News Analysis

September 26, 2002

Homestore: Implications of wrong-doing

Inman News Features

Take pity on Mike Long. No matter how much progress Homestore's new CEO makes in improving the company's financial and market positions, its sordid history of bogus revenues and stock-price manipulation hype keeps coming back to haunt him like a familiar ghost that refuses to go back to the graveyard.

The Securities Exchange Commission and U.S. Department of Justice today announced that three former Homestore executives agreed to settle an SEC lawsuit, plead guilty to criminal charges and cooperate with the government in its continuing investigation of an extensive scheme allegedly used last year to fraudulently inflate Homestore's online advertising revenues.

The news may seem remote from Homestore's day-to-day operations and its efforts to rebuild its relationships with its Realtor customers, given that the executives in question long since parted ways with the company. But the news casts a shadow—albeit one that may well be temporary--over the company by linking the Homestore name with such illegal activities as conspiracy to commit securities fraud, wire fraud, insider stock trading, securities fraud, lying to the auditors, falsifying corporate books and records, and aiding and abetting corporate reporting and record-keeping violations—all of which were part of today's guilty pleas and none of which are the sort of activites that bolster confidence among a company's investors, customers or employees.

The upside is that the SEC said it would not bring any enforcement action against Homestore because of its "swift, extensive and extraordinary cooperation" in the investigation. A statement from Attorney General John Ashcroft lauded the company for "reporting its discovery of possible misconduct to the SEC immediately upon the audit committee's learning of it, conducting a thorough and independent internal investigation, sharing the results of that investigation with the government (including not asserting any applicable privileges and protections with respect to written materials furnished to the Commission staff), terminating responsible wrongdoers and implementing remedial actions designed to prevent the recurrence of fraudulent conduct."

The admissions of wrongdoing by former Homestore executives nonetheless could have implications for the 30 or so shareholder lawsuits against the company that have been consolidated with California State Teachers Retirement System (CAL-STRS) as the lead plaintiff. Long has expressed optimism about reaching "an affordable negotiated settlement" in the matter. But the shareholders and their attorneys must be taking heart from the idea that today's guilty pleas could strengthen their case.

Another open question is whether the guilty pleas could carry some weight in Cendant Corp.'s effort to renegotiate terms and restrictions contained in the 2000 agreement that provided for Homestore's acquisition of Cendant's Web site and Welcome Wagon International operations. Cendant has accused Homestore of breaching certain representations in the agreement and Long has indicated that the situation is related to Homestore's restatements of its 2000 and 2001 financial results.

And what about Stuart Wolff and Peter Tafeen? The names of Homestore's former CEO and EVP of business development are conspicuous by their absence from today's news. Are the SEC and DOJ letting Wolff and Tafeen out of the trap? Or have the jaws of the investigation yet to snap completely shut? Is there a possibility that the investigation could ensnare any more higher-ups—maybe even some still on Homestore's board or its payroll?

The answers no doubt will emerge over the next few days and the chips will fall where they may, either on the side of more trouble for Homestore—or, indeed, perhaps not. The process may be painful, but each development in the investigation brings the whole situation closer to closure and the SEC's statement that it will not take action against the company is a very positive development. Indeed, today's reappearance of Homestore's ghost-of-misdeeds-past may auger the day when the whole sorry affair finally will be put to rest.

Copyright: Inman News Service

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