Shupe v. Rocket Companies, Inc.

660 F.Supp.3d 647

Carl SHUPE, individually and on behalf of all others similarly situated, Plaintiffs, v. ROCKET COMPANIES, INC., Jay Farner, Julie Booth, Robert Walters, Daniel Gilbert, and Rocket Holdings, Inc., Defendants.

Case No. 1:21-cv-11528

United States District Court, E.D. Michigan, Northern Division

Order Denying Reconsideration June 30, 2023

Signed March 8, 2023

James P. Allen, Schenk & Bruetsch PLC, Detroit, MI, Carol C. Villegas, David Saldamando, Labaton Sucharow LLP, New York, NY, for Plaintiff Carl Shupe.

Carol C. Villegas, Labaton Sucharow LLP, New York, NY, for Plaintiff Matthew Pearlman.

Jeffrey B. Morganroth, Morganroth & Morganroth, Birmingham, MI, Jeffrey Thomas Scott, Julia A. Malkina, Sharon Leigh Nelles, Sullivan & Cromwell LLP, New York, NY, for Defendants Rocket Companies, Inc., Jay Farner, Daniel Gilbert.

Jeffrey B. Morganroth, Morganroth & Morganroth, Birmingham, MI, for Defendant Rock Holdings Inc.

OPINION AND ORDER GRANTING IN PART PLAINTIFFS' MOTION TO STRIKE AND GRANTING IN PART DEFENDANTS' MOTION TO DISMISS

THOMAS L. LUDINGTON, United States District Judge

Plaintiffs have brought a class action against Rocket Companies and some of its officers and directors. Plaintiffs allege that, between February 25 and May 5, 2021, Defendants artificially inflated the price of Rocket Class A common stock by publicly misrepresenting numerous adverse facts, violating the Securities Exchange Act. Plaintiffs also allege that the Chief Executive Officer and controlling shareholder, Daniel Gilbert, traded securities using insider information.

Defendants filed a motion to dismiss, but their reply brief incorporated an analyst report that Plaintiffs did not submit or discuss. So Plaintiffs filed a motion either to strike the report or to convert the motion to dismiss to a summary-judgment motion.

The questions presented are whether Defendants' motion to dismiss must be converted to a summary-judgment motion, whether Plaintiffs have adequately alleged that Defendants made material misrepresentations in violation of the Securities Exchange Act, and whether Plaintiffs have adequately alleged that Daniel Gilbert committed insider trading.

I. BACKGROUND

In this securities-fraud class action, numerous shareholders of Rocket stock (NYSE:RKT) have sued Daniel Gilbert and Rocket Holdings (RHI),¹ Rocket Companies (RCI), and some of RCI's senior officers and directors: Jay Farner,² Julie Booth,³ and Robert Walters.⁴ ECF No. 42.

A.

In June 2021, Zoya Qaiyum brought this case under 15 U.S.C. § 78j(b), t(a) and 17 C.F.R. § 240.10b-5. ECF No. 1. The next month, District Judge Paul D. Borman recused himself from the case, which was then randomly reassigned to District Judge Judith E. Levy. ECF No. 4.

In August 2021, six plaintiffs from later-filed Case No. 5:21-CV-11618 filed five motions to consolidate that case with this case, as well as to be appointed as the lead or colead plaintiff under 15 U.S.C. § 78u-4(a)(3)(B)(i), as amended by the Private Securities Litigation Reform Act of 1995 (PSLRA). See ECF Nos. 10; 13; 14; 15; 16.

In April 2022, Judge Levy consolidated the cases under Federal Rule of Civil Procedure 42(a)(2) but did not determine the lead plaintiff under the PSLRA. See ECF Nos. 30; 31. Two days later, the case was randomly reassigned to the undersigned so that Judge Levy could "effectively manage the ongoing Flint water cases." E.D. Mich. Admin. Order 22-AO-024 (effective Apr. 19, 2022); see also In re Flint Water Cases, No. 5:16-CV-10444 (E.D. Mich. Feb. 23, 2023).

In May 2022, Qaiyum voluntarily dismissed her complaint and Carl Shupe was appointed as Lead Plaintiff of the Rocket Class. Shupe v. Rocket Cos., 601 F. Supp. 3d 214, 217 n.1, 221 (E.D. Mich. 2022). A month later, Plaintiffs filed the Second Amended Complaint, alleging that:

• Gilbert and RHI violated 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5 (Count I);

• Gilbert and RHI violated 15 U.S.C. § 78t-1 (Count II);

• RCI, Farner, Booth, Walters, and Gilbert violated 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5 (Count III); and

• RHI, Farner, Booth, Walters, and Gilbert violated 15 U.S.C. § 78t (Count IV).

ECF No. 42 at PageID.1165-74.

Seventeen days later, Defendants filed a motion to dismiss, ECF No. 44, which has been fully briefed, ECF Nos. 49; 50. In response to the Motion to Dismiss, Plaintiffs filed a motion to strike Defendants' reply or, alternatively, to deny the Motion to Dismiss as a premature motion for summary judgment because there has been no discovery in this case. ECF No. 51.

As required in the review of a motion to dismiss, Plaintiffs' factual allegations are assumed true and all reasonable inferences drawn from those factual allegations are in Plaintiffs' favor. Waskul v. Washtenaw Cnty. Cmty. Mental Health, 979 F.3d 426, 440 (6th Cir. 2020).

B.

Rocket Mortgage is the largest mortgage lender in the United States. Rocket lends funds, secured by mortgages, to its customers. ECF No. 42 at PageID.1031. Its most profitable business is "repackaging and selling" the customers' loans to government-sponsored enterprises (GSE), which sell the loans as mortgage-backed securities on a secondary market. Id. at PageID.1032.

Rocket capitalizes on what the mortgage industry calls the "primary-secondary spread": the difference between mortgage rates for borrowers (the primary rate) and the GSEs' yields on mortgage-backed securities (the secondary rate). Andreas Fuster et al., The Rising Gap Between Primary and Secondary Mortgage Rates, 19 ECON. POL'Y REV. 27 (2013). According to Plaintiffs, this spread substantially reflects the premium that the GSEs will pay for Rocket's loans in the future, after adjusting for other components like the guarantee fee⁵ and the servicing fee.⁶ ECF No. 42 at PageID.1101. Rocket uses this formula, Plaintiffs add, to approximate the profit margins of future loans. Id.

Plaintiffs allege that, during the Class Period (February 25-May 5, 2021), Defendants violated the Securities Exchange Act by making seven "false and misleading statements to the market about Rocket's" key performance metrics. See id. at PageID.1031-32.

Statements 1 and 2. On February 25, 2021, Rocket held an Earnings Call.⁷ Morgan Stanley Analyst James Faucette asked Defendant Farner to "help shed some light on what we should expect in terms of new applications and growing—continuing to grow the business—particularly in the rising rate environment.... And where should we be particularly sensitive?" Id. at PageID.1123-24. Farner responded that Rocket is "seeing strong consumer demand, especially in the housing market.... the strongest that it's been here in the last decade," and that "overall, [Rocket was] able to grow volume twice as fast as the industry in 2020." Id. at PageID.1124 (emphasis omitted).

In a follow-up to Defendant Booth's "very specific guidance for the first quarter" of 2021, a Morgan Stanley analyst asked: "How should we think about, particularly the evolution of gain on sale through the course of the year, at least directionally? And any color ... about like what the current environment is for selling of loans and how you're anticipating that, roughly, to evolve over the year?" Id. at PageID.1124. Booth replied that Rocket is "still in a very strong demand environment" and is "still seeing strong closed loan volume.... in Q4 of $107 billion and then looking ahead into Q1, between $98 million and $103 billion," which "would be the second biggest quarter in [Rocket's] history." Id. at PageID.1124-25 (emphasis omitted).

Statement 3. Later in the same Earnings Call, Goldman Sachs Analyst Ryan Matthew Nash asked Farner to discuss the "competitive dynamics [Rocket is] seeing given the changing [interest] rate backdrop," particularly "in the context of the direct-to-consumer and the partner segments." Id. at PageID.1126. Farner responded that the rising interest rates will give Rocket "an opportunity ... to lean in to spend more money," and that in "the retail or Direct-to-Consumer space," Rocket "[does not] see interest rates going up or down, really having an impact on [its] business one way or the other." Id. at PageID.1126-27 (emphasis omitted).

Statement 4. On March 3, 2021, Morgan Stanley held a virtual conference. "[A] Morgan Stanley analyst asked Farner about the growth rate for Rocket's business channels." Id. at PageID.1129. Farner responded that "you can probably sense from [his] passion, they're all growing." Id. at PageID.1129-30 (emphasis omitted).

Statement 5. On March 11, 2021, a representative of Fox Business asked Farner "whether it was 'good for Rocket Companies' that the effects of the pandemic were winding down." Id. at PageID.1131-32. Farner responded "You know, we're going to see interest rates tick up a little bit here," which Rocket takes "as an opportunity to grow.... So, really, interest rates moving around are a great benefit to [Rocket]." Id. at PageID.1132 (emphasis omitted). The same is true, he added, "when they drop back down." Id.

Statements 6 and 7. On March 17, 2021, Farner "boasted on Twitter that [Rocket] has increased its market share and that volume from third-party originators had increased." Id. at PageID.1134. Specifically, he tweeted, "Volume is up significantly at [Rocket]! Thank you partners. #BrokersCan[.]" Id. Defendant Gilbert retweeted this post two days later.⁸ Id.

C.

Plaintiffs contend that, as RHI's CEO and Board Chairman, Gilbert committed insider trading by selling Rocket shares with the permission of Rocket's Board, illustrated by ten details:

First. On March 3, 2021, 26 days before Gilbert sold his shares, Rocket CEO Farner publicly stated that Rocket had yet to sell any shares since going public "because [they] believe strongly in the future of what [they were] building." Id. at PageID.1149 (emphasis omitted).

Second. On March 23, 2021, Rocket's Board of Directors gave Gilbert a material, nonpublic report projecting that, during 2021, Rocket would lose (1) 0.31% of...