CalSTRS Expands Scope of Homestore Class Action Case
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.
View the amended complaint here.