Detroit-based Rocket Companies was hit Tuesday with a shareholder lawsuit accusing the firm and its executives of giving misleading guidance that the suit says artificially boosted Rocket's stock price in the weeks before founder Dan Gilbert sold $500 million in stock to finance a major philanthropic effort in the city's neighborhoods.
The lawsuit, filed in U.S. District Court in Detroit, claims that Rocket executives were extremely optimistic to the point of deception and fraud earlier this year when forecasting the anticipated "gain on sale" margin for its mortgage loans. The gain on sale margin is commonly viewed by investors as a core measure of profitability.
But once the May 5 release of Rocket's first-quarter earnings results showed these margins were shrinking fast, the company's stock price dropped to $19.01 per share from $22.80 per share in a day.
During that May earnings call, Rocket's Chief Financial Officer Julie Booth "admitted" that the trend toward shrinking gain on sale margins began "at the end of Q1," the lawsuit says. The shrinking margins are the result of increased competition among lenders and compression in the price spread between the primary and secondary mortgage market, among other factors, the suit says.
Rocket said during the May earnings call that it was on track for a 2.65% to 2.95% gain on sale margins for the second quarter. Previously, it had a 4.41% margin in the fourth quarter 2020 and 3.74% in the first quarter of this year.
That timing of Rocket's contracting margins is a key fact, according to the lawsuit, because on March 29 — two days before the end of the first quarter and well before news of the contraction was publicized — Gilbert and his wife sold 20.2 million Rocket shares at $24.75 to net $500 million in proceeds for their Detroit neighborhoods initiative. The 10-year initiative includes an initial $15 million to cover low-income Detroiters' delinquent property taxes.
A Rocket Companies representative did not respond to a request for comment Tuesday night. Gilbert, who is Rocket's chairman, is also a defendant.
The lawsuit's plaintiff, Zoya Qaiyum, bought 500 Rocket shares at $36.19 on March 2. Her lawsuit seeks class action status on behalf of anyone who bought Rocket stock between Feb. 25 and May 5. She is represented by three law firms, including The Miller Law Firm in Rochester belonging to E. Powell Miller.
Attorney Sharon Almonrode of The Miller Law Firm declined comment.
Rocket Companies went public last August at $18 per share on the New York Stock Exchange and, buoyed by historically low mortgage rates and a refinancing boom, enjoyed its most profitable year ever in 2020 with $9 billion in profit.
