Corporate titans AOL Time Warner, PricewaterhouseCoopers and Cendant were key players in the financial scandal that erupted last year at online real estate firm Homestore, according to an amended class-action complaint filed Friday in Los Angeles.
Scheming to boost their company’s revenue and stock price while the dot-com economy was still hot, former Homestore executives devised bogus deals involving 20 Internet and financial firms, the lawsuit by shareholders charges.
Homestore allegedly used the deals to funnel cash from itself to other companies and back to itself.
The lawsuit alleges that executives at AOL, Cendant and PricewaterhouseCoopers Homestore’s auditor helped structure many of the illegal and questionable deals that forced Homestore to reduce its revenue by $193 million, including other accounting changes, for fiscal 2000 and 2001.
The scandal led to a Homestore management shake-up and investigations of Homestore’s and AOL’s accounting by the Justice Department and the Securities and Exchange Commission. Since the scandal surfaced last December, Homestore has ousted several executives and named new top executives. AOL has fired two executives involved with Homestore.
”The executives obviously believed the wealth of the Internet bubble would cure all wrongs until the bubble burst,” says attorney Bruce Simon of Cotchett Pitre Simon & McCarthy.
The law firm sued Homestore on behalf of the California State Teachers Retirement System pension fund, which lost $9 million in its Homestore investment. Allegations have been made against:
AOL Time Warner. From 1999 to 2001, Homestore and AOL engaged in several deals ”designed to artificially inflate” their revenue, the lawsuit charges.
The key architects were former Homestore sales executive Peter Tafeen, former AOL senior vice president Eric Keller and David Colburn, a former AOL executive and top dealmaker, the lawsuit says. Two other AOL executives, vice chairman Joseph Ripp and senior vice president Steven Rindner, signed off on the last sham deal with Homestore, the suit alleges.
PricewaterhouseCoopers. Richard Withey, the partner who headed the Homestore account and advised the firm on some of its deals, knew Homestore was booking false revenue, the lawsuit claims.
The auditors ignored many red flags and gave the go-ahead to the accounting on some of the deals, the complaint charges.
Cendant. Richard A. Smith, real-estate division CEO and a Homestore director at the time, worked closely with Homestore to design several improper deals involving Cendant, the lawsuit claims. Smith resigned from the Homestore board in March.
Cendant, a franchiser of Century 21, Coldwell Banker and ERA, sold its online real estate service last year to Homestore and became its largest investor, now owning 16% of its stock.
Cendant and PricewaterhouseCoopers spokesmen declined to comment, and AOL and Homestore representatives could not be reached.
Homestore executives gained $80 million from inside trading during the frauds, the lawsuit alleges.
In September, former Homestore executives Joseph Shew, John Giesecke and John DeSimone pleaded guilty to securities fraud-related charges and agreed to help investigators.