With explosive news that was released over the weekend, Homestore's former management is alleged to be more deeply involved in fraudulent transactions to inflate advertising revenues than originally believed. If the detailed allegations of an amended shareholder lawsuit are provable, additional charges could be filed against a number of Homestore insiders including former Homestore CEO Stuart Wolff and former EVP of business development, Peter Tafeen as well as some executives with AOL and Cendant, among others.

A 244-page amended consolidated complaint (Case. No. 01-CV-11115) filed by the California State Teachers' Retirement System (CalSTRS), has expanded a class action lawsuit (CalSTRS serves as lead plaintiff) against Homestore to include corporate defendants AOL Time Warner, Cendant, and fourteen smaller companies.

These companies are alleged to have participated in three-way deals in which Homestore paid vendors for unnecessary products, while the vendors used some of the money to buy advertising from AOL, which kept part of the cash, and then funneled the rest of the money back to Homestore. Homestore fraudulently booked the round-trip cash as revenue, alleges the suit.

Also, Homestore gave Cendant 21.4 million shares of Homestore stock in exchange for two overpriced Cendant subsidiaries Move.com and Welcome Wagon, alleges the suit. Cendant established a $95 million Real Estate Technology Trust and used it to funnel money to Homestore through other transactions. As a result of these transactions, alleges the suit, Cendant owned 20 percent of Homestore and placed two members on Homestore's board, and Cendant was strongly incentified to funnel revenues to Homestore, alleges the suit.

More former corporate officers were also named in the suit including Richard A. Smith, current CEO of Cendant's real estate division, and AOL's former EVP of business affairs and development David Colburn and SVP Eric Keller, and an unnamed accountant defendant for PricewaterhouseCoopers LLP, Homestore's auditor.

The complaint alleges that the defendants conspired to create "illusions of revenue" through the use of barter transactions, revenue buying and round-tripping transactions.

Although not named as defendants, other companies are also mentioned. RE/MAX International (see p.34) and GMAC Real Estate (see pp. 37-38, 214-215) are also mentioned as participants in barter transactions. Other transactions questioned by the suit include some with Budget Group, a subsidiary of Cendant (see p. 22, 216-217), Bank of America (see p. 23, 221-223) and Wells Fargo (see pp. 38, 212-214.) So far, these other transactions have not resulted in charges being filed against companies or corporate officers.

See full complaint - Click Here. (In Adobe Acrobat format)

In a remarkable amount of detective work, the details of the transactions, mostly provided by Homestore insiders, indicate a tightening noose around the necks of former Homestore executives, including former CEO Stuart Wolff, EVP of business development Peter Tafeen, SVP Human Resources Catherine Kwong Giffen, EVP Corporate Development Allan P. Merrill, and Tafeen subordinates SVP Strategic Alliance Group Sophia Losh and director of transactions Jeff Kalina. All are alleged to have assisted in manipulating or covering up the true value of Homestore's stock while they dumped personal shares knowing that revenues were inflated.

The suit alleges that Homestore executives hoped to cover up their malfeasance with AOL by allowing the media firm to acquire the dot-com and write off the questionable deals, valued at more than $200 million, as worthless assets. At one point, Wolff told a Homestore executive that the company would no longer have to do such deals "because AOL would be buying Homestore or the economy would take care of any future concerns," says the lawsuit (see p. 118.) However, the timing was bad for AOL to acquire a pricey dot-com, and talks suspended in May 2001, leaving Homestore to account for its own shortfalls.

The allegations in the suit are significant for Wolff and Tafeen, who are currently under federal investigation according to insiders. Wolff is claiming that he is the victim of "rogue employees," and knew nothing of the fraudulent transactions, according to a November 18, 2002 USA Today story by Matt Kranz.

Yet numerous details of meetings with vendors and employees outlined in the suit suggest otherwise.

Wolff's own actions also lead credence to insider knowledge of a company imploding.

Writes Kranz, "Wolff ran Homestore during a period in which the company has since admitted it inflated revenue by $160.4 million — a third of its reported sales in 2000 and 2001. And as belief in Homestore's fake financials kept the company's stock price high, Wolff was the insider who sold the most. While exuding confidence, Wolff acted much differently with his own money, selling stock 22 times since the company went public, according to the Nasdaq. A particularly heavy bout of selling came in late April and early May 2001 — when Wolff unloaded $5.5 million in stock — right after declaring that Homestore turned its third quarterly profit."

Realty Times has also learned from people close to the investigation that Wolff was known as a micromanager, and it is highly unlikely that illegal revenue manipulations could have occurred without his knowledge, say insiders.

The attorneys for the class action suit have based their information on their own investigation of the case, including confidential unnamed sources, many Homestore insiders, and information obtained in a plea agreement by John Giesecke, Homestore's former CFO, among others.

Homestore, now under new management, has been cleared of wrongdoing by the Department of Justice.

Published: November 19, 2002

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