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Sacramento, CA – AOL/Time Warner, Cendant Corporation and 14 other
Internet-based firms were named Friday in an amended complaint alleging
they contributed to the financial collapse of Homestore.com.
The firms were added as defendants in a securities class action suit
brought by the California State Teachers’ Retirement System against
Homestore and its top officers. The amended complaint, filed in U.S. District
Court in Los Angeles by the Burlingame, California law firm Cotchett,
Pitre, Simon & McCarthy, states those named acted individually and
in concert to falsify revenues to maintain the myth of Homestore’s
inflated success story on Wall Street. As a result of a $192 million restatement
of Homestore's financial results for the years 2000 and 2001, the stockholders
of Homestore suffered massive losses in the value of their stocks.The
defendants engaged in schemes that included, the complaint states, intricate
“round-trip” transactions in which Homestore entered into agreements
with various firms for the circular flow of money from Homestore to those
firms and then back to Homestore. These round-trip transactions, in the
tens of millions of dollars, enabled Homestore to illegally recognize
revenue to meet its Wall Street targets and keep its stock prices climbing,
according to the complaint.
“The Homestore financial fraud was based on a simple concept: since
the company was not able to meet the expectations of Wall Street through
the production of legitimate revenues, Homestore resorted to ‘buying
revenues’ which were false and contrary to accounting and financial
reporting rules,” the complaint states.
The complaint also states Homestore could not have undertaken its financial
fraud without the “active and knowing participation” of the
other defendants, with AOL/Time Warner and Cendant Corporation being “two
of the most important pillars for Homestore’s rapid ascendancy as
a Wall Street darling ... Both of these giants had a huge financial stake
in Homestore, and in the case of Cendant, two seats on the (Homestore)
Board of Directors.”
Jack Ehnes, CalSTRS chief executive officer, said “CalSTRS, as lead
plaintiff in this case, is dedicated to obtaining a monetary remedy for
California’s educators and other class members caught up in this
scandal. The allegations in this complaint reinforce one of our principal
objectives in pursuing corporate responsibility as well as protecting
the rights of stockholders.”
Ehnes also praised the Department of Justice and the Securities and Exchange
Commission for their ongoing investigations in the Homestore case. “Their
pursuit of this case is a textbook example of how the system is designed
to work,” he said, noting that the federal investigations have resulted
in criminal complaints and guilty pleas from three former Homestore officers,
John M. Geisecke Jr., Joseph J. Shew and John D. DeSimone.
In addition to AOL/Time Warner and Cendant Corporation, the amended complaint
named L90, Dorado Corporation, Akonix Systems, Internet Pictures, CityRealty.com,
Classmates Online, CornerHardware.com, GlobeXplorer, Privista, PromiseMark,
RevBox, SmartHome, WizShop.com and Top Producer Systems.
The expanded scope of the allegations in the 240-page amended complaint,
including descriptions of specific transactions at the “heart of
the fraud,” were obtained from “confidential sources with personal
knowledge of how the fraud was accomplished,” the complaint states.
It describes the sources as persons who were part of Homestore’s
senior management team during the class period, May 4, 2000 to December
21, 2001.
CalSTRS is the third largest public pension fund in the U.S., with a
$92 billion investment portfolio. The pension system serves approximately
687,000 members and benefit recipients by providing retirement, disability
and survivor benefits to California's public school educators in grades
kindergarten through community college. Those benefits are guaranteed
by law and are not affected by changes in the investment portfolio.
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View the amended complaint here.
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