new and existing

subscribers were resisting Zillow’s attempt to increase pricing for subscriptions; (iii) there was

increased churn in Premier Agent subscriptions; and (iv) Zillow faced substantially increased costs

in an effort to remedy these problems. Defendants also failed to disclose that a significant portion of

Zillow’s new Premier Agent business came from Silver and Gold subscribers who paid much less for

their subscriptions than Platinum-level agents. Defendants finally revealed that a significant portion

of its new Premier Agents were lower margin Silver and Gold subscribers at the end of the Class

Period when they disclosed ARPU, which was much lower than analysts expected.

121. Also during the May 2, 2012 conference call, Rascoff indicated that Zillow had the

ability to raise prices for renewal of Premier Agent subscriptions and that agents were willing to pay


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I higher prices for the subscriptions because of the high return of investment (“ROI”) generated from

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I advertising on Zillow:

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As we have shared previously, at contract renewal points we may raise prices market by market based on increasing traffic and consumer contacts, and increasing demand

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from agents. Due to consistent growth in usage across the web and mobile during the six-month subscription term, our Platinum Premier Agent subscribers receive

5

exceptional value through an increasing number of contacts delivered to them, leading to a high ROI on their advertising spent the Zillow.

6 122. Rascoff’s statements in ¶121 were materially false and misleading because they failed

7 to disclose that many agents were unhappy with the new increased pricing and were not renewing

8 their Premier Agent subscriptions, as they were getting a low ROI from their Zillow listings.

9 Moreover, Zillow lacked the ability to raise pricing during this period as the ARPU numbers

10 disclosed at the end of the Class Period revealed.

11 123. Also during the May 2, 2012 call, Cohen stated:

12 The growth in our display business resulted from greater levels of commitment to

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advertising placements with us by our industry endemic advertisers, primarily real estate brokers, home builders and lending institutions. This result exceeded

14

expectations with the positive variance reflecting both the lower level of predictability in this business as well as the fantastic user experience across our

15

platform on web and mobile, which led to increased traffic and impression for our advertisers. Even though display continued to become a smaller proportion ofour

16

revenues, its contribution margin remains higher than in marketplace businesses, which results in a strong flow through from incremental sales to operating profit.

17 124. Cohen’s statements in ¶123 were materially false and misleading because they failed

18 to disclose that Defendants had known for a number of months that Foreclosure.com would not be

19 renewing its display advertising contract and that the Company had been engineering an in-house

20 alternative to Foreclosure.com for approximately half a year. As a result of this change, the

21 Company knew that its profits and display revenues would decrease.

22 125. In the Company’s quarterly report on Form 10-Q for the quarter ending March 31,

23 2012 (“1Q2012 Form 10-Q”), signed by Cohen and filed with the SEC on May 4, 2012, Defendants

24 acknowledged that the “number of Premier Agent subscribers is an important driver of revenue

25 growth,” and discussed Marketplace revenues, stating in relevant part:

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The increase in marketplace revenue was primarily attributable to growth in the number of subscribers in our Premier Agent program to 18,616 as of March 31, 2012

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from 10,710 as of March 31, 2011, an increase of 74%, as well as an increase in the average subscription price for new Premier Agents and for existing Premier Agents

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who renewed their subscriptions for additional six-month terms. We believe the increase in Premier Agent subscribers and the increase in the average price in our

4

Premier Agent program was driven by our further development of our marketplace program with the support of our sales team and the overall growth in the number

5

of unique users of our websites and mobile applications.

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126. Defendants’ statements in ¶125 were materially false and misleading because they

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failed to disclose that the Company knew that Premier Agents were purchasing lower priced

subscription tiers, rather than the high priced Platinum tier that the Company’s sales team was

instructed to sell to real estate agents. Contrary to Defendants’ statements, ARPU had been

essentially flat and had not materially increased during the quarter. Additionally, the Company

knew that many real estate agents were not renewing their Premier Agent subscriptions and were

being replaced by agents in either lower-priced geographic areas or by agents in lower-cost tiers.

The Company also knew that the new sales team was hired to deal with the “battle” the sales

consultants faced when trying to renew subscribers at much higher rates than what Premier Agents

had been paying.

127. The 1Q2012 Form 10-Q stated that the increase in Display Revenue was attributable

to the growth in unique users to the site, thereby increasing the number of impressions available.

According to the Company, “[t]his resulted in increased advertising spend by larger business and

industry-endemic advertisers such as real estate brokers, builders and lending institutions. ”


I failed to disclose that Defendants had known for a number of months that Foreclosure.com would

not be renewing its display advertising contract and that the Company had been engineering an in-

house alternative to Foreclosure.com for approximately half a year. As a result of this change, the

Company knew that its profits and display revenues would decrease.

129. Stock analysts following Zillow were encouraged by the overwhelmingly positive

statements by Defendants in the Company’s public filings and during the May 2, 2012 conference

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call. Although Zillow was concealing its actual ARPU metric, analysts were attempting to back into

that number based upon Defendants positive statements regarding increasing pricing for

subscriptions to the Premier Agent program. For example, PAA Research published a May 3, 2012

analyst report on Zillow noting: “Premium agent subscribers increased 73.8% YOY [year over year]

to 18,616 and average marketplace revenue per agent per month increased 40.4% YOY to $342.39.

During the quarter the company benefitted from the roll-off of 12-month contracts with Platinum

Premier agents that were booked in 1Q11.”

130. Similarly based on Defendants’ positive statements, a Craig-Hallum Capital Group

LLC (“Craig-Hallum”) May 3, 2012 analyst report stated: “Zillow reported very impressive Q1

results. The company added 2,817 Premier Agents, the best quarterly addition ever, and ARPU

again climbed sharply on the strength of increased pricing and a growing appetite from existing

agents to increase their online spend.” ThinkEquity LLC published a May 3, 2012 report stating:

“Marketplace revenue per Premier Agent growth accelerated to 32% Y/Y in 1Q12 to $321 compared

to 4Q11’s 28% growth to $298.7 and suggests to us that Zillow’s pricing increase is being absorbed

without disruption.”

131. Canaccord/Genuity issued a May 3, 2012 analyst report, similarly focused on

I Defendants’ positive statements regarding increased pricing of Premier Agent subscription under the

new pricing model:

We believe testing of a new CPM-based pricing model for the PA product could lead to more rapid pricing expansion . . . .

* * *

[Premier Agent subscription] base continued to grow nicely while growth in our calculated ARPU accelerated. Number of Ending Premier Agent subs grew 74% y/y to 18.6k, representing additions of 2.8k subs during the quarter. Average Revenue Per Sub grew 32% y/y to $321, as existing PAs sign on for additional products and Zillow Mortgage Marketplace revenue (unrelated to the PA product but still included in Marketplace revenue) becomes a more meaningful contributor.

* * *

Tests with new monetization model could prove to be transformational. The company has begun testing an alternative subscription-based pricing model that

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now fully transitioned to an impressions based model—which we were expecting to occur later this

year—and the company is now monetizing all three ad spots per zip-code. Overall, we believe

Zillow is taking advantage of its traffic growth by monetizing more of its agent backlog at higher

rates.”

E L . HAGENS BERMAN


would see advertisers get charged based on the number of impressions rather than percentage exposure as allocated by the current slot system. This new model could

2

see zip code monetization grow in lock-step with traffic (impression) growth. The company has not indicated whether the test have been successful or indicated when it

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would expect to roll such a model out across the user base. However, we believe this type of model could significantly raise the pricing potential in many geographic

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areas.

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132. Canaccord/Genuity also hosted a series of investor meetings with Cohen during

6

I which he further discussed the purported success of the new pricing program, as recounted in

7

Canaccord/Genuity’s May 23, 2012 report on Zillow, which continued to focus on the increased

8

I pricing that would be allowed under the new pricing model:

9

We hosted a series of investor meetings with Zillow CFO Chad Cohen and IRO RJ Jones. We believe investor interest is high as the company is executing well along

10

multiple avenues of expansion, and at roughly $1 billion in market cap is passing the screens of more investors.

11 * * *

12 On its Q1 earnings call, the company spent a good amount of time discussing testing

13

of a new pricing initiative designed to raise the long term price umbrella in the PA business. The new model, which will attempt to monetize impressions (CPM based)

14

rather than share of the voice for zip codes, will still be subscription based and transacted via credit cards, so little should change beyond price and the mechanism

15

used to derive it.

16 * * *

17

Even so, we believe the move toward CPM pricing would, if implemented, remove this artificial ceiling on inventory and also allow the company to benefit as publisher

18

from monetizing increases in traffic. We believe the company is encouraged by the progress thus far with customer testing of this model and believe the likelihood is

19

increasing that the model will be rolled out nationwide sometime in the second half of this year. We believe this would have the potential to re-accelerate growth in the

20

PA subs, which should more than offset any churn from existing subs who are hooked on the exclusivity offered by the current construct.

21 133. A ThinkEquity June 14, 2012 analyst report similarly noted: “We believe Zillow has

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concealing the adverse fact that Zillow had been unable to increase subscription pricing during 2Q12

because agents were resisting the Company’s new pricing plan, which was more expensive than the

previous percentage of voice plan. Cohen also failed to disclose that a high percentage of agents

were cancelling their subscription, while those who renewed their subscriptions frequently did so at

the same or lower pricing. As a result of the increased turnover and churn of Premier Agent

subscriptions, and agents’ refusal to pay higher prices, Zillow had not experienced any “existing

increased upsell to existing agents” during the quarter.

136. Cohen’s statements were also materially false and misleading because they failed to

disclose that Zillow was facing structural barriers that meant continued growth in marketplace

E L . HAGENS BERMAN


1 C. Second Quarter Misstatements

2 134

On August 7, 2012, Zillow issued a press release announcing its financial results for

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the quarter ending June 30, 2012. During an analyst conference call on the same date, Cohen

represented that Zillow was making good progress implementing its new pricing structure, as

existing subscribers were buying more inventory at higher Platinum level prices. Cohen also

indicated that Zillow added 4,100 Premier Agent subscribers in the second quarter for a total of

22,696 Premier Agents:

Moving now to our largest revenue category, marketplace. Revenues reached $19.6 million, representing 102% year-over-year growth and 71% of our total revenue. The increase in marketplace revenue was a function of the increase in the number of Premier Agent subscribers , existing agents extending their reach by purchasing more inventory, higher prices reflecting growth in our audience , as well as the launch of new product tiers. We added nearly 4,100 Premier Agents in the quarter, the most in any quarter thus far, representing a net increase of over 9,300 Premier Agents from this time last year. Our agent count as of the end ofthe second quarter reached a record level of the 22,696 Premier Agents.

The majority of increase in this figure is represented by Premier Agents purchasing our Platinum product, as they look to attract shoppers, utilize our business tools, and grow their professional brand across our platform. Please note that while our agent count is an important metric to watch, this figure is not necessarily comparable over time as we have introduced new products into the marketplace, enhanced existing product sets, and Premier Agents have changed their purchasing behavior, resulting in increased upsell to existing agents over the past year.

135. Cohen’s statements in ¶135 were materially false and misleading. Defendants were

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revenue would slow in the near future and margins would also be reduced due to the substantially

2

increased cost to Zillow of obtaining each new subscription to the Premier Agent program. Zillow

3

was incurring increasing costs in its effort to convince Agents to buy subscriptions, including

4

substantially increased sales and marketing expenses, which would continue rising in future periods,

5

thereby reducing profitability and ultimately generating losses.

6

137. During the August 7, 2012 conference call, Rascoff represented that Zillow’s Premier

7

Agent program provided subscribers with high ROI for their advertising dollars: “[W]e continue to

8

increase our relevance through a broader set of agents, with our expanding suite of marketing and

9

productivity services, our high ROI advertising program , and now our new Premier Agent

10

websites. By addressing critical needs of real estate agents as they manage and grow their

11

businesses, we continue to centralize our offering as the hub for agent’s everyday activities.”

12

138. Rascoff’s statements in ¶137 were materially false and misleading because they failed

13

to disclose that Zillow was experience substantial churn or subscribers renewing at lower tiers within

14

its Premier Agent business precisely because agents did not believe they were receiving high ROI on

15

the program. Additionally, Rascoff failed to disclose the material fact that many of the new

16

“marketing and productivity services” that Zillow had put in place were needed in order to address

17

subscribers’ complaints about Zillow’s existing business model and the number of agents who

18

perceived no significant ROI from advertising with Zillow.

19

139. During the August 7, 2012 analyst conference call, Cohen further represented that

20

I based on initial tests, Zillow’s new impression-based pricing model for Premier Agents had been

21

favorably received by agents:

22

By selling and delivering to agents a fixed number of impressions each month, we can as a publisher benefit from the growth in our consumer traffic more efficiently,

23

and remove our current theoretical limit of 12 agents advertising in a single zip code, as we are no longer constrained by agents purchasing inventory in 25% increments.

24

Based on the response from our customers, and from what we have learned in our initial test, we anticipate moving forward with – moving forward from testing to fully

25

converting our subscriber base to the fixed impression subscription model over the next six months.

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to disclose that Zillow had been experiencing substantial push back from agents over the proposed

increase in pricing and corresponding reduction in the scope of advertising that was being provided

to Platinum subscribers. As a result of this undisclosed problem, Zillow had been unable to increase

its ARPU for subscriptions and it had been forced to modify its pricing model by agreeing to

significant discounts for current Platinum subscribers who agreed to renew their subscriptions in an

effort to stop the ongoing cancellations.

141. During the August 7, 2012 conference call, Cohen also stated that Zillow’s

I profitability was being driven by the purported “ongoing strength” in the Premier Agent business

and display revenue, which had higher profit margins:

Turning now to profitability, our EBITDA for the second quarter was $5.3 million, representing 19% of revenues. This result exceeds the high end of our guidance range for the quarter by $1.5 million, and exceeded the margin on a percentage basis, which we forecast we would produce in the quarter. The outperformance in the quarter can be attribute to a few factors. First, revenue grew ahead of expectations in our marketplace category, due to the ongoing strength in our Premier Agent business, as well as the timing and partial period impact of opening up our third paid buyer agent position. Second, our display revenue is high margin, so any delivery beyond what was originally predicted in our guidance, drives high incremental margins. Last, overall operating expenses were in line with our plans , which led to revenue flow-through.

142. Cohen’s statements in ¶141 that Zillow was experiencing “ongoing strength” in its

Premier Agent business were materially false and misleading because they failed to disclose that:

(i) Zillow was struggling to stem the flow of Premier Agent cancellations; (ii) both new and existing

subscribers were resisting Zillow’s attempt to increase pricing for subscriptions; (iii) there was

increased churn in Premier Agent subscriptions; and (iv) Zillow faced substantially increased costs

in an effort to remedy these problems. Defendants’ statements were also false and misleading

because they failed to disclose that profitability would be negatively impacted by the internally

anticipated loss of the higher margin display advertising by Foreclosure.com , because Defendants

knew that Zillow was about to end its relationship with that customer.




143. During the Class Period, Defendants also refused to disclose Zillow’s actual ARPU

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for its Premier Agent program. In particular, when analysts asked about ARPU on the August 7,

2012 conference call, Cohen refused to disclose the actual number, and he attempted to confuse the

issue when highlighting the purported growth in Mortgage Marketplace business, which was a also a

component of Zillow’s Marketplace revenue, thereby making it impossible to calculate the actual

ARPU number for the Premier Agent program (because the publicly disclosed numbers came from

mixed revenue streams). Specifically, Cohen responded to the analyst question about ARPU for

Premier Agent program as follows:

Thanks for your question. So if you do the brute force math on the ARPU, looking at our total marketplace revenues, yes, I can see that ARPU is down. But it’s really a function of growing the number of Premier Agents that we had in the quarter. We were moving beyond just advertising services for Premier Agents, to offering a whole suite of business services, including Premier Agent websites. So with the growth of those other two tiers, Gold and Silver, that had the effect of bring the ARPU down, if you just look at the math. Loan requests and Zillow Mortgage Marketplace grew at a very nice and health pace in the quarter, so it was really not a function of that.

144. Investors were also being kept in the dark regarding Zillow’s true ARPU for

subscribers to the Premier Agent program, because Defendants represented that 50% of the new

subscribers during the quarter had just signed up in the last month of the quarter, and thus they did

not have a full quarter’s worth of revenue in the numbers, which was further confounding any

attempt by investors to calculate the actual ARPU. Thus, during the August 7, 2012 conference call,

an analyst pointed this out, and Cohen represented that including those subscribers in the calculation

had reduced the numbers, while telling investors that everything had gone according to plan with the

new pricing strategy:

Michael Graham: Chad, you mentioned in your prepared remarks that the optical reduction in ARPU was related to the notion that some of the pricing initiatives brought on a lot of non-linear [subscriptions] towards the end of the quarter. And so they weren’t in the revenue base for the whole quarter, but yet they’re sort of the average PA sub number. So I want to see if that is accurate? Then can you comment on the subs you did bring in towards the end of the quarter, where were they in pricing, relative to the existing base? . . . .

Chad Cohen: Thanks for your question. So yes, there are a couple of moving parts in the quarter. We did open up our inventory to a third buyer’s agent list position in


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the quarter, but that was really towards the end of the quarter. And you are correct, in that the growth in subs is partially a function of opening up that third buyer’s agent

2

list, as well as starting to sell our Premier Agent websites during the last part of the quarter as well, So that had the impact you mentioned.

3 In terms of where we are in terms of moving to an impression-based model, we

4

started testing sales of an impression basis. We had previously done on a share of voice basis, so started testing in that the first quarter to new agents. And started

5

selling those packages, still on a six-month subscription basis to new agents, as well as to existing agents looking to expand their profile across our platform. So

6

everything is going as planned. Agents are happy with the switch that we have made, and obviously this allows us to benefit from our traffic growth that we have

7

brought to the platform . So the plan is to keep marching down that path, and to complete that switch over the next six months.

8 145. Cohen’s statements in ¶143-144 were materially false and misleading because they

9 failed to disclose that agents generally did not like Zillow’s new pricing policy, which was proposed

10 to be more expensive than the previous percentage of voice model, and, as a result, agents were

11 resisting the Company’s efforts to sell them a reduced amount of advertising at significantly

12 increased prices. As Defendants ultimately disclosed at the end of the Class Period, Zillow’s ARPU

13 had not materially increased during this period, and moreover, due to the customer resistance, Zillow

14 had been forced to modify its pricing policy in an effort to retain existing Platinum subscribers who

15 otherwise would have cancelled their subscription instead of receiving reduced advertising and/or

16 significantly increased pricing.

17 146. Further demonstrating that investors wanted to fully understand Zillow’s ARPU and

18 churn numbers for Premier Agent subscriptions, another analyst on the August 7, 2012 conference

19 call inquired further about these numbers:

20 Mark Mahaney: Hi, two questions please, about the Premier Agents. One, could you

21

talk about the sources of the new Premier Agents? You did have that, pretty big increase sequentially there, new geographies, new types of subscribers, in addition to

22

just people signing is up for the website product? Then, is there a way to think about kind of same-store sales growth for Premier Agents, in terms of ARPU? So there’s a

23

lot of mix factors in there, but if we – but if you leave aside – you look at Premier Agents who have been with you for more than a year, or who have been – who have

24

had significant tenure with you, can you talk about what kind of wallet share you are – if there’s any increase in wallet share amongst those real estate agents? Thank

25

you.

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to disclose that in order to retain existing Platinum subscribers, Zillow had been forced to retain their


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147. Rather than provide the churn numbers or reveal that a significant number of existing

2

Platinum agents were cancelling their subscriptions due the change in pricing structure and concern

3

over low ROI, Cohen responded to this analyst’s question by hiding these adverse facts:

4

Chad Cohen: Hi, Mark, this is Chad. I will start off with – in terms of the sources of new PAs, as I mentioned, we did open up two new tiers in the quarter, that we

5

started selling those two new tiers later on in the quarter. But the primary driver of the growth in the quarter had to do with still our Platinum product that we sell on a

6

six-month subscription basis. So that is what drove the majority of the growth in the quarter, and got us to approximately 22,700 agents. In terms of same-store sales, I

7

mean some of the things we are seeing is just increased upsell of existing agents that are looking to expand their presence on our platform. We use to talk about sort of

8

30% to 40% upsells. But now we are seeing a number that is closer to sort of 50% upsell, as agents start buying more inventory to represent their actually their real

9

sales territory that they are actually working on the street. . . .

10


11

to disclose that a substantial number of Platinum Premier Agents were cancelling their subscriptions

12

due to dissatisfaction with the program. Moreover, many existing Platinum subscribers renewing

13

their subscription at a lower pricing level or for less inventory. Thus, even if they remained as

14

Platinum, there was little or no net increase in net revenue on a per subscriber basis. Indeed, at the

15

end of the Class Period, Defendants revealed that ARPU had been static during this period.

16

149. Rascoff also told investors during the August 7, 2012 conference call that Zillow had

17

I been successfully transitioning its Platinum Premier agents to the new pricing model and the

18

transition would continue to go smoothly:

19

So just to put a finer point on the first point, every new – every contract that has been sold, either to an old agent or to a new agent since first quarter has been on this

20

impression based model. So and – as Chad said, it’s because a lot of our new sales are to existing Premier Agents. Those old Premier Agents in many cases, in most

21

cases have already bought on this impression model. And those that haven’t have now had several months of data where we have been reporting to them, how – what

22

their impressions have been. So even if they bought, say two years, where they bought – I want to show up 50% of the time in a given zip code, well, for the last six

23

odd months we have been showing them how many time they have been displayed. So we have been training them to start thinking about impressions, and therefore

24

when we switch – when we roll them over late this year, it will be a quite smooth transition at that point.

25 150. Rascoff’s statements in ¶149 were materially false and misleading because they failed

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existing number of impressions. Rascoff’s statements were also false and misleading because a

2

substantial number of agents were cancelling their Premier Agent subscriptions due to dissatisfaction

3

with the program. As Rascoff admitted at the end of the Class Period, many agents believed they

4

were generating low ROI from their subscriptions and therefore cancelled their subscription or

5

renewed their subscription, but at the same or lower pricing. Thus, the transition to the new

6

impressions-based pricing model had not been a smooth one, and Zillow would need to further

7

adjust its pricing policy in order to gain Premier Agents’ acceptance of Zillow’s switch pricing

8

policy.

9

151. On August 8, 2012, the Company filed its quarterly report on Form 10-Q for the

10

quarter ending June 30, 2012 with the SEC (“2Q 2012 Form 10-Q”) reporting financial results for

11

the second quarter of 2012. In the 2Q 2012 Form 10-Q, signed by Cohen, the Company discussed

12

the Premier Agent program, stating in relevant part:

13

The increase in marketplace revenue was primarily attributable to growth in the number of subscribers in our Premier Agent program to 22,696 as of June 30, 2012

14

from 13,385 as of June 30, 2011, representing growth of 70%, as well as an increase in the average subscription price for existing Premier Agents who renewed their

15

subscriptions for additional six-month terms. We believe the increase in Premier Agent subscribers and the increase in the average subscription price in our

16

Premier Agent program was driven by our further development of our marketplace program with the support of our sales team and the overall growth in the number

17

of unique users of our mobile applications and websites.

18

152. Defendants’ statements in ¶151 were materially false and/or misleading because they

19

failed to disclose that the Company was aware that subscriber metrics were getting worse in 2012.

20

Contrary to Defendants’ representations, there had been no “increase in the average subscription

21

price in our Premier Agent program” during the quarter, and the ARPU numbers for 1Q12 and 2Q12

22

were static at $263.

23

153. The Company also discussed display advertising in the 2Q 2012 Form 10-Q, stating

24

that “[g]rowth in display revenue depends on continuing growth in traffic to our mobile applications

25

and websites and migration of advertising spend online from traditional broadcast and print media.”

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I failed to disclose that the Company knew it would be losing Foreclosure.com as a display advertiser

I and that the Company had been engineering an in-house alternative to foreclosure and pre-

foreclosure listings for a number of quarters.

155. Following the August 7, 2012 conference call, Canaccord/Genuity issued its

August 7, 2012 analyst report which raised concerns of the possibility that Zillow might be

experiencing reduced ARPU on subscriptions to its Premier Agent program. However, because

Defendants were refusing to disclose the actual ARPU numbers, other analysts following Zillow

believed the apparent decline in 2Q12 ARPU was an aberration largely caused by the increase in

new subscribers late in the quarter who drove down the averages because they had not contributed

revenue for all three months of the quarter. As explained in a Craig-Hallum August 8, 2012 analyst

report: “In Q2, Zillow added 4,080 Premier Agents, over 2X the number we anticipated. Growth

was aided by the introduction of a third buyer’s agent slot, effectively increasing advertising capacity

by 50%, and the introduction during the quarter of a new low cost websites subscription service.

ARPU declined slightly, likely due to the new lower priced subscriptions and back end weighted sub

adds.”

156. Based on investor concern over Zillow’s ARPU and whether it was increasing during

I 2Q12, the Company’s stock price immediately dropped from $41.76 per share on August 7 to $38.24

per share on August 8—an 8.81% price decline. Zillow’s stock price fell further to close at $37.81

on August 9, 2012.

157. However, the market price for Zillow stock was still artificially inflated because

Defendants were concealing and misstating whether ARPU had actually declined in 2Q12, whether

any such possible decline had been caused by temporary factors such as the addition of new

subscribers late in the quarter, whether there had been rising ARPU for Premier Agent subscriptions

throughout the prior quarters, as well as whether real estate agents were embracing the new pricing

strategy so as to allow for increased pricing. Moreover, Defendants’ misstatements and omissions

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caused analysts following Zillow stock during this time period to believe that Zillow’s existing

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ARPU on its Premier Agent program was much higher than was actually true. For instance,

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Canaccord/Genuity believed Zillow’s ARPU was $317 (down from $321 during 1Q12).

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ThinkEquity believed Zillow’s ARPU in 2Q12 was $317. Ultimately, Defendants would disclose

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that the ARPU on the Premier Agent program was much lower, at or below $270, throughout this

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period, as alleged below.

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158. As a result of Defendants’ misleading disclosures regarding the success of the new

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pricing plan and Zillow’s power to increase pricing, PAA Research issued an August 8, 2012 analyst

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report that noted: “Zillow added 4,080 premier agents Q/Q in 2Q12, well above our estimate for

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2,500 adds. However, ARPA (average price per agent) of $316.66 fell short of our estimate of

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$336.27. As we outlined in our original report on Zillow, we think the company has an enormous

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opportunity to increase pricing with existing platinum agents.” The report continued: “[W]e think

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most contract renewals come at appreciable higher pricing.” The report also concluded that the

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2Q13 miss on ARPA could have been resulted from the timing of new subscribers: “A large increase

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in agent additions in the last month of the quarter could negatively impact ARPA trends. We are not

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sure how much of a role that played in Zillow’s 2Q12 results.”

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159. Defendants misled investors into believing that the new program was generating

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higher prices and that the large number of newly added subscribers in late 2Q12 had distorted the

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averages (since those new subscribers had not been paying for the entire quarter). As a result,

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investors continued to believe that ARPU was much higher than was actually the case, as was

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revealed at the end of the Class Period, when Defendants disclosed that ARPU had been essentially

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static at between $258 and $270 throughout the class period, and that it was likely to decline going

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forward.

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160. On September 7, 2012, Defendants filed the Prospectus Supplement with the SEC in

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connection with Zillow’s secondary public offering. The Prospectus Supplement continued to

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I misrepresent that Zillow was making good progress with its new pricing program. For instance, the

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Prospectus Supplement incorporated and republished statements in the Company’s 2Q 2012 Form

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10-Q which represented: “We believe the increase in Premier Agent subscribers and the increase in

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the average price in our Premier Agent program was driven by our further development of our

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marketplace program with the support of our sales team and the overall growth in the number of

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unique users of our websites and mobile applications.”

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161. Critically, Zillow’s Prospectus Supplement did not disclose the Company’s ARPU,

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notwithstanding that the SEC had directed the Company to do so and even though Zillow’s response

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to the SEC was that they would make such disclosures going forward . Similarly, the Prospectus

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Supplement did not reveal that ARPU had been essentially static for several quarters and that there

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had been no increase in average pricing as a result of the new impressions-based pricing program.

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162. After investors recovered from the initial shock of Zillow’s surprise secondary stock

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offering (which was completely unexpected in light of Defendants’ assurances during the August 7,

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2012 conference call that no such stock offering was being contemplated) and after the stock price

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recovered from its initial decline, Defendants’ false statements in connection with the secondary

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offering and in the September 7, 2012 Prospectus Supplement caused Zillow’s stock price to

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continue to be artificially inflated.

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163. On September 12, 2012, Cohen spoke at the G9 conference held by ThinkEquity,

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where he continued to represent that Zillow was making good progress in rolling out the new

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impression-based pricing program. As stated in ThinkEquity’s September 13, 2012 analyst report:

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We reiterate our Buy rating on Z shares coming out of Zillow’s CFO presentation at our G9 growth conference yesterday. CFO Cohen highlighted the opportunity

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around Zillow’s new businesses such as rentals and the Mortgage Marketplace while reinforcing that it remains early days in Zillow’s core Premier Agent business as the

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company transitions to an impressions based model. Overall we believe the long- term fundamental opportunity remains strong, that Zillow is executing very well, and

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given Zillow’s relatively fixed cost structure, we are increasingly optimistic that margins should continue to expand going forward.

24 [] Additionally, Zillow confirmed that all new Premier Agents contracts are now

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being sold on an impressions basis. We believe this new approach, once fully implemented, could drive a significant increase in overall pricing. We expect full

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implementation over the next few quarters.

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164. As a result of Defendants’ false statements, Zillow’s stock price reached its Class

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Period high on September 20, 2012, when it closed at $46.17 per share.

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165. However, on October 1, 2012, Zillow’s stock price took a steep decline as investors

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I learned that the SEC had earlier been questioning Zillow’s failure to provide investors information

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I specifically related to the ARPU of its Premier Agent business. On October 1, 2012, the SEC’s

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I August 2012 communications with Zillow about this issue were widely reported by news outlets.

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166. In an October 2, 2012 article entitled “ Zillow Sinks After SEC Asks For Added

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Disclosures,” Yahoo! Finance reported that “[r]eal estate information provider Zillow (Z) is

retreating after the SEC disclosed that it had asked the company to disclose additional information

about the selling prices of its subscriptions and more data about its accounting practices.” Similarly,

in an October 2, 2012 article entitled “ Zillow Falls After Saying SEC Questioned Financial Report ,”

Bloomberg reported Zillow stock price “fell after disclosing that the U.S. Securities and Exchange

Commission asked the company to respond to questions about how it reported revenue.”

167. The widespread disclosure of the SEC’s actions regarding this important metric for

understanding Zillow’s business conditions and trends reignited investor concern over the question

of whether the new pricing plan had actually allowed Zillow to increase its price for subscriptions to

the Premier Agent program as Defendants had been publicly stating. In the wake of these

disclosures regarding the SEC direction to Zillow in August 2012 that it should disclose its ARPU

numbers, and the fact that Defendants had failed to make such disclosures in the Prospectus

Supplement for the September 2012 stock offering, Zillow’s stock price fell sharply. Zillow’s stock

price declined from $42.18 on September 28, 2012 (the last trading day before the disclosure of this

information) to $37.79 on October 4, 2012—four trading days after the disclosure of the SEC’s

action on the ARPU disclosures. Although Zillow’s stock price had significantly declined, it was

still trading at artificially inflated levels during this period, as Defendants continued to conceal that

ARPU had not been increasing as a result of the new pricing policy.

CONSOLIDATED CLASS ACTION AMENDED _____________ COMPLAINT (2:12-cv-02084-RSM)



168. ThinkEquity’s October 3, 2012 analyst report concluded that Zillow’s ARPU was

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$327 and “that the shift to impression based billing will lead to improved pricing going forward”

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once there full quarter of the newly added subscribers. The report also noted that investors’ concern

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over the ARPU numbers had driven the stock price lower, after it had been disclosed that the SEC

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wanted Zillow to disclose this metric:

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We believe that the market is increasingly concerned around the mix-shift of Premier Agents between Platinum, Gold, and Silver tiers and the impact on ARPU, market

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penetration among the top zip-codes, and disclosure of certain metrics per recent SEC comments (which are now resolved). As a result, Zillow’s shares have

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underperformed since the recent high on September 20 with Z shares down 15% compared to the S&P down 1% over the same period. But we view these concerns as

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shorter-term and we recommend that investors take advantage of the weakness in the stock. We believe the overwhelming majority of net-adds will continue to come

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from Platinum Premier Agents, we project ARPU to grow sequentially in 3Q & 4Q as Zillow will have benefited from a full quarter of net adds from its June product

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changes, and we note that the end result of SEC comments will be improved disclosure around Premier Agent ARPU, the latter of which should also lead to

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improved details around Zillow’s Mortgage Marketplace.

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169. As alleged below, at the SEC’s insistence, Defendants finally disclosed at the end of

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the Class Period the actual ARPU numbers for Zillow’s Premier Agent program, and those numbers

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showed not only that ARPU was much lower than analysts had expected, but also that ARPU had

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been essentially flat throughout the Class Period.

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VIII. THE TRUTH IS FINALLY REVEALED

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170. On November 5, 2012, after the market closed, Zillow issued a press release

19 announcing its third quarter 2012 financial results. Additionally, Zillow provided an update to its

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fourth quarter and full year 2012 revenue guidance, revealing significantly lower guidance than what

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the market was expecting and attributing the lower guidance to seasonality in advertising spending,

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that its new sales office was still in the process of ramping up, and finally admitting to the loss of

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Foreclosure.com .

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171. Specifically, Zillow reported anticipated fourth quarter and full year 2012 revenue

25 guidance in the range of $30.0 to $31.0 million for the fourth quarter of 2012, and revenue guidance

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for the full year 2012 of $113.0 million. The 4Q12 guidance was roughly $2 million less than

I analyst consensus expectations on both revenue and EBITDA.

A. Disclosures that ARPU Levels Were Flat

172

Zillow’s Form 10-Q for the period ending September 30, 2012 filed with the SEC the

next day (“3Q 2012 Form 10-Q”) provided additional detail on the reasons for the decreased

guidance. As the 3Q 2012 Form 10-Q revealed, average monthly revenue per subscriber had been

static during 1Q12 and 2Q12, had not increased during this period, and at $263 per subscriber was

far below what analysts estimated.

173. Moreover, Zillow’s 3Q12 Form 10-Q also revealed that ARPU had been substantially

increasing in 2011 before the switch to the new pricing plan, but no further material increase had

occurred once the new pricing plan was being implemented. Thus, the Company had been able to

increase ARPU by only 1.9% in 1Q12, indicating agents began dropping out of the program or

reducing their member level. Zillow’s ARPU had been $258 in 4Q11 and it increased by only $5 or

1.9% to $263 in 1Q12. During 2Q11 to 4Q11, the increase in ARPU had been 25%, but once the

new price plan was rolled out, growth essentially halted.

174. Zillow was unable to make any further price increases during 1Q and 2Q 2013.

While Zillow achieved a slightly higher ARPU in 3Q12 (a 2.5% increase to $270), this required a

huge increase in sales effort with associated increased costs. As a result of the increased sales and

marketing costs, Zillow’s earnings per subscriber was $87.40 in 3Q12 ($2.3 million divided by

26,703 subscribers) down significantly from the $92.60 earnings per subscriber in 1Q12

($1.7 million divided by 18,616 subscribers). The huge sales and marketing cost increases in 2Q12

had caused earnings per subscriber to fall to $58.69 in that quarter.

175. During a November 5, 2012 analyst conference call, Cohen admitted that Defendants

I monitored the turnover in Premier Agent subscriptions ( i.e. , churn). Cohen acknowledged that this

I churn had been “stable and predictable” during the prior periods, and he attempted to down play the

I significance of churn levels by asserting churn was purportedly “healthy and appropriate in relation


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to our operating history.” When an analyst pressed for further details on churn levels, Cohen refused

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to provide them stating: “With respect to churn, I mean, what we’ve seen historically is low, stable,

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and predictable churn, and it’s something that, in isolation is very hard to give more meaningful

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discussion on a phone call like this.”

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176. Cohen refused to explain how Premier Agent churn could be “healthy” for Zillow or

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whether historical churn levels had recently increased, but he did acknowledge: “The number one

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reason agents say for cancelling is that they had low ROI on the program. In other words, they

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didn’t convert enough of their annualized 180 leads per year into transactions.” At a minimum,

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Cohen’s November 5, 2012 statements acknowledged that Zillow had been experiencing ongoing

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cancellations and churn within the Premier Agent Program due to the lack of benefit to users and low

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ROI on the program.

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177. Moreover, Cohen’s attempt to downplay the churn issue is refuted by the many

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I confidential witnesses who worked within Zillow’s Premier Agent sales force during the time in

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I question, and who have now revealed that churn was an increasing problem for Zillow during this

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time period, as alleged above.

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178. Unbeknownst to Lead Plaintiffs and class members who purchased Zillow stock at

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artificially inflated prices during the Class Period, Zillow had not been smoothly rolling out its new

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pricing plans for the Premier Agent program so as to maximize revenue and profitability. Rather,

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Zillow had been experiencing a high rate of subscription cancellations due to agents’ lack of

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perceived benefits from that program.

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179. Rascoff and Cohen remained coy about the Company’s churn and concerns of

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difficulty in retaining return subscribers to the Platinum program, continuously refusing to disclose

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churn on the analyst call, which contributed to the lower than expected guidance numbers. Cohen

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remained steadfast in refusing to provide churn numbers on the conference call, but he did

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acknowledge that these agents had little ROI on their advertising with Zillow:

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Another metric we’re often asked about is churn. Over time, our churn has been stable and predictable as well as healthy and appropriate in relation to our operating

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in an effort to overcome real estate agents’ perception that there was a negative cost benefit analysis


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history. The layers of variables, which comprise the metric, have many useful permutations, such as by customer segment, contract size, or cohort. We’ve chosen not to disclose our churn due to its complex nature and for competitive reasons. But let me give you a little more insight into this metric .

Agents who cancel their subscription were receiving, on average, about 15 leads per month at an approximate $17 cost per lead. This is similar to the number of leads and the cost per lead of agents who don’t churn. The number-one reason agents say for canceling is that they had little ROI on the program. In other words, they didn’t convert enough of their annualized 180 leads per year into transactions.

180. In an effort to remedy this problem, Zillow had incurred substantially increased costs,

What you’re seeing with EBITDA guidance is the drop-down of – the down guidance on revenue from $31.9 million in the quarter to essentially $30.5 million at the midpoint. So you have to take that into consideration when you look at the fourth quarter. I think the other thing to consider is, if you take third quarter expenses and drag those to the right, what you do have to do is layer on top of those expenses, and we are at about $29 million to $30 million in operating expenses in the third quarter, you have a layer on top of that, transaction costs related to the two acquisitions that we announced, as well as integration costs, and just overall growth in costs and facilities expenses related to normal growth in our headcount. That’s what’s contributing to EBITDA being in the range of $3 million to $3.5 million.

182. According to CW2, Zillow had also been offering discounts during the Class Period

which Defendants knew would drive down its profitability going forward. For instance, during the

November 5, 2012 analyst conference call, Rascoff noted that several of Zillow’s acquisitions during

the Class Period had been designed, at least in part, to reduce Premier Agent churn: “So yes, it’s

early, for example on the agent website business, but as more of our Premier Agents roll out their

own websites from Diverse Solutions, the company that we acquired, we are seeing lower churn

from those agents.”

181. Defendants knew that in order to stem the tide of cancelling Premier Agents and to

grow marketplace revenue, Zillow had to substantially change its cost structure during the Class

Period, including by increasing its sales force and acquiring new operations intended to increase

Premier Agents’ ROI so that they would continue to purchase advertising from Zillow. When asked

by an analyst during the November 5, 2012 conference call why EBITDA had been substantially

reduced going forward, Cohen responded:

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to becoming a paying subscriber to the Premier Agent program. Providing these discounts, which

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had real costs to Zillow, resulted in further downward pressure on the Company EBITDA.

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183. Following the analyst conference call on November 5, 2012, Craig-Hallum published

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its Our Call coverage of the Company, wherein it lowered its stock price target for Zillow to $28

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from $38, citing concerns over future growth rates and “whether saturation level is beginning to be

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seen.” Craig-Hallum’s report further commented that Defendants’ guidance during the conference

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call “implies marketplace revenues will slow as well. By our estimates, the company’s guidance

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implies flat or only limited Premier Agent additions with a sequentially down ARPU.” The negative

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conditions driving this outlook had been present throughout the Class Period, but as alleged above,

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Defendants’ Class Period misstatements concealed and misrepresented Zillow’s true business

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conditions.

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184. As the market came to grips with the fact that Zillow had been unable to substantially

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increase it pricing for the Premier Agent program—due in large part to subscriber churn and refusal

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to pay Platinum level pricing—the price for Zillow stock corrected, as it tumbled 18% in value in a

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single day of trading.

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185. Defendants also acknowledged during the November 5, 2012 conference call that

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Zillow had been forced to adjust its new pricing structure so that existing Premier Agents would

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retain their exiting level of advertising exposure rather than have to pay increased costs to maintain

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that advertising. Thus, contrary to Rascoff’s prior representations that there had been a smooth

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transition to the new impressions based pricing model, he finally acknowledged that there were

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protracted discussions with existing Platinum Premier Agents over the impact of switching to the

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new pricing policy. Moreover, he admitted Zillow had been forced to grandfather in the existing

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level of impressions for existing subscribers in order to retain their business:

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I’d like to take a moment to describe how this [transition to new pricing plan] is happening. Since January, we have been reporting to Platinum Premier Agents their

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delivered impressions compared to their contracted levels to give them visibility into their performance. Many of our Platinum Premier Agents have experienced

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significant over-delivery versus their original contracted levels in the share of the voice basis, some as high as eight time or more for many months. We are working

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with each of our subscribing agents experiencing over-delivery in their percentage contracts to given them the opportunity to lock in their current level of bonus

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impressions, if they would to keep them, and pay for the additional amount. Our approach to these discussions are deliberate and staggered market by market. The

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dialogue is individualized and multi-step, not a flip of the switch .

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and efforts to replace them) is reflected in the increasing costs associated Zillow’s sales and

marketing activity. For instance, Zillow’s cost of sales and marketing increased 52% in 1Q12

compared to 1Q11. The sales and marketing cost increase was even more dramatic in 2Q12 when

there was 116% increase compared to the same quarter of the prior year. While Zillow disclosed its

increasing costs, it never revealed to investors that increased costs were being driven by churn in its

broker subscription business that had occurred in reaction to Zillow’s efforts to increase pricing for

subscription services.

187. On November 26, 2012, Morgan Stanley initiated analyst coverage of Zillow with a

report that noted: “Zillow’s pricing transition remains a key risk and could lead to agent churn, with

may lead to share price downside, offsetting the upside opportunity,” and “the greatest risk facing

the company near-term is higher than anticipated churn of Premier Agents.” The Report also stated:

“We believe the stock will trade off of both ARPU and number of Premier Agent Subscribers,

although we believe that [subscriptions] are more important near-term; ARPU will be increasingly

important in the mid-to-long-term.”

B. Disclosures Regarding Loss of Display Advertising Business

188

The November 5, 2012 press release also announced that the Company launched a

search feature on its website to help consumers get information about pre-foreclosures and

foreclosed homes. The press release failed to mention, however, that this product—which had been

in the works since at least the beginning of the Class Period—ended Zillow’s partnership with

Foreclosure.com, a key driver of the Company’s display advertising segment.

189. On the subsequent analyst conference call later that day, Rascoff revealed for the first

time that the Company was losing Foreclosure.com , and revealed that the Company’s plans to drop

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I Foreclosure.com had been planned for a substantial period of time. In his prepared remarks, Rascoff

I stated the following concerning the Company’s long-term development of the product that would

I replace Foreclosure.com:

Now, I’d like to cover a few significant consumer product developments during the quarter. First, two weeks ago, we introduced pre-market inventory to our home shopping search for the first time. Now, shoppers can find information on 1.2 million pre-foreclosures, which are homes where the owner has received a Notice of Default and foreclosed homes, in which the bank has ceased the homes, but it’s not yet on the market. Amassing this inventory nationwide, scrubbing and enhancing the data and offering it in a consumer intuitive mobile and web search took nearly a year of coordinated analytics, engineering and software development .

190. In the following Q&A with analysts, Rascoff was asked when the Company decided

to bring the foreclosure resources “in-house, as opposed to outsource it.” Rascoff reiterated that “the

entire product development initiative took a couple of quarters .”

191. Cohen also stated that the Company had ended its relationship with Foreclosure.com

due to the launch of Zillow’s own product, stating “[p]rior to this product, we received all of our

listings via an advertising relationship with Foreclosure.com . We no longer receive this revenue now

that we’ve launched this competitive product ourselves, which we believe is a far superior consumer

experience. However, because this relationship has ended, we will experience a near-term revenue

impact.”

192. As a result of the lower than expected guidance, driven by lower ARPU, the

substantial churn, and sudden announcement of the loss of Foreclsoure.com , Zillow’s stock

collapsed $6.22 per share to close at $28.15 per share on November 6, 2012, a one-day decline of

nearly 18% on very heavy volume of 7.4 million shares traded.

193. Analysts commented on the weak Q412 guidance and lowered price targets for the

Company following the announcement. On November 6, 2012 for example, Craig-Hallum lamented

the loss of advertising revenue from Foreclosure.com , and commented that the lowered guidance

“implies marketplace revenues will slow as well,” adding “[b]y our estimates, the company’s

guidance implies flat or only limited Premier Agent additions with a sequentially down ARPU

[average revenue per user].” Similarly, The Benchmark Company, LLC commented on the


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I “disappointing” 4Q12 guidance and highlighted the “soft display outlook and lower expectations for

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I PA [Premier Agent] additions .”

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IX. ADDITIONAL SCIENTER ALLEGATIONS

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194. As alleged herein, the Individual Defendants acted with scienter in that they:

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(a) knew or recklessly disregarded that the public documents and statements

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issued or disseminated in the name of the Company were materially false and misleading;

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(b) knew or recklessly disregarded that the documents or statements would be

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issued to the investing public; and

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(c) knowingly and substantially participated or acquiesced in the issuance or

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dissemination of such documents or statements in violation of the Exchange Act.

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195. The Individual Defendants each ran Zillow as a manager, director and/or control

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I person, dealing with important issues facing Zillow’s business, and controlled the grossly inflated

13 statements concerning Zillow’s ongoing business strategy and ability to generate revenue.

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196. The Individual Defendants, by virtue of their high-level positions with Zillow and/or

15 stock ownership, directly participated in the management of Zillow, were directly involved in the

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day-to-day operations of Zillow at the highest levels and were privy to confidential proprietary

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information concerning Zillow and its business, operations, products and services, growth, financial

18 metrics such as churn and ARPU, financial statements and financial condition and were aware of or

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deliberately disregarded that false and misleading statements were being made by and regarding the

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Company. Because of their positions with Zillow, each of the Individual Defendants had access to

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the adverse undisclosed information about Zillow’s business, financial condition and prospects and

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knew (or deliberately disregarded) that the adverse facts alleged herein rendered the positive

23 representations made during the Class Period materially false and misleading.

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197. Each Individual Defendant was personally familiar with the problems Zillow faced,

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I including issues concerning churn and ARPU, because they closely monitored Zillow’s revenue and

26 closely monitored the performance of Zillow’s operations via reports from Zillow’s Finance and

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Sales Departments, which were generated and provided to the Individual Defendants on a regular

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basis. The fact that Defendants could make public statements regarding the purportedly increasing

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pricing for subscriptions means that they received data regarding these metrics, including reports on

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ARPU. As a result, they knew the adverse information regarding static ARPU during the Class

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Period.

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198. As set forth elsewhere herein in detail, Defendants knowingly concealed from the

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I investing public Zillow’s long-held plans to roll out an in-house foreclosure tool and cancel its

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I revenue stream with Foreclosure.com .

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199. CWs have stated that they were told starting in February and March 2012, the

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beginning of the Class Period, that Zillow would be cancelling its business arrangement with

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Foreclosure.com. This is confirmed by public statements by Rascoff himself, where he confirmed

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that the plan to develop an in-house product to replace Foreclosure.com had been in the works for

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“nearly a year.”

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200. Defendants have also concealed the substantial churn that has plagued the Company,

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I forcing it to redouble its sales efforts to replace subscribers at a constant rate to continue to earn

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I revenues.

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201. Finally, the fact that the Individual Defendants profited substantially from sales of

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Zillow stock during the Class Period is further evidence that they acted with the intent to defraud the

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market. The Individual Defendants— in particular defendants Barton and Frink—reaped enormous

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profits through their sales during the Class Period: Barton gained over $42.2 million, Frink gained

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over $48.2 million, Rascoff gained over $2.1 million, and Cohen gained over $1.7 million, totaling a

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staggering $94.4 million in profits gained through stock sales by the Individual Defendants during

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the Class Period .

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202. While many of these trades were made on the open market, others were made

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I pursuant to 10b5-1 trading plans. The fact that these trades were made pursuant to a 10b5-1 plan,

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I however, does not obviate the Individual Defendants’ duty not to trade while in possession of

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material non-public information. 10b5-1 plans are under heavy scrutiny from the SEC in light of a

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recent Wall Street Journal investigation that found that insiders trading pursuant to 10b5-1 plans

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were still trading at opportune times and reaping better-than-expected results. According to the

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November 27, 2012 Wall Street Journal article entitled “Executives’ Good Luck in Trading Own

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Stock,” executives trading pursuant to 10b5-1 plans are still able to time their trades to avoid losses

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and increase earnings because trading plans are not public and can be canceled or amended at any

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time without disclosure.

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203. With regard to such trading plans, a December 13, 2012 Wall Street Journal article

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I entitled “Trading Plans Under Fire,” notes “[i]n building this ‘safe harbor’ for executives, the SEC

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I has unwittingly given them a defense for unethical behavior.” According to one source cited in the

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article, “[c]ompanies are using these plans as a tool . . . that allows executives to do insider trading.”

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204. Further, though the Individual Defendants filed Forms 4 disclosing their trades and

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indicating that they were made pursuant to 10b5-1 plans, no further information is available on the

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plans. Without discovery, investors cannot tell when the plans were created, when they were last

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amended, whether any trades pursuant to the plan were canceled, or what criteria, such as share

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price, triggered sales pursuant to the plans.

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205. Each of the Individual Defendants participated in or failed to prevent the false reports

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I regarding Zillow’s operational and financial condition during the Class Period to maintain the

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I Company’s high stock price to facilitate the sale of hundreds of millions of dollars of insiders’

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Zillow stock at artificially inflated prices.

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X. FRAUDULENT SCHEME AND COURSE OF BUSINESS

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206. Defendants are liable for: (i) making false and/or misleading statements; (ii) failing to

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disclose adverse facts known to them about Zillow; and (iii) participating in a fraudulent scheme and

24 course of business that operated as a fraud or deceit on purchasers of Zillow publicly traded

25 securities. Defendants’ fraud was a success, as it: (i) deceived the investing public regarding

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Zillow’s revenue, earnings, income from operations, net income, gross profit, net income per share,

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accounts receivable, interest income and stock-based compensation expense; (ii) deceived the

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investing public regarding Zillow’s accounting practices, revenue recognition practices and internal

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controls; (iii) artificially inflated the price of Zillow’s securities; and (iv) caused Lead Plaintiffs and

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other members of the Class to purchase Zillow publicly traded securities at inflated prices and be

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damaged thereby.

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XI. LOSS CAUSATION/ECONOMIC LOSS

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207. By misrepresenting its financial results and condition, Defendants presented a

8 misleading picture of Zillow’s business and prospects. Thus, instead of truthfully disclosing during

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the Class Period that Zillow was losing Foreclosure.com as a display advertiser and by failing to

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disclose that the Company was experiencing high churn, Defendants falsely reported the Company’s

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business condition and financial results.

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208. These false financial results caused and maintained the artificial inflation in Zillow’s

13 stock price throughout the Class Period.

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209. Defendants’ false and misleading statements had the intended effect and caused

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Zillow’s stock to trade at artificially inflated levels throughout the Class Period, reaching a Class

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Period high of over $46.17 per share.

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210. As alleged above, disclosures regarding reduced ARPU caused Zillow’s stock to

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decline on August 8 and 9 and in early October 2012.

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211. The truth about Zillow’s reduced and static ARPU and loss of Foreclosure.com and

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lower than expected guidance further shocked the market on the last day of the Class Period, causing

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I the stock to drop nearly 18% by the close of the next day.

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I XII. CLASS ACTION ALLEGATIONS

23 212. Lead Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal

24 Rules of Civil Procedure on behalf of all persons who purchased or otherwise acquired Zillow

25 publicly traded common stock and call options during the Class Period (the “Class”). Excluded from

26 the Class are defendants, the officers and directors of the Company, at all relevant times, members of

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their immediate families and their legal representatives, heirs, successors or assigns, and any entity

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in which defendants have or had a controlling interest.

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213. The members of the Class are so numerous that joinder of all members is

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impracticable. The disposition of their claims in a class action will provide substantial benefits to

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the parties and the Court. Zillow has approximately 27.3 million shares of Class A common stock

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outstanding, many of which were acquired during the Class Period, by hundreds if not thousands of

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persons.

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214. There is a well-defined community of interest in the questions of law and fact

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involved in this case. Questions of law and fact common to the members of the Class which

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predominate over questions which may affect individual Class members include:

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(a) whether Defendants violated the Exchange Act;

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(b) whether Defendants omitted and/or misrepresented material facts;

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(c) whether Defendants’ statements omitted material facts necessary to make the

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statements made, in light of the circumstances under which they were made, not misleading;

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(d) whether Defendants knew or deliberately disregarded that their statements

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were false and misleading;

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(e) whether the prices of Zillow publicly traded securities were artificially

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I inflated; and

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(f) the extent of damage sustained by Class members and the appropriate measure

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of damages.

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215. Lead Plaintiffs’ claims are typical of those of the Class because Lead Plaintiffs and

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the Class sustained damages from Defendants’ wrongful conduct.

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216. Lead Plaintiffs will adequately protect the interests of the Class and has retained

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counsel who are experienced in class action securities litigation. Lead Plaintiffs have no interests

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which conflict with those of the Class.

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217. A class action is superior to other available methods for the fair and efficient

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adjudication of this controversy.

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XIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

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5 218. At all relevant times, the market for Zillow securities was an efficient market for the

6 following reasons, among others:

7 (a) Zillow securities met the requirements for listing, and was listed and actively

8 traded on the NASDAQ Capital Market, a highly efficient and automated market;

9 (b) As a regulated issuer, Zillow filed periodic reports with the SEC and the

10 I NASDAQ;

11 (c) Zillow regularly communicated with public investors via established market

12 communication mechanisms, including through regular disseminations of press releases on the

13 national circuits of major newswire services and through other wide-ranging public disclosures, such

14 as communications with the financial press and other similar reporting services; and

15 (d) Zillow was followed by several securities analysts employed by major

16 brokerage firms who wrote reports which were distributed to the sales force and certain customers of

17 their respective brokerage firms. Each of these reports was publicly available and entered the public

18 marketplace.

19 219. As a result of the foregoing, the market for Zillow securities promptly digested

20 current information regarding Zillow from all publicly available sources and reflected such

21 information in the prices of the securities. Under these circumstances, all purchasers of Zillow

22 securities during the Class Period suffered similar injury through their purchase of Zillow securities

23 at artificially inflated prices, and a presumption of reliance applies.

24 XIV. NO SAFE HARBOR

25 220. The statutory safe harbor provided for forward-looking statements under certain

26 circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as and were not “forward-looking

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E L . HAGENS BERMAN


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statements” when made. To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Alternatively, to the

extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein,

defendants are liable for those false forward-looking statements because at the time each of those

forward-looking statements was made, the particular speaker knew that the particular forward-

looking statement was false, and/or the forward-looking statement was authorized and/or approved

by an executive officer of Zillow who knew that those statements were false when made.

XV. CAUSES OF ACTION

COUNT I

For Violation of Section 10(b) of the Exchange Act and Rule 10b-5(a), (b) & (c) Promulgated Thereunder

Against All Defendants

221. Lead Plaintiffs repeat and reallege each and every allegation contained above as if

I fully set forth herein.

222. During the Class Period, Defendants participated in the preparation of and/or

disseminated or approved the false statements specified above, which they knew or deliberately

disregarded were misleading in that they contained misrepresentations and failed to disclose material

facts necessary in order to make the statements made, in light of the circumstances under which they

were made, not misleading.

223. Defendants violated §10(b) of the Exchange Act and Rule 10b-5(a) and (c) in that

I they employed devices, schemes and artifices to defraud and engaged in acts, practices and a course

I of business that operated as a fraud or deceit upon Lead Plaintiffs and others similarly situated in

connection with their purchases of Zillow publicly traded securities during the Class Period.

224. Defendants also violated §10(b) of the Exchange Act and Rule 10b-5(b) in that they

I made untrue statements of material facts or omitted to state material facts necessary in order to make

I the statements made, in light of the circumstances under which they were made, not misleading.




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225. Defendants, individually and together, directly and indirectly, by the use, means or

I instrumentalities of interstate commerce and/or the mails, engaged and participated in a continuous

course of conduct to conceal the truth and/or adverse material information about the business,

I operations and future prospects of Zillow as specified herein.

226. Defendants employed devices, schemes and artifices to defraud, while in possession of

I material, adverse, non-public information and engaged in acts, practices, and a course of business

which operated as a fraud and deceit upon the purchasers of Zillow securities during the Class Period.

227. Defendants had actual knowledge of the misrepresentations and omissions of material

fact set forth herein, or recklessly disregarded the true facts that were available to them. Defendants’

misconduct was engaged in knowingly or with reckless disregard for the truth, and for the purpose

and effect of concealing Zillow’s true financial condition from the investing public and supporting

the artificially inflated price of Zillow’s securities.

228. Lead Plaintiffs and the Class have suffered damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for Zillow publicly traded securities.

Lead Plaintiffs and the Class would not have purchased Zillow publicly traded securities at the prices

they paid, or at all, had they been aware that the market prices for Zillow’s securities had been

artificially inflated by Defendants’ materially false and misleading statements.

COUNT II

For Violation of Section 20(a) of the Exchange Act Against the Individual Defendants

229. Lead Plaintiffs repeat and reallege each and every allegation contained above as if

fully set forth herein.

230. The Individual Defendants acted as controlling persons of Zillow within the meaning

of §20(a) of the Exchange Act. By reason of their positions with the Company, and their ownership

of Zillow securities, the Individual Defendants had the power and authority to cause Zillow to

engage in the wrongful conduct complained of herein. Zillow controlled the Individual Defendants

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I and all of its employees. By reason of such conduct, the Individual Defendants are liable pursuant to

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§20(a) of the Exchange Act.

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XVI. PRAYER FOR RELIEF

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WHEREFORE, Lead Plaintiffs pray for judgment as follows:

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A. Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;

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B. Awarding Lead Plaintiffs and the members of the Class damages, including interest;

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C. Awarding Lead Plaintiffs reasonable costs and expenses incurred in this action,

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including attorneys’ fees and expert fees; and

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D. Awarding such equitable/injunctive or other relief as the Court may deem just and

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I proper.

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JURY TRIAL DEMANDED

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Lead Plaintiffs hereby demand a trial by jury.

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DATED: June 24, 2013 HAGENS BERMAN SOBOL SHAPIRO LLP

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/s/ Steve W. Berman Steve W. Berman, WSBA #12536

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/s/ Karl P. Barth Karl P. Barth, WSBA #22780

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1918 Eighth Avenue, Suite 3300 Seattle, WA 98101

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Telephone: (206) 623-7292 Facsimile: (206) 623-0594

19 [email protected] [email protected]

20 Liaison Counsel

21 LEVI & KORSINSKY LLP

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Nicholas I. Porritt Thomas M. Gottschlich

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1101 30th Street NW, Suite 115 Washington, DC 20007

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Telephone: (202) 524-4290 Facsimile: (202) 337-1567

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Email: [email protected] Email: [email protected]

26 Lead Counsel for Plaintiff

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CERTIFICATE OF SERVICE

On June 24, 2013, I caused to be electronically filed the foregoing with the Clerk of the Court using the CM/ECF system, which will send notification of such filing to the following attorneys of record:

• Karl Phillip Barth [email protected] ,[email protected],[email protected]

• Ronald L Berenstain [email protected] ,[email protected],[email protected]

• Steve W. Berman [email protected],[email protected],[email protected]

• Francis A. Bottini , Jr [email protected]

• Clifford A Cantor [email protected],[email protected]

• Brian Edward Cochran [email protected] ,[email protected]

• Jonathan Gardner [email protected]

• Mark S. Goldman [email protected] ,[email protected]

• Sean C Knowles [email protected],[email protected],[email protected] m

• Angelina Nguyen [email protected],[email protected]

• Nicholas I. Porritt [email protected]

• Darren J Robbins [email protected]

• David C Walton [email protected],[email protected]

/s/ Karl P. Barth Karl P. Barth, WSBA #22780


HAGENS BERMAN

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