WESTLAKE VILLAGE, Calif. (Inman News Features) - A shareholder lawsuit has been added to the list of troubles facing Homestore.com. The class action against the Westlake Village, Calif.-based company that operates Realtor.com and other homes-related Web sites was filed last week in the U.S. District Court for the Central District of California on behalf of certain purchasers of Homestore's common stock.
The complaint charges that Homestore chairman and CEO Stuart H. Wolff, EVP business development and sales Peter B. Tafeen and former CEO Joseph J. Shew "misrepresented Homestore's true prospects in an effort to conceal Homestore's improper acts until they were able to sell $27.9 million worth of their own Homestore stock."
The complaint alleges that Homestore violated generally accepted accounting principles required by SEC rules by engaging in improper "roundtrip" transactions that resulted in overstatement of the company's revenues and assets in the second, third and fourth quarters of last year and the first, second and third quarters of this year, that those transactions ceased in the third quarter of this year because the company's "roundtrip partner" stopped doing those transactions with the company and that the company's reporting of such transactions in its financial results constituted stock price manipulation.
The complaint doesn't define "roundtrip" transaction or reveal the name of the "roundtrip" partner.
The plaintiffs state that Homestore's stock price increased $7 per share, or more than 25 percent, on July 19, 2000, the day after the company reported allegedly overstated financial results, then dropped by more than 50 percent after the company reported poor results for the third quarter of 2001 and cut its 2002 revenue projections from $563 million to $375-$425 million, according to the law firm representing the shareholders.
Homestore.com attributed the weak third quarter and reduced prospects to a decline in advertising revenues.
The lawsuit alleges the negative developments resulted from a material decline in Homestore's business with its main "roundtrip" partner.
The complaint includes a point-by-point summary of positive forward-looking statements clipped from Homestore.com's quarterly financial results press releases and an allegation that such statements were false and misleading.
"The second quarter 2000 through third quarter 2001 financial results and the statements about them were false and misleading, as such financial information was not prepared in conformity with GAAP, nor was the financial reporting a fair presentation of the company's operations due to the company's improper accounting for its revenue in violation of GAAP and SEC rules," the complaint states.
Homestore.com's announcements warn that actual results may differ materially from forward-looking statements, forward-looking commentary is subject to a lengthy list of material risks and uncertainties and investors should not place undue reliance on such statements.
A Homestore spokesperson said the company has not yet had a chance to review the complaint.
The SEC on Friday halted trading in Homestore's shares, after the company announced its board of directors' audit committee was reviewing some of its accounting practices and that prior financial results would be restated. Trading remains suspended today.
The complaint states that Wolff, Tafeen and Shew sold 444,225 shares of stock worth $13.2 million, 409,195 shares worth $12.1 million and 90,000 shares worth $2.6 million, respectively, during the class period from July 20, 2000, to Dec. 21, 2001. Shew resigned from the company earlier this month.
The plaintiffs seek to recover damages on behalf of investors who purchased Homestore common stock during the class period.