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Rocket Companies scored a win in a derivative lawsuit alleging insider trading by its primary stakeholder, Rocket Holdings, Inc. (RHI), an entity owned by founder and chairman Dan Gilbert, and its board of directors.
The lawsuit stemmed from two complaints, one filed by the Doris Shenwick Trust in November 2021 and another by investor Christopher Vargoshe in February 2022. The plaintiffs claimed Gilbert pocketed $500 million by selling company stock ahead of Rocket reporting poor earnings and guidance. The case was heard in the Delaware Chancery Court.
Following a three-day trial, Judge Kathaleen McCormick ruled that the plaintiffs “did not prove motive” behind the allegations, according to court documents released on Monday. Representatives for Rocket and the plaintiffs did not reply to HousingWire‘s requests for comments.
McCormick noted that to prove insider trading, plaintiffs must show that the defendant possessed material, nonpublic information and traded motivated by the substance of that information.
“The plaintiffs claim material, nonpublic information concerning a projected decline in a key financial metric motivated RHI to sell $500 million worth of stock on March 29, 2021. But the plaintiffs did not prove motive. This decision enters judgment for RHI,” Judge McCormick wrote in her ruling.
The trial, held from May 20 to May 22, 2024, included 427 exhibits, live testimony from seven fact and four expert witnesses, and deposition testimony from 18 additional witnesses.
According to the plaintiffs, on March 29, 2021 — six days after a board meeting and two days before the end of Rocket’s Q1 2021 — Gilbert sold $500 million in Rocket stock “despite having actual or constructive knowledge of material, non-public information about Rocket.”
The information in question included a March 9 Compass report forecasting a 2021 gain-on-sale margin of 3.47% — below the market consensus of 3.54% — and a March 23 board presentation reflecting management’s year-end prediction of a 3.19% margin, also below analyst expectations.
According to Securities and Exchange Commission (SEC) filings, Gilbert sold 20.2 million Rocket shares at $24.75 each on March 29.
According to the lawsuit, on May 5, Rocket released its first quarter of 2021 earnings and second quarter of 2021 guidance, reporting projected loan volume of $82.5 billion to $87.5 billion and gain-on-sale margins between 2.65% and 2.95%. Following this announcement, Rocket’s stock dropped to $19.01 on May 6, the lawsuit noted.
However, the court determined that the timeline did not show that Rocket leadership was motivated by the Compass report or board presentation when selling shares. The stock sale was led by then-CEO Jay Farner and Chief Investment Officer Scott Elking.
Rocket went public in August 2020, when RHI sold roughly 6% of its equity in an initial public offering. The company had targeted raising $3.5 billion but ultimately raised only $2 billion, prompting plans for a secondary offering.
In October 2020, Rocket filed a confidential secondary prospectus with the SEC. Morgan Stanley advised pricing shares between $24 and $30 to avoid negative impact on Rocket’s stock, a range only achieved due to the collapse of Archegos Capital Management.
“Farner and Elkins put the wheels in motion when the trading window opened on March 1, prepared to ‘pull the trigger’ mid-way through the trading window when the stock price started to rise, sought formal approval mid-way through the window, and involved internal counsel, external counsel, and the independent Audit Committee members in a sale process with a documented paper trail,” Judge McCormick wrote in her ruling.
McCormick added: “It was not until Archegos collapsed on March 26, and Farner and Elkins were positive that Rocket’s trading price would support a sale price in the mid-$20s, that Farner approved the sale.”
