Homestore To Settle Accounting-Fraud Suit Worth $70 Million

Homestore, an online real estate services company that provides listings to America Online, has said that it has agreed to pay about $70 million in cash and stock to settle a class-action lawsuit over accusations of accounting fraud.

The suit, filed by the California State Teachers’ Retirement System as the lead plaintiff, attracted widespread attention because it included accusations that AOL Time Warner and Homestore had colluded to defraud their shareholders. The suit provided a rare window into a small corner of the simultaneous federal investigations into AOL’s accounting.

Several former executives who provided information about AOL to the federal authorities provided the same information to the lawyers suing Homestore, according to people involved in both matters. W. Michael Long, who was named chief executive of Homestore after it fired previous executives for overstating financial results, said Wednesday, when the settlement was announced, that the company had acknowledged that its misstatements hurt shareholders.

We did not deny that the class had been damaged and it was a matter of how to generate the best recovery of those damages, and the best way to do that was their participation in the long-term success of Homestore, Long said. Under the terms of the agreement, which requires the approval of the judge hearing the suit, Homestore will pay $13 million in cash and 20 million shares of common stock. Shares of Homestore rose 37 cents to close at $2.90 on Wednesday on the Nasdaq stock market. Basically, it is a settlement that maximizes the cash that Homestore is capable of paying, said Bruce Simon, a lawyer with the San Francisco firm of Cotchett, Pitre, Simon & McCarthy who represented the California teachers’ fund.

The settlement also requires Homestore to make changes in its corporate governance, including requirements for independent directors and special committees, Simon said. The Securities and Exchange Commission and the Justice Department are investigating former Homestore executives over their roles in its accounting problems, but the federal investigators have said that they are not focusing on Homestore or its current management, in part because of the company’s cooperation.

In a preliminary hearing, a federal judge eliminated AOL Time Warner and Cendant, another Homestore business partner, as defendants in the class-action suit, ruling that as a matter of law shareholders of one company cannot sue another company for aiding and abetting fraud. Simon said he intended to appeal that ruling, arguing that AOL Time Warner and Cendant were so close to Homestore that they were effectively participants.

The class-action suit also named Homestore’s former accountant, PricewaterhouseCoopers, and two of Homestore’s former top executives, Stuart Wolff and Peter Tafeen.

Source: http://securities.stanford.edu/news-archive/2003/20030815_Settlement01_Kirkpatrick.htm

Date: 15th August, 2003.

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Sarang is one of the first forensic accountants in the country who worked extensively with the law enforcement agencies across the country to solve the fraud problems. He is a Certified Anti Money Laundering Expert. He worked in the shipping industry before joining Riskpro and is instrumental in exposing the Trade based money laundering cases for the banking sector. He investigated numerous Ponzi Schemes for the Government of Maharashtra and presented in the court of laws as the expert witness to justify the findings of the reports.