The crux of the class action securities fraud suits against Homestore is the revenues it reported from its advertising partners. Will Homestore's officers and directors named in the suits get to keep $27 million in stock gains?

That's what at least seven law firms intend to find out.

On December 27, 2001, Milberg Weiss Bershad Hynes & Lerach LLP became the first of seven law firms from New York to California to file a complaint alleging violations of the federal securities laws by Homestore.com, Inc. and three of its top officers and directors.

The class action by Milberg Weiss was commenced in the United States District Court for the Central District of California on behalf of purchasers of Homestore common stock between July 20, 2000 and December 21, 2001. At least six other law firms have followed suit, pardon the pun, with their own similarly worded complaints against Homestore.

According to the first complaint, on July 19, 2000, Homestore announced positive earnings in the second quarter of 2000, causing the stock to soar almost 25 percent the following day. Boosting revenues through improper use of generally accepted accounting principles continued for several quarters, alleges the petition, allowing Homestore defendants to sell more than $27 million of their own stock. The boosted revenues were accomplished through allegedly improper "roundtrip" transactions which led to a "dramatic overstating of revenues and assets."

The roundtrip transactions came to an end in Q3-2001 because Homestore's main roundtrip partner "stopped doing these transactions with the company." Following the Q3 announcement, Homestore also slashed its 2002 revenue projections due to the decline in revenues from this roundtrip partner, from $563 million to about $400 million. This announcement caused Homestore's stock to drop by 50 percent the next day.

Following the filing of several complaints, Homestore issued a press release admitting that it would be forced to restate past revenues which it did, for a shortfall up to $95 million for the first three quarters of 2001.

A spokesperson for Milberg Weiss declined to name who this roundtrip partner is, but agreed to explain what a roundtrip transaction might look like.

"It's difficult to diagram," he explains. "Let's say Company B has an agreement with company A that says any business that is referred to you on a particular kind of business that you will give us 40 percent. If you just went public and have no way to get revenue, you can buy worthless software technology from company C, and company C takes 90 percent of that money and buys advertising from company B. That's a roundtrip transaction."

Roundtrip transactions aren't illegal, but improper accounting for them is. A spokesperson for Wechsler Harwood Halebian & Feffer LLP says,"Our understanding is that what Homestore was doing with its transactions was receiving money for advertising which it spent with the same firms for services they provided so the money just went back and forth."

"The recognition of revenue from these transactions is in violation of the Securities Exchange Act of 1934 for failure to disclose proper accounting for those transactions. Homestreore practice is in violation of generally accepted accounting principles (GAAP.)," he adds. "At this time, Homerstore.com has yet to disclose the names of the firms they have engaged in roundtrip transactions with. The crux of the lawsuit is matching up what the company's financial and accounting practices are with what it discloses to the public and its shareholders."

But first a few things have to happen.

Rather than face an endless stream of litigation which could theoretically bankrupt any company or individual, defendants of multiple class action lawsuits are given a break. Typically, it works something like this. The suits are petitioned to the court by the competing litigants to be consolidated. Within 60 days of the first lawsuit being filed, any plaintiff who would like to be considered for appointment as lead plaintiff must move the court to make a motion. The lead plaintiff will move the court for his/her selection of lead counsel. Generally, there will be between two to five competing lead plaintiff motions. Then the judge decides who will be appointed lead plaintiff and counsel and the suit will commence.

The downside for the defendants is that the plaintiffs' attorneys then pool their knowledge - so that the lead plaintiff and attorney for the class is better able to make the best case possible.

"Between one to five plaintiffs will be appointed by the court to represent the class," explains the Wechsler spokesperson. "Those shareholders can be individual investors or institutional investors - including pension funds. We estimate a class of thousands."

In Homestore's case, a lead plaintiff could stand in for thousands of shareholders who held over 117 million shares for the class period named in the lawsuits.

If a shareholder bought 10,000 worth of Homestore stock at $30 a share, what can he or she hope to get back? "The litigation process is lengthy, time-consuming and resource intensive," explains the Wechsler spokesperson. "Realistically, each case is different, and we believe in the merits of this case. Shareholders have been significantly damaged and they (Homestore)are liable for that damage."

Awards could come in the form of a settlement or a judgment. The money could come from a variety of sources - directors and officers' liability insurance, personal accounts from the defendants and company coffers.

"Whether from settlement or judgment, the awards could come from company coffers, it can come from a D& O policy (directors' and officers' liability insurance policy) and as our complaint alleges certain officers and directors are liable for damages, then their personal assets could be at risk."

But aren't corporations all about limiting personal risk?

"A corporation limits personal liability," he explains. "However, as our complaint alleges, several of Homestore's officers and directors directly profited from the fraud alleged by selling personal holdings of Homestore stock.

"Those proceeds would be at risk."

Published: January 7, 2002

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