AOL, Cendant Added to Fraud Suit
Investors led by California’s teacher-pension fund sued AOL Time Warner Inc. and Cendant Corp. on Friday, contending that the two corporate giants played key roles in Homestore Inc. financial frauds that cost investors hundreds of millions of dollars.
Maintaining that the case “represents the very worst of the Internet ‘bubble,’ ” the filing greatly expands an earlier lawsuit that had named as defendants Homestore, five of its former executives, business partner L90 Inc. and PricewaterhouseCoopers, the accounting firm that certified Homestore’s initial public offering in 1999 and then audited its financial statements.
The amended suit places AOL and Cendant at the top of a list of 17 companies that allegedly helped Homestore inflate its revenue by $192.6 million in 2000 and 2001. That fraud, the suit alleges, allowed Westlake Village-based Homestore, which places residential real estate listings and related services on the Internet, to beat analysts’ expectations and yielded its insiders more than $70 million in stock-sale profits.
The suit also names 10 individual defendants, seven of whom are former Homestore executives. They include founder Stuart H. Wolff, chief deal maker Peter B. Tafeen and three financial executives who already have pleaded guilty to criminal fraud charges and are now cooperating with federal authorities. It also names former AOL executives David Colburn and Eric Keller, along with Richard A. Smith, the chairman of Cendant’s real estate division. New York-based Cendant franchises the Coldwell Banker, ERA and Century 21 brokerages.
Representatives of AOL and Cendant declined to comment Friday on the suit, which they had not seen. Homestore also declined to comment.
Accounting practices at AOL, which operates the America Online Internet service, are being investigated by the Justice Department and the Securities and Exchange Commission. The company also faces shareholder lawsuits in New York accusing it of accounting fraud.
Friday’s amended class-action complaint, seeking damages on behalf of all Homestore shareholders, was filed in federal court in Los Angeles by Bay Area law firm Cotchett, Pitre, Simon & McCarthy.
Attorney Joseph W. Cotchett referred calls to the California State Teachers’ Retirement System, the lead plaintiff in the case. CalSTRS Chief Executive Jack Ehnes said that in addition to recovering losses, he hopes to send a message to Wall Street that corporate governance must be taken more seriously.
“This case started with a single-company focus, but it’s blossomed into a corporate house of cards,” Ehnes asserted.
“This isn’t just a few low-level employees at one company gone astray. This is corporate greed at the highest levels.”
Ehnes said shareholders lost more than $1 billion, including $9 million by CalSTRS. Homestore’s stock peaked in January 2000 at $122.25 a share. It closed Friday at $1.02, up 2 cents, in Nasdaq SmallCap trading.
The suit contends Homestore, to meet Wolff’s ever more aggressive revenue goals, began engineering phony deals that grew in complexity over time.
In the case of AOL, Homestore allegedly bought goods and services it didn’t need from vendors, with the unwritten provision they would buy advertising on AOL.
AOL then forwarded most of the funds to Homestore via profit sharing and advertising deals, the suit says.
“It is beyond doubt that AOL knew the exact details of the deal and knowingly participated in Homestore’s scheme to defraud the investing public,” the suit says.
The suit contends that AOL provided critical assistance by enabling Homestore to meet its quarterly financial targets.
The suit claims that at least four AOL executives knew about the bogus deals, including Keller and Colburn, who allegedly agreed not to document some of the transactions to avoid a paper trail.
Neither returned phone calls Friday. Wolff also could not be reached. A lawyer for Tafeen questioned the allegations against his client.
Two other AOL executives, Steven E. Rindner and Joseph A. Ripp, took over one questionable deal after Keller was fired in 2001 and tried to unwind it, according to the suit. But AOL completed the deal, even though the executives realized it was improper, the suit says.
Another company whose AOL dealings have come under scrutiny is Mountain View, Calif.-based Veritas Software Corp., which said Thursday that it is cooperating with the SEC’s probe of AOL.
The allegedly fraudulent deals with Cendant, a New York-based franchiser of hotels, rental car agencies and real estate brokerages, include a highly complex agreement in early 2001 in which Homestore acquired Cendant’s money-losing Move.com online business, plus Cendant’s Welcome Wagon operation, in return for 21.4 million Homestore shares that were worth $750 million at the time.
Those transactions, the suit says, were linked to another agreement in which Cendant placed $95 million in a trust with the understanding it would spend $80 million on Homestore commercial products and services.
According to the suit, Cendant real estate chief Smith, who joined Homestore’s board, participated in deals designed to generate phony revenue.
The suit contains what the plaintiffs say are details of specific meetings at which Homestore executives allegedly discussed fraudulent deals -- even spelling out obscene language purportedly used by a former executive when he learned that Barbara Alexander, the Homestore director who headed the company’s audit committee, had been asking bluntly whether the company was “buying” revenue.
It also describes a study commissioned by Joseph Shew, then Homestore’s chief financial officer, that calculated the especially aggressive deals were actually costing the company $3 for every $1 it booked as revenue.
The suit describes deals in which Homestore stock or stock warrants were issued to Wells Fargo & Co. and General Motors Corp.’s GMAC Mortgage in 1999 and Bank of America Corp. in 2000. The lenders then announced they would spend millions of dollars marketing their services on Homestore sites or using Homestore to design their Web sites, substantially boosting the real estate company’s revenue.
The suit describes the BofA deal as an “illegal transaction” and describes the bank as a “participant” in the schemes, but does not include it among the defendants. Wells and GMAC aren’t named as defendants or participants. BofA and Wells Fargo representatives declined to comment. A GM spokesman could not be reached.
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Times staff writer Josh Friedman contributed to this report.
