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US: AOL, Cendant Added to Homestore Pension Fund Suit

Reuters
November 17th, 2002

SACRAMENTO, Calif. -- AOL Time Warner Inc. and Cendant Corp. were among 16 companies that contributed to the financial collapse of online real estate firm Homestore.com, a California retirement fund has alleged in a lawsuit.

The companies were added as defendants in a securities class action suit brought by the California State Teachers' Retirement System, the third largest U.S. public pension fund, against Homestore, a once high-flying dot-com, and its top officers, the fund said in a statement Saturday.

The amended complaint, filed in U.S. District Court in Los Angeles last week, alleged the parties falsified revenues to maintain the myth of Homestore Inc.'s inflated success story on Wall Street.

Homestore, AOL and Cendant officials could not be immediately reached for comment.

In October, three former top executives at Homestore pleaded guilty to federal criminal charges they fraudulently inflated company revenues by $46.4 million in 2001.

The former chief financial officer, former chief operating officer and former vice president agreed to cooperate with an ongoing U.S. government probe of Homestore.

The U.S. Department of Justice has also filed a civil lawsuit against the three former executives in connection with Homestore's alleged fraud.

According to the complaint filed by the pension fund, the defendants' concocted intricate "round-trip" transactions, with money flowing from Homestore to the companies, then back to Homestore. The deals enabled Homestore to illegally recognize revenue to meet its Wall Street targets and keep the stock price climbing, according to the complaint.

The teachers' retirement system sued Homestore last summer, alleging revenue-boosting schemes with third parties, including America Online, although AOL was not mentioned by name. The suit alleged the Internet giant was part of the types of deals that caused Homestore to restate results for much of 2000 and 2001 after determining revenues had been overstated by more than $500 million.

The California State Teachers' Retirement System said it bought 431,123 Homestore common shares between May 2000 and December 2001, for a total cost of more than $13 million and lost more than $9 million.

Shares of Homestore, which hit a high of $138 in January 2000, traded at $1.02 Friday on Nasdaq.


Latest Blow to AOL

AOL Time Warner has been the subject of several shareholder lawsuits, as its stock has plunged as much as 60 percent this year. The company has been hit by slowing advertising and subscriber growth at its America Online unit and federal probes into accounting practices at the Internet division.

AOL Time Warner disclosed in August that America Online may have overstated revenue. The Washington Post had questioned whether AOL had boosted revenue through unconventional deals with companies like Homestore. At the time, AOL Time Warner declined to disclose which deals were at issue after the company's review.

AOL Time Warner executives recently restated results for a two-year period after finding accounting irregularities related to AOL advertising and commerce deals during that time. The company's internal review is continuing, as are probes by the Securities and Exchange Commission and the Justice Department.

Some AOL executives closely involved with those deals have left, including top dealmaker David Colburn, and Eric Keller, the No. 2 dealmaker.

Colburn and Keller, who designed the ad deals with Homestore.com and business software maker PurchasePro.com Inc., were named as individual defendants in the California teacher's fund suit.

Keller and Peter Tafeen, a former Homestore sales executive, allegedly concocted a complex scheme. Homestore would buy goods or services from third-party companies and AOL would pay Homestore cash for advertising. Then, the third-party companies would buy advertising from AOL, using money round-tripped by Homestore.

The amended complaint also named L90, Dorado Corp., Akonix Systems, Internet Pictures, CityRealty.com, Classmates Online, CornerHardware.com, GlobeXplorer, Privista, PromiseMark, RevBox, SmartHome, WizShop.com and Top Producer Systems.





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