The Real Deal New York

Valuation challenges

Sometimes company valuations don’t just raise eyebrows — they prompt lawsuits
By Kevin Sun | December 01, 2018 10:00AM

While company valuations often raise industry eyebrows, they can also result in legal action. Sometimes there are legitimate allegations of improper activity — with a firm cooking the books. Other times, enterprising plaintiffs’ lawyers sue when a company’s stock price plummets, or investors take action when they believe they’ve been deceived. Below are three real estate valuation cases from different time periods that ended with varying results.

Related: Valuation inflation

Cendant Corporation
1998 (Settled)

Call it a bad marriage. Cendant Corporation was formed in December 1997, when Henry Silverman’s Hospitality Franchise Systems merged with direct-marketing company CUC International in a $14 billion deal. The company provided a variety of business and consumer services ranging from real estate and hospitality to car rental and video games.

But in 1998, just a few months after the merger, Cendant announced that it had discovered massive accounting irregularities in CUC’s books — including a $100 million overstatement of earnings for 1997. Further investigations uncovered a pattern of fraudulent accounting at CUC that went back more than a decade.

Soon after the revelations, shareholders sued Cendant, alleging that the false financial statements artificially inflated the company’s value.

In December 1999, Cendant settled with shareholders for over $3 billion — the largest such settlement in U.S. history at the time. While that unfortunate record has been broken several times since — Enron settled a $7.2 billion case with shareholders and investors in 2010 — it still ranks as the fourth-largest case of its kind.

In 2006, Cendant’s real estate division was spun off as Realogy, parent company to the Corcoran Group, Citi Habitats, Sotheby’s International Realty and a number of other brokerages. The hospitality division was likewise spun off as Wyndham Worldwide.

CUC’s founder and CEO, Walter Forbes, was sentenced to 12 years in federal prison in 2007. He was released this July.

Zillow group
2012 and 2017 (Dismissed)

Most New York City real estate players know about the broker backlash Zillow has faced in the five boroughs. But the online listings giant has also faced investor lawsuits in recent years, including two securities class actions filed after major drops in its stock price. But both lawsuits were dismissed.

The first of them, which was filed in 2012, came on the heels of disappointing third-quarter financial results, which caused a single-day stock drop of 18 percent.

Shareholders alleged that Zillow had concealed difficulties in signing up new brokers for its Premier Agent program, and the churn it was facing among agents who were already subscribers. Zillow adamantly denied that it had tried to conceal anything. And in 2014, a federal judge in Seattle dismissed the case with prejudice because the plaintiffs were unable to demonstrate fraudulent intent.

A second lawsuit, filed in 2017, alleged that Zillow failed to disclose that its co-marketing program — which allowed Premier Agents to invite “Premier Lenders” to share advertising costs and appear alongside them — was under investigation by the Consumer Financial Protection Bureau. Though the company was made aware of the investigation in 2015, it did not inform investors until March 2017. Zillow’s share price fell 15 percent in the two days after the news became public.

The CFPB investigation was closed this June, and the class action was dismissed in October. According to the judge, the plaintiffs failed to prove that Zillow knowingly violated the laws that had led to the investigation.

Apart from these class actions initiated by shareholders, Zillow also faced a class action from homeowners in the Chicago area over its controversial Zestimate tool. That lawsuit was dismissed this year as well.

American Realty Capital Properties
2014 (Ongoing)

This Arizona-based REIT, now known as VEREIT, was embroiled in a high-profile accounting scandal in October 2014 when it announced that it had discovered errors in its financial statements. The company’s audit committee found that the REIT had overstated revenue and understated losses — and that some of the mistakes were intentionally left uncorrected.

Executive Chairman Nicholas Schorsch and CEO David Kay were forced to resign, while CFO Brian Block was sentenced to 18 months in prison.

Before the scandal, American Realty Capital had been on an aggressive buying spree. In the first quarter of 2014 alone, it bought $1 billion worth of NYC real estate. And at one point the company was the largest single-tenant landlord in the country.

In addition to the primary class action lawsuit, VEREIT was also sued by Vanguard (whose lawsuit represented the second-largest share of VEREIT stock) and faced 12 “opt out” cases involving plaintiffs who qualified to join the class action but chose to sue separately instead.

In June 2018, VEREIT settled the suit with Vanguard for $90 million. But its total settlements are now up to $217.5 million. The company has, however, avoided prosecution from regulators.