It's hardly appropriate for Homestore to break out the champagne glasses yet, but the company should be enjoying some relief today, nonetheless.

Because of the whistle-blowing done by the HOMS board on its company's managing officers, and its subsequent cooperation in criminal and civil investigations, the SEC has been able to bring three former officers to justice, and is in hot pursuit of others connected with the securities fraud that has dragged the dot-com into criminal and civil investigations and shareholder class action lawsuits.

The stock market was at first unsure of how to receive the news, but the fact is one of HOMS largest hurdles has been removed, and another, the class action lawsuit by shareholders, may be wobbling.

Shareholders will receive over $4.6 million, which will be returned by the confessed officers. In addition, the Commission is seeking the permission of the Court to have one officer, former COO John Giesecke's civil monetary penalty of $360,000 paid to the benefit of shareholders under the Fair Funds provision of the recently enacted Sarbanes-Oxley Act of 2002.

The SEC makes it clear that others will also be brought before the court, which should result in more monetary gains for shareholders. These developments should go a long way to soothing class action shareholders' losses. The lead plaintiff in the shareholders' suit still owns over 150,000 shares of HOMS stock.

The day is a triumph, as the company's directors were also publicly commended by Attorney General John Ashcroft, who stated, “The Board of Directors and new management of Homestore are to be commended for fully cooperating with government investigators in their efforts to uncover and prosecute the illegal conduct of the defendants.

“Homestore's Board of Directors, along with independent counsel and outside accountants, proactively initiated an accounting inquiry late last year. During our investigation we provided preliminary and final reports to the SEC. Since the conclusion of Homestore's internal investigation in April, we have continued to work closely and cooperate fully with the SEC in its investigation.

A press release by the SEC stated, “The Commission also announced today that it would not bring any enforcement action against Homestore because of its swift, extensive and extraordinary cooperation in the Commission's investigation. This cooperation included reporting its discovery of possible misconduct to the Commission immediately upon the audit committee's learning of it, conducting a thorough and independent internal investigation, sharing the results of that investigation with the government (including not asserting any applicable privileges and protections with respect to written materials furnished to the Commission staff), terminating responsible wrongdoers, and implementing remedial actions designed to prevent the recurrence of fraudulent conduct. These actions, among others, significantly facilitated the Commission's expeditious investigation of this matter.”

What does this mean for Homestore?

HOMS' VP of corporate strategy Allan Merrill says, “It means you were right. You wrote that the SEC would not take action against the company. It means that we can focus on our customers. We know what the SEC has said, that no enforcement will be taken, and they commended us on national television. We are encouraged and that allows us to focus on our business.”

Other hurdles remain. What about the class action shareholders lawsuit?

”I don't know the answer,” says Merrill. “We know there are a variety of outstanding issues, and now we can turn our attention to others. We are a management team and board that is developing a new reputation for Homestore. We are action-oriented, there's transparency, and we want to be known as people of our word. Those are characteristics that will be recognized by the SEC.”

Merrill could not address how the discovery of fraud will impact the shareholders lawsuit against HOMS. Fraud isn't covered by D & O insurance. Will the shareholders still come after the company?

”I'm not expert in D&O,” says Merrill, “and the issues don't relate to the class action lawsuit. It remains our intention to resolve that as soon as possible. Our stated intention is to reach closure on that as quickly as possible.”

How close to a settlement? “I can't comment,” says Merrill, “but we have a sophisticated plaintiff, and they will pursue their own remedies. In many class action suits there isn't a pension fund as lead plaintiff. We can talk to them about our business and industry. They have the capacity to understand what this means. From our perspective, we have a great market opportunity.”

What about AOL? HOMS is involved in an arbitration with AOL that could result in AOL being declared in violation of its agreement. If so, HOMS gets to keep over $90 million it has restricted. Is the issue that the faces keep changing over there?

”I can't comment on behalf of AOL,” says Merrill. “Our contract extends through the third quarter of next year, and we want to put together a new relationship. Our content is important to their members. They have represented to us that the House and Homes channel is a top three destination for them. They like our content and we like being connected to one of the largest media companies in the world. Both of us have management teams working for customers and shareholders.”

Is the issue over traffic or money?

”In our agreement,” explains Merrill, “we could have third-party arbitration to see if the contract had been adhered to. We want a third party to determine if the agreement had been followed. A panel of three arbitrators, one picked by AOL and one by us, and a third member picked by both parties, is looking into it. We are optimistic about having it go forward.

What about positive cash flow?

”Taking into accounts the Memberworks settlement,” says Merrill, “we had 100 million at the end of June, and we will be cash flow positive by the end of the year. That has given us liquidity to support our customers and our operations.”

Will more heads roll? What about Stuart Wolff and Peter Tafeen?

”No comment.”

Who are the heroes here? Who should investors, customers be thanking for getting these bad boys out of the company?

”They ought to look at the board,” says Merrill. “This is meritorious board that acted decisively. The board started the investigation and replaced the management team. That was courageous and unusual, but those actions created a future for Homestore.”

He adds, “We see light at the end of the tunnel. Now we know exactly what business we are pursuing, and we have the lead position. That excites all of us.”

Published: September 26, 2002

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