AOL, Cendant Dismissed From Homestore Suit
A federal judge in Seattle has dismissed AOL Time Warner Inc., Cendant Corp. and other former business partners of Homestore Inc. as defendants in a massive accounting fraud lawsuit against the Westlake Village-based firm.
The ruling Friday removes two large financial targets for investors seeking to recover more than $1 billion in losses on Homestore stock. Shares of the online real estate firm, worth more than $100 a share during the Internet bubble, closed at 69 cents Monday on Nasdaq.
Attorneys for the California State Teachers’ Retirement System, which lost $9 million on its Homestore investment and is lead plaintiff in the class-action suit, said they would press on with their cases against Homestore, several of its former executives and auditor PricewaterhouseCoopers.
“We believe greatly in this case,” said plaintiff attorney Bruce Simon, adding that he will appeal the dismissal of AOL and Cendant as defendants.
Steven G. Silber, a spokesman for PricewaterhouseCoopers, said the accounting firm was the first to detect questionable transactions at Homestore that were later unraveled as fraud. “We look forward to proving that PWC’s audit work was completely appropriate,” he said.
The suit portrays AOL and Cendant as aiding and abetting the scheme to overstate advertising sales and other revenue at Homestore. However, it doesn’t depict them as “primary violators,” U.S. District Judge Marsha J. Pechman ruled.
Federal securities law allows only primary violators to be sued, the judge said, saying she felt “compelled to arrive at this result” despite having reservations about it.
“The acts alleged,” Pechman wrote, “describe a massive conspiracy driven by pure avarice. In particular, the detailed factual allegations describing the role of AOL and its agents in helping Homestore please Wall Street and in boosting its own revenues through bogus commissions give this court great pause.”
AOL, whose America Online unit had a series of advertising deals with Homestore, declined to comment on the ruling and on a government investigation into accounting irregularities at America Online.
Referring to the government probe, Pechman said her decision “does not mean that the wrongs of these aiders and abettors will necessarily go unchecked.”
New York-based Cendant, a franchiser of real estate and travel businesses, had advertising deals with Homestore and became its biggest shareholder when Cendant sold Move.com, its own real estate site, to Homestore for stock.
Cendant said it had contended from the outset that the suit had no merit. “We are pleased that the court agreed,” Cendant’s general counsel James E. Buckman said.
Pechman said the suit “establishes a strong inference” that PricewaterhouseCoopers “acted with deliberate indifference, if not conscious misconduct” in its financial monitoring of Homestore. But the accounting firm spokesman said defendants have had no chance to challenge the allegations.
Pechman dismissed several AOL and Cendant executives as defendants, along with several Homestore business partners, including the small Marina del Rey advertising firm L90 Inc., now known as MaxWorldwide Inc. and based in New York.
Four former Homestore financial executives have pleaded guilty to fraud charges and are cooperating with the government’s investigations. They also have assisted with the shareholders’ lawsuit.
The litigation is being heard by Pechman in Seattle because of heavy caseloads in Los Angeles, where it was filed. The trial is scheduled for November in Los Angeles, however, with a jury of Southern Californians.
