Homestore Investors Raise New Claims About AOL Deal

In March 2001, officials at Homestore Inc. were worried.

Though Wall Street viewed the online real estate company as an island of stability in a dot-com storm, Westlake Village-based Homestore was scrambling like everyone else. A grim-faced Peter B. Tafeen, at the time Homestore’s executive vice president, walked into the office of the chief financial officer and broke the bad news: Homestore would miss its quarterly revenue target by $15 million.

But Homestore was saved from a Wall Street pounding thanks to a timely deal with the America Online unit of media giant AOL Time Warner Inc., according to a description of the deal included in an amended lawsuit filed Friday by Home- store investors led by the California teachers pension fund.

The suit raises new claims about AOL’s alleged role in propping up Homestore. It also supports assertions that AOL made to government investigators that Eric Keller, a fired AOL executive, masterminded most of the deals. But the suit also claims that others inside AOL took part in or knew about the activities, including Keller’s boss, David Colburn; AOL Senior Vice President Steven E. Rindner and former Chief Financial Officer Joseph A. Ripp, now vice chairman of the Internet unit.

An AOL spokeswoman declined to comment Friday. Keller and Colburn did not return phone calls.

According to the suit, Keller, Colburn, Tafeen and others helped devise a plan to secretly allow Homestore to funnel $15 million of its own money through third-party vendors, then to AOL and back to Homestore.

AOL’s Keller helped Tafeen recruit the third-party vendors, the suit alleges. Homestore allegedly purchased worthless assets from the companies, with the understanding that they would use most of the money to buy advertising on a Web site jointly operated by AOL and Homestore. As part of a revenue-sharing agreement, Homestore received $15 million in ad revenue, which it used to meet its Wall Street targets, the suit alleges.

An attorney for Tafeen questioned the allegation Friday, saying Homestore had other revenue-raising options and would not have needed to resort to such a deal.

Shortly after the first deal was completed, AOL began negotiating to buy Homestore. The lawsuit claims the acquisition was an attempt by the executives to “cover up” the deal by allowing the bogus transactions to be written off by the larger AOL in a merger.

Talks fell through, however, and Keller was suspended in the summer of 2001 when it was discovered that he tried to backdate a contract to help one of the third-party vendors, according to sources familiar with the AOL investigation. He was later fired. Colburn was fired earlier this year. When Keller left, he and Tafeen had been working on a second ad deal to give Homestore $31.5 million in ad revenue, the suit claims.

AOL’s Rindner and Ripp took over negotiations and began asking questions about the deal, expressing concerns about whether AOL would collect the money from the third-party companies, the suit says. “This, in and of itself, was an acknowledgment by AOL of its knowledge of the round-trip nature of the deal,” the suit says. But AOL agreed to complete the deal anyway, according to the suit.