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AOL Caught In HOMS Lawsuit

August 6, 2002

CalSTRS Amends Class-Action Shareholder Complaint

Inman News Features

The California State Teachers' Retirement System has refiled the pending shareholder lawsuit over Homestore's alleged accounting irregularities. The new filing by CalSTRS was a consolidated and amended version of the previous class-action lawsuit, not a new legal action, according to a Homestore spokesperson.

CalSTRS is the lead plaintiff in the consolidated lawsuits against the Westlake Village, Calif.-based technology company that operates and other homes-related Web sites.

CalSTRS is being represented in the lawsuit by the law firm of Cotchett, Pitre, Simon & McCarthy in Burlingame, Calif. Attorney Joe Cotchett is a well-known litigator who 10 years ago successfully prosecuted Charles Keatings' Lincoln Savings & Loan on behalf of its shareholders. That case resulted in $3.3 billion jury verdict that later was reduced to $1.75 billion.

The lawsuit alleges that Homestore illegally increased its revenues through round trip transactions that involved AOL, an Internet business unit of Time Warner. AOL has been caught up in the lawsuit, but is not named as a plaintiff, according to news reports.

The other defendants in the lawsuit are Homestore's former Chairman and CEO Stuart Wolff, former COO Peter B. Tafeen and former CFO Joseph J. Shew.

The relationship between Homestore and AOL dates to April 2000, when the two companies signed a five-year marketing and distribution agreement. Homestore at that time paid AOL $20 million in cash and issued AOL about 3.9 million shares of Homestore common stock. Homestore guaranteed that set percentages of AOL's stock would achieve 30-day average closing prices in the $60-plus range on July 31 in 2003, 2004 and 2005, and Homestore agreed to cover any shortfall in cash payments to AOL. The aggregate amount was limited to $90 million, an amount reported as restricted cash on Homestore's balance sheet.

Homestore disclosed late last year that it had filed an arbitration action against AOL. The notice of arbitration alleged that AOL breached the agreement and sought a variety of remedies, including equitable relief and damages.

CEO Mike Long has said he expects the company to reach settlement agreements in both the AOL arbitration and the original shareholder lawsuits.

CalSTRS has a $100 billion investment portfolio and is the third-largest pension fund in the United States. The state-run teacher's pension program reportedly lost $9 million on its investment in Homestore.

The amended lawsuit was filed in U.S. District Court in Los Angeles.

Homestore stock closed today at 75 cents.

Copyright: Inman News Service

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