[00:00:02] Speaker 03:
And before we get started, Mr. Gilmore, thank you for stepping up.

[00:00:07] Speaker 03:
Appreciate it.

[00:00:43] Speaker 01:
Morning.

[00:00:45] Speaker 01:
May it please the court, Peter Morrison on behalf of the appellants.

[00:00:49] Speaker 01:
I'd like to reserve three minutes for rebuttal.

[00:00:52] Speaker 01:
The district court wrongly applied a loss causation standard to assess whether defendants demonstrated a lack of price impact sufficient to rebut the presumption of reliance.

[00:01:03] Speaker 01:
That was error.

[00:01:04] Speaker 01:
The Supreme Court has explained in Halliburton 1

[00:01:07] Speaker 01:
that loss causation is a quote distinct concept in securities laws.

[00:01:11] Speaker 01:
It is not price impact.

[00:01:14] Speaker 01:
The Second Circuit has addressed the issue and explained that the standard for price impact

[00:01:18] Speaker 01:
is different than the standard for loss causation, explaining that the Supreme Court's decision in Goldman, quote unquote, requires a closer fit for price impact than is required for loss causation.

[00:01:31] Speaker 01:
This makes complete sense, Your Honors.

[00:01:34] Speaker 01:
This is a very specific type of securities case.

[00:01:36] Speaker 01:
It's a price maintenance case or an inflation maintenance case.

[00:01:41] Speaker 01:
In this case,

[00:01:42] Speaker 01:
The plaintiff doesn't argue that the stock price rose based on a misstatement.

[00:01:48] Speaker 01:
The stock price stayed the same.

[00:01:49] Speaker 01:
And the plaintiff is arguing that the misstatement prevented the stock line from declining.

[00:01:55] Speaker 01:
Well, in that instance, it's really difficult to determine whether there's been price impact, because the stock didn't move.

[00:02:01] Speaker 01:
If it had risen, we could fight about whether or not there was price impact.

[00:02:05] Speaker 01:
Here, it didn't.

[00:02:06] Speaker 01:
So what the plaintiff does goes forward in time,

[00:02:09] Speaker 01:
finds a back-end disclosure and a price drop, and then argues that that back-end drop is a proxy for the front-end price maintenance.

[00:02:21] Speaker 00:
Well, isn't that a permissible theory if there's a match between the alleged false statement and the corrective statement?

[00:02:30] Speaker 01:
Yes, Your Honor.

[00:02:31] Speaker 01:
That's exactly where I'm going.

[00:02:32] Speaker 00:
There's nothing wrong with the concept in the abstract.

[00:02:37] Speaker 01:
We have not taken the position that inflation maintenance is impermissible, per se.

[00:02:42] Speaker 01:
But, Your Honor, even though we haven't challenged the

[00:02:46] Speaker 01:
inflation maintenance, the theory is inherently tenuous.

[00:02:50] Speaker 01:
And to your point, it only works if the so-called later backend disclosures are a close fit

[00:02:59] Speaker 01:
to the earlier so-called front-end disclosures by revealing what the front-end disclosures supposedly concealed.

[00:03:07] Speaker 01:
Without that close connection, there's no basis to accept an inference that the back-end drop should serve as a proxy to tell the court how the stock would have reacted on the front-end had the statements been what the plaintiffs say they should have been.

[00:03:22] Speaker 01:
Rather than apply Goldman's mismatch standard here, Your Honors, the district court applied a far broader loss causation, collapsing loss causation and reliance.

[00:03:31] Speaker 00:
What was the back end disclosure here in your view?

[00:03:35] Speaker 00:
How would you describe it?

[00:03:37] Speaker 01:
So the back end disclosure that they talk about is the revelation, in their words, the revelation that Zillow couldn't get its pricing right in its eye buying business.

[00:03:50] Speaker 00:
Well, that seems to me to be a fit because at the beginning Zillow bragged about the wonderful algorithm, I guess is the right word.

[00:04:08] Speaker 00:
We have this fabulous algorithm that's going to tell us so precisely what the value is and we are bragging about our ability to renovate.

[00:04:20] Speaker 00:
And those turned out to be false or at least that's the allegation because there was this so-called overlay where the algorithm didn't work all by itself and the renovations didn't work because they stopped using the contractors.

[00:04:38] Speaker 00:
So I'm not really sure why you think there's a mismatch.

[00:04:43] Speaker 01:
Well, before we even get to mismatch, we know that the district court below applied a loss causation standard.

[00:04:50] Speaker 01:
That can't stand after Halliburton and Goldman, two Supreme Court authorities.

[00:04:54] Speaker 01:
So that case has to be vacated.

[00:04:56] Speaker 00:
I don't understand that.

[00:04:58] Speaker 04:
Yeah, I don't understand that argument either.

[00:04:59] Speaker 04:
Because you seem to be making a fine-tuned distinction.

[00:05:05] Speaker 04:
And maybe there are different theories, but they seem to be aimed at the same issue.

[00:05:10] Speaker 01:
They're really not, Your Honor, and I really want to address that.

[00:05:14] Speaker 01:
Maybe I'll address Judge Graber's question and then come back to your question, Your Honor.

[00:05:20] Speaker 01:
So why is it not a match, putting aside the different legal standard and assuming that the court had actually applied a mismatch standard?

[00:05:31] Speaker 01:
Their theory is not that Zillow misrepresented its pricing problems on the front end.

[00:05:39] Speaker 01:
On August 5th and September 13th, nobody disagreed, and they're not challenging, that Zillow raised its pricing to buy more homes.

[00:05:48] Speaker 01:
Nobody disagreed or is challenging that Zillow in fact scaled and bought more homes because it raised the price.

[00:05:56] Speaker 04:
But I thought they were claiming that the algorithm, that Zillow was saying our algorithm is working and they were secretly, is the allegation, having human hands come in and like readjust this.

[00:06:12] Speaker 01:
Right.

[00:06:13] Speaker 01:
So what they're arguing is not that the price wasn't increased, but it's how was the price increased.

[00:06:19] Speaker 01:
Right.

[00:06:19] Speaker 01:
But how the price was increased was the gross price overlay.

[00:06:24] Speaker 01:
What was omitted was not that we were having pricing problems.

[00:06:27] Speaker 01:
It was we didn't disclose how we were doing it.

[00:06:30] Speaker 01:
We didn't disclose the gross price overlay itself.

[00:06:33] Speaker 04:
was that you were misrepresenting how you were doing it.

[00:06:37] Speaker 04:
That was the allegation.

[00:06:39] Speaker 04:
I mean, that's the allegation.

[00:06:40] Speaker 04:
Whether it stands or not, I don't know.

[00:06:43] Speaker 04:
But the allegation is your Zillow's out here claiming we have this algorithm.

[00:06:46] Speaker 04:
It works.

[00:06:49] Speaker 04:
And yet, I mean, I was thinking of the Theranos example.

[00:06:52] Speaker 04:
Sorry.

[00:06:53] Speaker 04:
I sat on that case where they're like, oh, we're doing the blood draw.

[00:06:57] Speaker 04:
Well, there's a big difference between whether it's Theranos' blood draw or whether as it

[00:07:03] Speaker 04:
facts suggested they were out there using other people's machines to do it.

[00:07:08] Speaker 04:
That was held to be a misrepresentation.

[00:07:11] Speaker 04:
And that seems to be somewhat analogous here.

[00:07:15] Speaker 01:
Again, I'll get to make two points.

[00:07:17] Speaker 01:
I disagree strongly that their case is at a broad level.

[00:07:22] Speaker 01:
We said we got pricing right, and then on the back end, we didn't get pricing right.

[00:07:28] Speaker 01:
We told the market

[00:07:30] Speaker 01:
that this is a very difficult pricing environment.

[00:07:33] Speaker 01:
As early as February of that year, in our 10K, we said, this is a new business, pricing's really hard, it may be inaccurate, we don't know.

[00:07:41] Speaker 01:
On August 5th, in the very earnings call that they are focused on, the CEO was asked, what's the biggest challenge?

[00:07:48] Speaker 01:
And he said, pricing.

[00:07:50] Speaker 01:
We have to get better and better at pricing.

[00:07:51] Speaker 01:
This is really, really hard.

[00:07:54] Speaker 01:
Fast forward.

[00:07:55] Speaker 01:
Their corrective disclosure dates in the back end where they say you revealed pricing was a problem was October 17th, 18th, 31st, 1st and 2nd.

[00:08:05] Speaker 01:
As early as October 4th, RBC puts out an analyst report that says Zillow is getting its pricing wrong.

[00:08:14] Speaker 01:
It looks at publicly available information and says it's getting its pricing wrong.

[00:08:18] Speaker 01:
The market knew as of October 4th that Zillow was not getting its pricing right.

[00:08:24] Speaker 04:
If we're in an efficient market...

[00:08:29] Speaker 01:
So it matters for purposes of mismatch, but for purposes of whether this can impact the stock, if you take them at their word that the backend drop was caused by the, we think it's a repeat of information, but the revelation that we couldn't get pricing right, that information was in the marketplace long before the corrective disclosures.

[00:08:48] Speaker 01:
And if it's an efficient market, and they need that to rely on this presumption of reliance,

[00:08:53] Speaker 01:
The repeat of information that's already in the market can't possibly be what's impacting and driving the stock price.

[00:08:59] Speaker 01:
And on all of the disclosure dates, and it's in the record, where analysts are looking at publicly available data, you can go on Zillow's website and pull it down, they all looked at it and they said, Zillow's not getting its pricing right.

[00:09:14] Speaker 01:
Zillow's gonna miss the third quarter, it's gonna be dealing with inventory into the fourth quarter, and RBC on October 4th says, this is readily understood in the market.

[00:09:22] Speaker 01:
The stock price on that day didn't drop.

[00:09:24] Speaker 01:
It didn't move.

[00:09:25] Speaker 01:
And then there's no fewer than eight.

[00:09:28] Speaker 01:
What did cause the stock price to drop?

[00:09:29] Speaker 01:
Two things.

[00:09:30] Speaker 01:
And our expert says this.

[00:09:32] Speaker 01:
One, in the middle of August, we paused home buying.

[00:09:36] Speaker 01:
That's new information.

[00:09:37] Speaker 01:
That couldn't be what drove the stock price because nobody knew, as of August and September, the dates of the misstatements, that we would have paused home buying in the middle of October.

[00:09:46] Speaker 01:
That's new news.

[00:09:46] Speaker 01:
The stock price dropped because it was bad news.

[00:09:50] Speaker 01:
Then, fast forward to the beginning of November, we shut down an entire business line.

[00:09:54] Speaker 01:
Of course the stock price moved in response to that.

[00:09:57] Speaker 01:
And they don't say that the pause and the closing of the business revealed the fraud.

[00:10:04] Speaker 01:
They say the revelation of the fraud was we couldn't get pricing right.

[00:10:07] Speaker 01:
Everybody knew we weren't getting pricing right by that time.

[00:10:11] Speaker 01:
And that's the point we made.

[00:10:12] Speaker 01:
How can they show price impact by repeating information that's been in the market seven or eight times that we know didn't move the stock?

[00:10:20] Speaker 01:
They can't say the market's efficient for purposes of their presumption when it's good for them, and then say, oh, but it's not efficient, and don't look at that stuff when it's bad for them.

[00:10:28] Speaker 01:
And let me give you one example, Your Honor, of that, because I know that the Court's concerned about it.

[00:10:37] Speaker 01:
Because I think it's apropos.

[00:10:40] Speaker 04:
But can I just ask you, because some of the allegations that, well, some of the statements that were made that I think are included in the complaint,

[00:10:56] Speaker 04:
This is from Waxman, and he sat with an interview.

[00:11:01] Speaker 04:
This is the September 2021 statement.

[00:11:04] Speaker 04:
Some unit economic improvements are durable, including on more dynamic renovation will be passed back on to the customer and eventually to the bottom line.

[00:11:15] Speaker 04:
I guess I read that, or at least the plaintiffs are suggesting that means unit economic improvements are durable sort of suggests that

[00:11:24] Speaker 04:
We're coming up with a system that's going to work on this, that's going to make this work.

[00:11:30] Speaker 01:
Right, but again, those two positions are not mutually exclusive at all.

[00:11:34] Speaker 01:
Like, you can say on the front end that we are reducing pricing, which they're not arguing that historically we had, sorry, reduced costs.

[00:11:43] Speaker 04:
Right.

[00:11:44] Speaker 01:
Second, and relatedly, what the language is, we are making progress on our pricing modeling.

[00:11:49] Speaker 01:
We are improving our pricing modeling.

[00:11:52] Speaker 04:
So are you saved on that because it says some?

[00:11:56] Speaker 04:
Yeah, it says it would that be false if you had said, well, our unit economic improvements are durable.

[00:12:01] Speaker 04:
I mean, is that is that means when it says unit economic improvements are durable.

[00:12:05] Speaker 04:
Does that mean we're using an algorithm.

[00:12:08] Speaker 01:
No, Your Honor, that goes to their argument that somehow Zillow contractors were refusing Zillow jobs.

[00:12:17] Speaker 01:
That says nothing about what contractors were doing.

[00:12:19] Speaker 01:
They're saying that durable is false, because at some point in their view, we reduced the scope of renovation projects to reduce costs, and Zillow contractors refused jobs.

[00:12:30] Speaker 01:
The back end doesn't reveal that at all.

[00:12:35] Speaker 01:
Right, and that's a complete mismatch.

[00:12:38] Speaker 01:
So let me come back to your sort of larger question about why is loss causation and price impact different?

[00:12:46] Speaker 01:
And this is really critical because if the court allows a loss causation standard to stand to look at a mismatch, you could seriously expand securities liability beyond where it already is.

[00:12:59] Speaker 01:
First, so let me try it this way.

[00:13:02] Speaker 04:
Didn't Goldman, well, I want to hear you, but the question in the back of my mind is, didn't the Supreme Court and Goldman already sort of do this?

[00:13:11] Speaker 04:
They looked at some of these lost causation cases.

[00:13:16] Speaker 01:
OK, go ahead.

[00:13:17] Speaker 01:
No, the Supreme Court did not look at lost causation cases at all.

[00:13:23] Speaker 01:
What the Supreme Court said, Your Honor, and I really want to get back to explaining the distinction, but the Supreme Court said

[00:13:31] Speaker 01:
It said that in inflation maintenance cases, defendants may rebut the basic presumption by showing, quote, a mismatch between the contents of the misrepresentation and the corrective disclosures, and that the final inference that the back-end drop equals front-end inflation starts to break down where there was a mismatch between the contents of the misrepresentation and the corrective disclosure.

[00:13:51] Speaker 01:
And the reason is that if there's a mismatch, there's less reason to infer, to use the language of the court, front-end price inflation.

[00:13:57] Speaker 01:
That is price impact from back-end drop.

[00:13:59] Speaker 01:
So what Goldman is saying is, there's got to be a close fit.

[00:14:02] Speaker 01:
That's what the Second Circuit says.

[00:14:03] Speaker 01:
And the Second Circuit specifically says that this close fit analysis is not a loss causation analysis.

[00:14:09] Speaker 01:
And now let me explain why.

[00:14:11] Speaker 01:
So if you were to let the district court case stand, it would create a circuit split between the Ninth Circuit and the Second Circuit.

[00:14:16] Speaker 00:
What do you make of the Supreme Court's statement in Goldman Sachs that on remand the Second Circuit must take into account all record evidence relevant to price impact regardless of whether the evidence overlaps with materiality or any other merits issue?

[00:14:34] Speaker 00:
Basically, I read Goldman Sachs to say nothing more than look at everything and use your common sense and see if it makes sense to find a match or not.

[00:14:48] Speaker 00:
I don't see them as saying you can't consider things that might affect the merits.

[00:14:56] Speaker 01:
That's the difference, your honor, between an evidentiary question and a legal standard.

[00:15:00] Speaker 01:
As far as evidence goes, we are on the same page.

[00:15:03] Speaker 01:
The merits evidence can be considered whether it overlaps with loss causation, materiality, what have you.

[00:15:09] Speaker 01:
Evidence should all be considered.

[00:15:11] Speaker 01:
That's actually one of our errors that we've argued below, which is

[00:15:15] Speaker 01:
the court specifically said it wasn't considering some of our evidence because it quote unquote went to the merits.

[00:15:19] Speaker 01:
That's another error the court made.

[00:15:21] Speaker 01:
So in terms of evidence, okay, but the legal standards, the legal standard that needs to be met by looking at all that evidence is vastly different between price impact and loss causation.

[00:15:34] Speaker 01:
Loss causation is like out of tort law, it's proximate cause.

[00:15:38] Speaker 01:
It can be shown in all sorts of different ways.

[00:15:40] Speaker 01:
In looking at Ninth Circuit precedent,

[00:15:43] Speaker 01:
the misstatement can be a substantial factor in causing the loss.

[00:15:49] Speaker 01:
Number two, the loss can be foreseeable from the front end statement.

[00:15:55] Speaker 01:
In mine workers, which the court below wrongly cited, it says that the back end drop can be a mere consequence of a risk that was hidden on the front end.

[00:16:07] Speaker 01:
Very broad, lots of different ways to satisfy that standard.

[00:16:11] Speaker 01:
Price impact, and so basically it's did A cause B?

[00:16:15] Speaker 01:
Price impact under Goldman isn't about whether A caused B. It's not a proximate cause issue.

[00:16:21] Speaker 01:
It's whether the drop after B equals A because we want to look at whether the drop on the back end can serve as a proxy for price inflation on the front end where the price on the front end didn't move.

[00:16:34] Speaker 01:
What we're trying to figure out is what would have happened here on the front end

[00:16:38] Speaker 01:
had these statements been what plaintiffs claim they should have been.

[00:16:42] Speaker 01:
The only way you can accept a back-end front-end inference is if the back-end reveals the falsity of the front-end or reveals the omitted facts.

[00:16:51] Speaker 01:
And the facts that they say were omitted is price overlays and that contractors refusing jobs.

[00:16:56] Speaker 01:
That's exactly what was not revealed on the back-end.

[00:16:59] Speaker 01:
And therefore, there's no basis to make this assumption that the back end drop that we say is caused by the shuttering of a business line should be fast forwarded to say this is what would happen on the front end.

[00:17:10] Speaker 01:
We don't know under these circumstances.

[00:17:12] Speaker 01:
And just very briefly, I think I'm

[00:17:15] Speaker 03:
You're over, but I'll finish this point and I'll give you two minutes for a bottle.

[00:17:19] Speaker 01:
Thank you very much.

[00:17:20] Speaker 01:
And just to get to the district court case for a second, when setting up the standard, the court doesn't actually apply a mismatch test.

[00:17:28] Speaker 01:
The court looks at three Ninth Circuit loss causation cases, two of which are motion to dismiss cases.

[00:17:34] Speaker 01:
That can't be right.

[00:17:35] Speaker 01:
It can't be that if you plead loss causation, a defendant can never show a lack of price impact.

[00:17:42] Speaker 01:
The presumption of reliance would become a rule.

[00:17:45] Speaker 01:
And the last point, really quickly, what the court quoting mine workers says, an event can be corrective when it merely discloses a consequence of concealed information.

[00:17:55] Speaker 01:
For example, an earnings miss, even if the connection between the cause and the consequence is not made explicitly in the disclosure.

[00:18:03] Speaker 01:
What the court below is saying is, even if there's a mismatch, you can have price impact by applying mine workers.

[00:18:09] Speaker 01:
And then when it applies it, and I'll give you one example and then I'll sit down.

[00:18:12] Speaker 01:
Thank you for your indulgence.

[00:18:14] Speaker 01:
When it applies it, it says, because October 31 Key Bank Report and the November 1 Bloomberg article disclose the consequences of using the language of mine workers loss causation case,

[00:18:27] Speaker 01:
Zillow's alleged misrepresentations, they are corrective disclosures capable of having a price impact.

[00:18:33] Speaker 01:
That's the wrong question.

[00:18:34] Speaker 01:
Whether the back end disclosures are capable of having a price impact isn't the question.

[00:18:39] Speaker 01:
That's a causation question.

[00:18:41] Speaker 01:
The question is whether the front end misrepresentations could have a price impact.

[00:18:46] Speaker 01:
That's exactly the analysis he's not doing here.

[00:18:49] Speaker 01:
And so we think at a minimum this case the decision should be vacated so that way a loss causation standard isn't bound up with this price impact analysis and at a minimum should be remanded.

[00:19:02] Speaker 03:
Thank you for the time.

[00:19:11] Speaker 02:
Good morning.

[00:19:12] Speaker 02:
May it please the court, Lucas Gilmore, on behalf of the plaintiff and the putative class.

[00:19:18] Speaker 02:
Before addressing the arguments, I think just immediately upfront that Zillow has fundamentally taken up the wrong case on appeal under the Goldman mismatch issue.

[00:19:30] Speaker 02:
None of the concerns animating the Supreme Court and Goldman are present here, and Goldman

[00:19:37] Speaker 02:
it holds that the court should conduct a searching price inquiry analysis where there's three issues that are present, a generic front end misstatement, a considerable gap in specificity and subject matter of the corrective disclosure, and where the corrective disclosure doesn't refer at all to the front end generic misstatement.

[00:20:03] Speaker 04:
So can you help flush this out?

[00:20:05] Speaker 04:
Because I want to clarify my understanding of what the statements were.

[00:20:12] Speaker 04:
What was the statement that I guess came up in October 31st that was not already public?

[00:20:18] Speaker 02:
So two categories of misstatements.

[00:20:22] Speaker 02:
The first have to do with claims of improved pricing models and record purchases.

[00:20:27] Speaker 02:
So Zillow claimed in August that it doubled acquisitions, which reflected the progress of strengthening its price models.

[00:20:36] Speaker 02:
Senior officers repeated were, quote, back on track, improved pricing models, sharpened offer strength, record purchases.

[00:20:45] Speaker 02:
and they claimed confidence in the ability to scale this resulting from the progress it made and strengthening its pricing models.

[00:20:52] Speaker 02:
Okay, so, but that only references pricing models.

[00:20:55] Speaker 04:
I guess I thought that the distinction was the difference between algorithms and, you know, manual manipulation of, because they were doing, they found out their algorithms weren't working correctly, so they kind of come in and, like,

[00:21:09] Speaker 02:
Yeah, I think they're one in the same, the pricing models.

[00:21:12] Speaker 04:
Why are they one in the same?

[00:21:13] Speaker 04:
Because, yeah, the pricing model, I mean, they didn't actually represent how the pricing model was conducted.

[00:21:21] Speaker 04:
They just said it's a better pricing model.

[00:21:23] Speaker 04:
They might have been right, they might have been wrong, but they were making improvements that they thought

[00:21:28] Speaker 04:
Is your claim that they didn't disclose how those pricing models were done earlier?

[00:21:35] Speaker 04:
Now that I'm thinking about it, there's no information later on how the pricing models were actually done.

[00:21:42] Speaker 04:
Is there a mismatch there?

[00:21:45] Speaker 02:
No, Your Honor.

[00:21:46] Speaker 02:
They're an eye buying.

[00:21:51] Speaker 02:
They make their purchases based on their algorithmic pricing models.

[00:21:56] Speaker 02:
They express confidence in their ability to price out the information.

[00:22:01] Speaker 02:
In reality, there was a code red due to their inability to properly predict pricing.

[00:22:08] Speaker 02:
That's a paragraph 91 of the complaint.

[00:22:11] Speaker 02:
And then they secretly launched a project catch up

[00:22:15] Speaker 02:
to apply management-determined overlays, where the overlays increased offers by five to seven percent above the algorithmic valuations, despite warnings of overpaying.

[00:22:29] Speaker 02:
That's false misleading.

[00:22:32] Speaker 02:
And at the front end, there's concern... What about that was not public?

[00:22:40] Speaker 04:
About the... About the pricing model.

[00:22:43] Speaker 04:
Because they, I mean, Zillow's here saying, well, wait, everybody knew it was hard to price these.

[00:22:50] Speaker 04:
We weren't saying we're getting this perfect, but we were saying we were developing this.

[00:22:56] Speaker 04:
I thought there was a misrepresentation in how the models were being done, but now I'm starting to question.

[00:23:02] Speaker 04:
That doesn't seem to be what you're arguing.

[00:23:04] Speaker 04:
Your Honor, what we're saying is they're making their... You're just saying, what you're saying is when you said your pricing models were getting better, they weren't.

[00:23:14] Speaker 02:
Well, yes, and in particular, it's misleading to fail to disclose that you're making manual overlays.

[00:23:20] Speaker 02:
Why?

[00:23:22] Speaker 02:
Why is that misleading?

[00:23:23] Speaker 02:
Well, because they know at the time that they're overpaying and it creates a significant risk.

[00:23:29] Speaker 02:
Well, those are two different issues.

[00:23:31] Speaker 02:
I don't view them, and the court didn't view them as two different issues.

[00:23:35] Speaker 02:
When you affirmatively tout the model you're buying prowess and you fail to disclose information that you're moving away from the pricing model itself and making manual overlays, that's false and misleading.

[00:23:49] Speaker 04:
In the definition of the pricing model,

[00:23:51] Speaker 04:
Did they define the pricing model as only algorithm and no manual overlay?

[00:23:58] Speaker 02:
Your Honor, that's what was understood by the market was they were using their algorithmic method.

[00:24:04] Speaker 00:
And that's the material that starts at paragraph 70 of your complaint that talks about how they advertise and they market Wall Street Journal and all these other folks understand it to mean that this estimate that comes out of the computer.

[00:24:21] Speaker 02:
That's right, and that's core to their business.

[00:24:23] Speaker 02:
That's what their business model is.

[00:24:24] Speaker 02:
That's what separates them from competitors who operate in this space that don't use the algorithm.

[00:24:32] Speaker 02:
Now, this was value relevant information.

[00:24:36] Speaker 02:
Analysts, the most sophisticated investors, investment banks, repeated and referred to the misstatements in their reports to investors.

[00:24:46] Speaker 04:
So when was it made public?

[00:24:51] Speaker 04:
that there were manual overlays to the zestimate algorithm.

[00:24:56] Speaker 02:
Well, we allege that the truth was eventually disclosed over three partially corrective disclosures, ultimate revealed to the market on November 2nd when they closed Zillow Offers.

[00:25:10] Speaker 02:
It begins on October 17th through 18th when they announced a pause in purchases.

[00:25:17] Speaker 02:
Bloomberg reported that- The pause in purchases doesn't address the pricing model.

[00:25:23] Speaker 02:
It does, because they blamed it on operational backlog for renovations and closing, and that partially revealed the consequence of the fraud, that they had not improved their acquisition, they had over-acquired, and they had not made operational cost savings, and in fact, there was a renovational backlog.

[00:25:46] Speaker 04:
But what I'm not hearing

[00:25:48] Speaker 04:
in what you just said, is any reliance on the zestimate versus manual overlay?

[00:25:56] Speaker 04:
I'm probably missing something, but.

[00:26:02] Speaker 02:
Well, that's not typically how securities frauds work.

[00:26:05] Speaker 02:
You're not going to have a corporate issuer admit to a fraud.

[00:26:11] Speaker 02:
You have partial disclosures, and here.

[00:26:14] Speaker 04:
But what about that partial disclosure?

[00:26:18] Speaker 04:
Part of the problem is you need to have your theory of pricing, as I understand it, relies on, at some point, the fraud being understood.

[00:26:28] Speaker 04:
Otherwise, you can't come in and say, well, it was these manual overlays that were causing the inflated

[00:26:37] Speaker 04:
prices, or excuse me, it was the lack of understanding of the manual overlays that were increasing the prices.

[00:26:44] Speaker 04:
But then the manual overlays are not disclosed, and then you say, but that shows that that was causing the harm.

[00:26:51] Speaker 02:
Well, no, I think that we point to market evidence.

[00:26:56] Speaker 02:
At each disclosure, you have analysts.

[00:26:58] Speaker 04:
Right, but where's the disclosure?

[00:27:01] Speaker 04:
The disclosure has to be tied.

[00:27:02] Speaker 04:
I don't know if I'm talking about a mismatch issue or what, but the disclosure has to be tied to what you're saying is wrong.

[00:27:10] Speaker 04:
And you're saying, well, they disclosed that they weren't able to get workers to come in and do the renovations.

[00:27:18] Speaker 04:
What does that have to do with the pricing model?

[00:27:20] Speaker 02:
Well, no, they disclosed that they had over-acquired, and that's consistent.

[00:27:24] Speaker 04:
OK, but what does that have to do with the pricing model?

[00:27:26] Speaker 02:
Again, in response to that, analysts

[00:27:29] Speaker 02:
immediately after that were skeptical of their suggested.

[00:27:34] Speaker 04:
But why isn't that, why, and maybe this just goes to the evidence and how you value, you know, it seems to me that you could explain the price decrease just as much from, hey, we overbought.

[00:27:49] Speaker 04:
as much as, oh, it turns out that our pricing, we screwed up our pricing model.

[00:27:55] Speaker 04:
We weren't doing it like everybody assumed we were doing it.

[00:27:58] Speaker 02:
Well, ultimately, that was revealed at the very end.

[00:28:01] Speaker 02:
After the November 2nd.

[00:28:03] Speaker 02:
Go with me to that, because now I'm... There was a Bloomberg report and Wall Street Journal report that identified Project Ketchup.

[00:28:13] Speaker 02:
But by that time, the market, they'd already

[00:28:18] Speaker 02:
ruled that the business was zeroed out.

[00:28:20] Speaker 04:
That only goes to Zillow may have leaned into home acquisitions at the right time, at the wrong time.

[00:28:28] Speaker 04:
I don't understand where the pricing model, well, the October 31 disclosures called it overpayment disclosures.

[00:28:37] Speaker 02:
That's what you're referencing.

[00:28:40] Speaker 02:
It's typical of securities fraud where the truth ebbs out over partial disclosures.

[00:28:45] Speaker 04:
We do reference the... That's why I don't care if it comes out over multiple disclosures.

[00:28:50] Speaker 04:
I want to know that it came out.

[00:28:51] Speaker 04:
Yeah.

[00:28:52] Speaker 04:
And I'm not hearing from you where the pricing model is ultimately disclosed and caused the decline.

[00:28:59] Speaker 02:
Your Honor, we point to analyst market reactions in which they were initially skeptical and posited potential algorithmic errors after the October 17th through 18th.

[00:29:13] Speaker 04:
After the October... Paragraph 234, I think this is of your complaint.

[00:29:18] Speaker 04:
The pricing algorithm's observed error rate has been far more volatile than expected.

[00:29:24] Speaker 04:
That's what Zillow acknowledged in November.

[00:29:26] Speaker 02:
I would also point to the expert reports at 2ER-215, where at least three analysts publicly posited potential algorithmic errors.

[00:29:35] Speaker 02:
After the October 31st and November 1st overpayment disclosures, analysts' reaction recognized that Zillow might exit the eye buying due to undisciplined execution, the need for a rational bidding algorithm.

[00:29:52] Speaker 02:
In November 2nd,

[00:29:54] Speaker 02:
drawing it back, you have two types of disclosures.

[00:29:59] Speaker 02:
One is you have what the court identified as an announcement of the ultimate consequences of the fraud that was revealed.

[00:30:08] Speaker 02:
You have the winding down of the business and a $569 million.

[00:30:17] Speaker 04:
You just called it the fraud that was revealed.

[00:30:20] Speaker 04:
I'm trying to understand the fraud.

[00:30:21] Speaker 04:
You're making a statement, and I'm asking you for facts.

[00:30:26] Speaker 04:
Because it's not clear to me that it was a fraud that was revealed.

[00:30:29] Speaker 04:
I want to know, I mean, I think you're there, but you keep kind of obfuscating the issue.

[00:30:36] Speaker 04:
The fraud that was revealed was the pricing algorithm, correct or not correct?

[00:30:41] Speaker 02:
Well, what came from the company was the pricing algorithmic that they could not accurately predict what they had said just months ago that they had improved and that they could.

[00:30:53] Speaker 03:
I thought the theory was they said it worked and then they said it didn't work.

[00:30:56] Speaker 02:
That's right.

[00:30:57] Speaker 02:
That's right.

[00:30:57] Speaker 03:
Isn't that what the case is?

[00:30:58] Speaker 02:
Yes.

[00:30:59] Speaker 02:
Yes.

[00:31:00] Speaker 02:
And then it didn't.

[00:31:00] Speaker 00:
It's simpler than you're trying to make it.

[00:31:03] Speaker 04:
I think you might be confusing.

[00:31:05] Speaker 04:
I thought I had a handle on this.

[00:31:06] Speaker 04:
And I think you might be confusing me more than you are intending to.

[00:31:10] Speaker 04:
And that's probably on me.

[00:31:12] Speaker 00:
They said we have a great algorithm.

[00:31:14] Speaker 00:
It's perfect.

[00:31:15] Speaker 00:
We love it.

[00:31:16] Speaker 00:
It's even better than it used to be.

[00:31:18] Speaker 00:
It tells us the exact price we should pay, and everything's hunky-dory.

[00:31:23] Speaker 00:
And then they say, oops, it really didn't predict things.

[00:31:28] Speaker 02:
We're going to turn it off.

[00:31:29] Speaker 00:
Yeah.

[00:31:30] Speaker 00:
Yeah.

[00:31:30] Speaker 00:
OK.

[00:31:31] Speaker 02:
Yes.

[00:31:32] Speaker 02:
And then just going to opposing counsel, the court did not apply a loss causation standard.

[00:31:39] Speaker 02:
The court applied what Goldman Sachs said it should do.

[00:31:42] Speaker 02:
The court said it would take into account

[00:31:45] Speaker 02:
all evidence, even if that evidence crosses over with merits issues.

[00:31:49] Speaker 02:
In the issue of price impact, that issue, while it's separate elements, goes to related questions.

[00:31:57] Speaker 02:
Did the statement matter?

[00:31:59] Speaker 02:
And so you're going to, when the Goldman Sachs sent that down to district courts, it would naturally infer that the court would use tools that have been around

[00:32:09] Speaker 00:
Let me ask you quickly.

[00:32:11] Speaker 00:
What is our standard or review if if we were to determine that the district court for example used Untoward wording in describing what it was doing, but we see that Hypothetically a match between the alleged misstatements and the correction What what do we do?

[00:32:34] Speaker 02:
I would say it's an abuse of discretion.

[00:32:37] Speaker 00:
We look at the conclusion that certification is appropriate.

[00:32:44] Speaker 00:
If we get there a slightly different way, in your view, we're looking at the end result.

[00:32:51] Speaker 02:
That's right.

[00:32:52] Speaker 02:
To the point of the loss causation, that's not what the court did.

[00:32:57] Speaker 02:
What the court did is what

[00:32:58] Speaker 02:
is nationally what other courts are doing and what the Third Circuit recently did in J&J.

[00:33:05] Speaker 02:
It looks to three different points.

[00:33:07] Speaker 02:
Was the back end statement corrective?

[00:33:10] Speaker 02:
And it analyzed all evidence, found it was corrective of the alleged misstatements for each misstatement.

[00:33:17] Speaker 02:
They asked whether it was new information.

[00:33:20] Speaker 02:
The court went methodically through each corrective disclosure and determined

[00:33:24] Speaker 02:
It was new, consistent with the J&J court.

[00:33:28] Speaker 02:
It found that information that might be out there that's fragmented, like the analyst reports or other media reports that didn't provide information with the requisite intensity and credibility, that can be a corrective disclosure.

[00:33:41] Speaker 02:
It considered Zillow's arguments and rejected them.

[00:33:45] Speaker 02:
And then it found that the information was value relevant.

[00:33:49] Speaker 02:
You know, was there a statistically significant stock drop?

[00:33:53] Speaker 02:
It was.

[00:33:54] Speaker 02:
And then you have analysts connecting that specific drop with the information that was released on the corrective disclosure.

[00:34:02] Speaker 02:
So that's precisely what Goldman instructs to do.

[00:34:07] Speaker 03:
All right.

[00:34:08] Speaker 03:
Thank you very much, counsel.

[00:34:23] Speaker 01:
few points in rebuttal.

[00:34:25] Speaker 01:
First, the gross price overlays didn't come out until November 9th and November 17th after the class period.

[00:34:32] Speaker 01:
Stock price didn't move.

[00:34:33] Speaker 01:
Not a single October 8th, 17th.

[00:34:35] Speaker 04:
There was a 23% decrease on November 2nd.

[00:34:40] Speaker 01:
But not because they said overlays or that Zillow was refusing jobs.

[00:34:44] Speaker 01:
That's the date we shuttered the business.

[00:34:46] Speaker 04:
Wait, I thought Zillow said, I mean this is, I thought Zillow acknowledged that it had been unable to accurately forecast future home prices and its pricing algorithms observed error rate has been far more volatile than expected.

[00:34:59] Speaker 04:
That was on November 2nd.

[00:35:01] Speaker 01:
Why isn't that enough?

[00:35:02] Speaker 01:
Two problems.

[00:35:03] Speaker 01:
Mismatch and not new.

[00:35:04] Speaker 01:
So, and I'll mismatch really briefly.

[00:35:06] Speaker 01:
The reason why it's, I understand that the court is suggesting that it's, we said pricing was good and pricing was bad.

[00:35:12] Speaker 01:
That's really not their theory.

[00:35:13] Speaker 01:
Not even the court says that.

[00:35:15] Speaker 01:
The court in its class third order says what Zillow didn't do was it did not credit Zillow offers increased acquisition volume to the use of overlays.

[00:35:23] Speaker 01:
That's what the court said.

[00:35:24] Speaker 01:
The court didn't say you promised you cracked the code for pricing.

[00:35:27] Speaker 01:
In fact, we said the opposite on August 5th.

[00:35:30] Speaker 01:
The CEO said, we've got to get better and better at pricing.

[00:35:33] Speaker 01:
It's really, really hard.

[00:35:34] Speaker 01:
So it's just not consistent with their theory, number one.

[00:35:37] Speaker 01:
But there's a bigger problem with that.

[00:35:40] Speaker 01:
Let's assume that the court accepts that we cracked the code for pricing and we got pricing wrong.

[00:35:48] Speaker 01:
Getting pricing wrong can't possibly be what had price impact here.

[00:35:52] Speaker 01:
because it's already out in the market.

[00:35:55] Speaker 01:
They're relying on the efficient market hypothesis, right, which is any publicly available information is already bound up on the price of the stock.

[00:36:03] Speaker 01:
Again, October 4th, RBC says we're getting pricing wrong, looking at publicly available information.

[00:36:09] Speaker 01:
October 19th, a public news article.

[00:36:12] Speaker 01:
Zillow's paying well above the market median.

[00:36:15] Speaker 01:
October 20th, a BTIG analyst report.

[00:36:18] Speaker 01:
The average listing price is below the purchase price.

[00:36:22] Speaker 01:
October 25th, listings are currently priced at a medium of 6.2% below what they were bought for.

[00:36:28] Speaker 01:
So what dropped the price by 23% on November?

[00:36:32] Speaker 01:
They shut the business down.

[00:36:34] Speaker 01:
Your Honor, let's say there was no fraud here.

[00:36:37] Speaker 01:
Let's say that there isn't a fraud here.

[00:36:39] Speaker 01:
Let's say there's no allegations of fraud.

[00:36:41] Speaker 01:
Let's say there's no allegations of fraud, right?

[00:36:43] Speaker 01:
And Zillow got pricing totally right.

[00:36:46] Speaker 01:
And then at the end, and they were doing great.

[00:36:48] Speaker 01:
And then they said, you know, we're shutting the business down.

[00:36:50] Speaker 01:
Priced would have dropped.

[00:36:51] Speaker 04:
November 2nd, I thought that came later.

[00:36:54] Speaker 01:
No, November 2nd is when they shut the business down.

[00:36:56] Speaker 01:
That's why it dropped.

[00:36:57] Speaker 01:
And why it dropped on October 18th is they said they paused home buying.

[00:36:59] Speaker 04:
So it was only after the business was shut down that they revealed?

[00:37:03] Speaker 01:
That the Wall Street Journal article interviewed some people.

[00:37:07] Speaker 01:
I mean, look at, again, October 26th, Bloomberg article couldn't have been more explicit.

[00:37:14] Speaker 01:
If you accept

[00:37:16] Speaker 01:
If you accept, and again, they're running away from the theory that got passed the motion at its misstage.

[00:37:20] Speaker 01:
They are.

[00:37:21] Speaker 01:
But if you accept it for purposes of this argument, October 26th, Zillow, quote, tweak the algorithms that power its home flipping operation to make higher offers.

[00:37:31] Speaker 01:
And that, quote, slowing price appreciation means it will sell many homes at a loss.

[00:37:37] Speaker 01:
Quote, Zillow cut prices on nearly half of its US listings in the third quarter, according to Yipit.

[00:37:42] Speaker 01:
signaling that its inventory was commanding prices lower than it expected.

[00:37:46] Speaker 01:
Same exact quote on October 27th in Bloomberg, Bank of America on October 28th.

[00:37:51] Speaker 01:
And why Bank of America on October 28th is important is that the Key Bank report that they lay so much weight on on October 31st repeats the exact same information that Bank of America put out three days earlier.

[00:38:03] Speaker 01:
If, and on all of these dates I just took you through, stock price didn't move at all.

[00:38:08] Speaker 01:
You want to know why?

[00:38:09] Speaker 01:
Everybody knew pricing was hard.

[00:38:11] Speaker 01:
The October 4th analyst says everybody understands pricing is hard.

[00:38:15] Speaker 01:
If the stock price doesn't move on all of these disclosure dates, that discloses the information that they claim caused the stock price to drop on the back end,

[00:38:25] Speaker 01:
The repeating of information that's already bound up in the stock price that doesn't cause it to move can't suddenly cause it to move on the back end if we're in an efficient market.

[00:38:36] Speaker 01:
And last point on the standard review, Your Honor, it's de novo because the court below relies on loss causation cases.

[00:38:46] Speaker 01:
That is error.

[00:38:47] Speaker 01:
And if you do anything, please, please, I hope that you'll correct that.

[00:38:51] Speaker 01:
Thank you.

[00:38:52] Speaker 01:
Thank you very much.

[00:38:53] Speaker 03:
Thank you both for your briefing and argument in this case.

[00:38:55] Speaker 03:
This matter is submitted, and we will see you tomorrow.