On January 21, 2021, Judge Stanley R. Chesler of the United States District Court for the District of New Jersey dismissed with prejudice a putative class action asserting claims under the Securities Exchange Act of 1934 against a real estate services company and certain of its current and former executives. Tanaskovic v. Realogy Holdings Corp., No. 19-cv-15053, slip op. (D.N.J. Jan. 21, 2021). Plaintiff alleged that the company made misrepresentations concerning: (1) the effect of increased commissions paid to its agents; (2) technology offerings; (3) the company's acquisition strategy; and (4) allegedly anticompetitive behavior that inflated the company's average commissions. The Court held that the alleged misstatements were either not alleged to be false with the required particularity or were otherwise not actionable.
With respect to the increased commissions paid to its agents, plaintiff contended that the company represented that commissions would not increase further than they had, that any negative impact on the company's profitability would be short-term, and that the initiative could be maintained while also leading to sustainable growth and increased profitability. Slip op. at 9-10. The Court determined that statements plaintiff pointed to as supposedly providing assurances that the commission payments would not increase were taken out of context, and that plaintiff's assertions did not establish that the statements were false. Id. at 10–11. Similarly, the Court explained that plaintiff's challenges to statements regarding the short-term impact of the initiative and the path to sustainable growth were based on conclusory and unsupported assertions, id. at 13-15, and amounted to impermissible pleading of “fraud by hindsight,” id. at 21.
In addition, the Court rejected plaintiff's claims that the company misled investors by touting the company's technology initiative, which was designed to provide new technology and data-driven products for its agents, without disclosing that the technology was outdated. Id. Again, the Court determined that plaintiff's assertions of obsolescence were conclusory and unsupported by any factual allegations that the technology was outdated. Id. at 21-22. Moreover, while plaintiff claimed that statements by company executives showed that the technology was outdated, the Court disagreed, and further noted that to the extent one statement was critical of the technology, when read in context, it was a criticism of the entire real estate industry and not the company in particular. Id. at 23-24.
Next, the Court addressed the company's statements that it was shifting to organic growth strategies from a prior acquisition-focused strategy. Plaintiff alleged the statements were misleading because they failed to disclose the inefficiencies that had been caused by the company's previous acquisitions. Id. at 25. Here, too, the Court concluded that plaintiff's allegations of inefficiencies were conclusory and unsupported by any factual allegations, and that assertions based on an executive's statements were taken out of context and did not show that the acquisitions had not been effectively integrated. Id. at 25-27.
Finally, the Court also dismissed plaintiff's claims that the company had failed to disclose that the stability of average commissions reported was due to allegedly anticompetitive conduct to keep that rate artificially high. Id. at 27. Specifically, plaintiff asserted that the stability was due to an anticompetitive scheme in the real estate industry whereby, for properties listed in the primary industry database, the seller's broker or agent would make a blanket, non-negotiable offer for how much of the commission would be shared with any buyer's broker or agent, which plaintiff alleged led to inflated buyer's agent commissions by eliminating competition among buyer's agents. Id. at 27-28. In support of this assertion, plaintiff pointed to two class action lawsuits brought against several real estate brokerage firms, including the company, as well as the fact that the DOJ subsequently announced an investigation into anticompetitive practices in the industry generally. Id. at 28. The Court concluded, however, that the existence of these lawsuits and the investigation, standing alone, were insufficient to establish falsity of the alleged misstatement. While noting that plaintiff was not required at the pleading stage to establish that defendants actually engaged in anticompetitive behavior, it nevertheless was required to plead facts supporting that conclusion with particularity. Here, though, plaintiff merely relied on the other lawsuits and the DOJ investigation without pleading with any specificity “the who, what, when, where and how” of the purported anticompetitive behavior. Id.
The Court also noted that various of the challenged statements were not actionable for other reasons, including that they were forward-looking statements accompanied by meaningful cautionary language, statements of opinion, or puffery. Id. at 31, 33, 38. While plaintiff argued that some forward-looking statements were nevertheless actionable because they were based on then-present facts, the Court disagreed, noting that for such statements—for example, that “we see no reason to think [the guidance for the commissions paid to our agents] [i]s any higher than that”—any “present-tense aspect” was “too vague to be actionable and cannot be separated from the future projection.” Id. at 33.
Given that plaintiff had already amended its complaint and there was no indication that further amendment could cure the deficiencies found by the Court, the Court denied leave to amend and dismissed the action with prejudice. Id. at 41.
Originally Published by Shearman & Sterling, January 2021
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