Prosecutors Seek Delay of Civil Suit Against Homestore

Federal authorities have asked a judge to put on hold the civil lawsuit on behalf of Homestore Inc. shareholders, contending it may interfere with attempts to prosecute former executives of the Westlake Village online real estate firm and their business partners at AOL Time Warner Inc.

The value of Homestore’s stock plunged more than $1 billion as Internet mania waned and a major accounting fraud was exposed at the Internet real estate company. But an investors’ suit seeking damages from the company, its auditor and former executives would be halted or slowed until next March if prosecutors succeeded in their bid to stop witnesses from providing sworn statements in deposition questioning by attorneys.

One deposition already has been taken in the civil case and another -- this one of a key participant in the fraud who has pleaded guilty -- is scheduled for Thursday. According to federal prosecutors in Los Angeles, testimony also is being sought from additional former Homestore employees who have pleaded guilty, as well as targets of the continuing criminal investigations and third-party witnesses.

Depositions may “provide the as-yet-uncharged defendants with an unfair advantage in a future criminal case” by allowing them to solicit and review evidence in the civil procedures, which have looser procedural rules than criminal proceedings, prosecutors Douglas Fuchs and Michael Wilner argued.

In court filings, Fuchs and Wilner said authorities expect to announce another round of guilty pleas and cooperation agreements “within the next few weeks” from additional former employees of Homestore.

“Other targets of the investigation, however, likely will be indicted by a federal grand jury for their roles,” the prosecutors said. The indictments are expected to occur by March of next year, they said, asking U.S. District Judge Marsha Pechman in Seattle, who is overseeing the civil litigation, to freeze the case for at least that long.

Fuchs and Wilner said that civil depositions would jeopardize not only their case, which focuses on the California company, but also a parallel investigation into AOL’s accounting that is being handled by federal prosecutors in Virginia.

The shareholders’ lawyers oppose the government’s motion because “the work in the civil case shouldn’t be thrown out the window -- we want to keep our momentum going,” said Bay Area attorney Bruce Simon, who represents Homestore investors led by the California State Teachers’ Retirement System, the third-largest U.S. pension fund.

Simon, who already has deposed one of Homestore’s auditors at accounting firm PriceWaterhouseCoopers, said he would be glad to cooperate with prosecutors in scheduling testimony.

Pechman held one conference-call hearing Friday and scheduled another for today on the matter. In previous high-profile fraud cases, including that of Lincoln Savings boss Charles H. Keating Jr., courts have allowed the criminal prosecution to take precedence over civil cases.

Homestore is the largest Internet-based provider of homes-for-sale listings and related services. Its announcement in late 2001 that it would restate its financial reports and that its founding managers had quit triggered a wave of private securities-fraud suits along with investigations by the U.S. attorney’s office, the FBI and the Securities and Exchange Commission. It recently settled the shareholders’ lawsuit for about $80 million in cash and stock.

Four former Homestore financial executives have pleaded guilty to fraud and conspiracy charges in a scheme to make Homestore look healthier -- and allow the employees to sell millions of dollars in stock -- by improperly booking advertising sales.

Several sources familiar with the investigation, speaking on condition of anonymity, said prosecutors have been trying to finalize plea agreements with as many as four former members of Homestore’s business-development unit. That group of employees devised the circular deals with other companies that, as described in filings by prosecutors, the SEC and civil attorneys, allowed Homestore to recycle its own funds as apparent revenue.

Peter Tafeen, the former Homestore business-development chief, opposes freezing the civil proceedings, said his attorney, Robert Friese of San Francisco.

Tafeen, who helped craft the joint-advertising deals that have come under scrutiny, is a target of the criminal investigation, his lawyers have acknowledged. Faced with the threat of accepting a 15- or 20-year prison sentence even if he strikes a plea bargain, Tafeen has elected to fight the prosecutors, contending he believed the deals and the accounting for them to have been legitimate.

The deposition of former Homestore Chief Financial Officer Joseph Shew is scheduled for Thursday. Shew, the first Homestore executive to strike a plea bargain, could be sentenced to a maximum of five years in prison.