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Pension Fund Sues AOL Over Ties to Homestore

Nov 17, 2002 | The Wall Street Journal

AOL Time Warner Inc.'s (AOL, news) accounting woes deepened as the company was slapped with a shareholder suit alleging the media titan was complicit in fraud perpetrated with Homestore Inc. (HOMS, news) , The Wall Street Journal reported.

The California State Teachers' Retirement System, the nation's third-largest public pension fund, which lost about $9 million on Homestore shares, filed the amended lawsuit late Friday. In August, the pension fund filed a suit alleging that Homestore boosted revenue through complex third-party transactions involving AOL, but it didn't name AOL as a defendant.

"After conducting all this extensive research, we've really discovered a spider web of scandal," said Jack Ehnes, chief executive of the pension fund. " The true fraud isn't about any one company at all; it's many companies participating in an organized way."

The suit, filed in the U.S. District Court in the Central District of Los Angeles, also names as defendants Cendant Corp. (CD, news) and 14 other small companies. But some of the most striking revelations are about AOL's America Online unit, which allegedly crafted illegal "round trip" deals with Homestore. America Online's advertising deals already are being scrutinized by the Securities and Exchange Commission and the Justice Department. A spokeswoman for Homestore didn't return calls seeking comment. The SEC recently dropped Homestore as a subject of inquiry but continues to probe certain former Homestore executives.

According to the complaint, former America Online executive Eric Keller helped set up an arrangement that boosted Homestore's revenue by $15 million during the first quarter of 2001. These complex deals allegedly involved Homestore buying products from a third company, and that company in turn spending almost all the money it received from Homestore to buy ads on America Online. America Online then shared the advertising revenue with Homestore. Mr. Keller didn't return a call seeking comment.

The complaint alleges that one of the companies that participated in the scheme during that first quarter was PurchasePro.com Inc. (PROEQ, news), a small software company whose relationships with America Online also are being investigated by the SEC. A spokesman for PurchasePro, which is in Chapter 11 bankruptcy protection and wasn't named as a defendant in the suit, declined to comment.

Bruce Simon, of Cotchett, Pitre, Simon & McCarthy, attorney for the pension fund, said of the PurchasePro relationship: "Based on our confidential sources, the intersection between the Homestore and AOL investigation should prove to be fertile ground." He referred further inquires to the pension fund.

An AOL spokesman declined to comment. The company has tried to distance itself from these accounting problems by terminating Mr. Keller and his supervisor, David Colburn, and restating about $190 million in online advertising revenue over the past two years. Mr. Colburn didn't return a call seeking comment.


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