Editor’s note: The series has been corrected and amended in response to requested corrections, clarifying statements and additional information brought forward by lawyers for Realogy and Richard A. Smith.
This is the first of a two-part series on a legal settlement resolving the alleged involvement of Realogy Corp.’s predecessor, Cendant, in inflating the revenue of Realtor.com operator Homestore (now Move Inc.). This article details the terms of the settlement, and the reasons each side gave for agreeing to end a 6 1/2-year-long court battle. Part 2 examines aspects of deals between Cendant and Homestore that Homestore investors would later claim were concealed from them.
Realogy Corp. and Chief Executive Officer Richard A. Smith have extricated themselves from a legal battle over the alleged role of their former parent company in one of the most notorious episodes of the dot-com bust.
Smith and Realogy’s former parent company, Cendant Corp., were accused in a class-action lawsuit of concealing the reciprocal nature of deals that allegedly helped Cendant’s business partner, Homestore.com, claim revenue growth that artificially inflated the company’s share price.
After Homestore’s stock crashed, the nature of those deals and others emerged. Investors sued the company, its executives and business partners.
During the ride up, Cendant had taken a 20 percent stake in Homestore and Smith won a seat on the company’s board of directors. Cendant also had a "non-compete" agreement with Homestore — the operator of Realtor.com — that fed the site listings from Cendant’s Century 21, Coldwell Banker and ERA franchise systems.
Cendant’s real estate division, later spun off by its parent company as Realogy, was accused of helping Homestore pump up its revenue in exchange for Homestore’s purchase of Cendant’s Move.com and Welcome Wagon businesses at inflated prices.
When the reciprocal nature of those deals and others Homestore entered into with companies like America Online were revealed in the weeks after the Sept. 11, 2001, attacks, investors rushed to the exits.
On Dec. 21, 2001 — the day Homestore announced it was launching an internal audit and would restate past earnings — shares in the company were changing hands for $3.60 before trading was halted by NASDAQ. At their peak in January 2000, shares in Homestore traded for more than $120.
The company, which has since rebranded as Move Inc., eventually restated earnings spanning seven quarters in 2000 and 2001, deleting from its books $192.6 million in revenue, according to U.S. Securities and Exchange Commission filings.
The episode generated a flood of civil lawsuits and criminal charges. Thirteen former Homestore employees were convicted of violating securities law or settled charges with the SEC.
Civil suits by Homestore investors against the company and 27 other defendants were consolidated into a class-action lawsuit claiming nearly $1 billion in losses. The lawsuit, filed in December 2001, has produced about $120 million in settlements to date, according to court documents. …CONTINUED
The latest settlement in the 7-year-old lawsuit not only releases Cendant and Smith from liability, but allows Cendant to claim nearly $12 million paid by other defendants in the case.
Cendant was the last company named in the civil suit to reach a settlement with Homestore investors. Because Cendant was also a Homestore shareholder when the company’s share price collapsed, the company was in an unusual position. Not only was Cendant a defendant in the class-action lawsuit against Homestore, it was a potential injured party eligible to collect a share of settlements paid by other defendants.
To release itself from claims by Homestore investors, Cendant agreed to relinquish $4 million of the nearly $16 million in settlement proceeds the company stood to receive had it refused to settle and ultimately been dismissed from the case.
Cendant also gave up the right to receive any share of proceeds from a possible settlement with the final defendant in the civil lawsuit, former Homestore chairman, CEO and founder Stuart Wolff.
Wolff’s 2006 fraud conviction and 15-year prison sentence were overturned last year, when an appeals court ruled that the judge presiding over the case should have recused himself because he owned stock in America Online, one of Homestore’s partners in "roundtrip" advertising deals that allegedly helped inflate earnings (see story).
The civil case against Wolff is on hold until at least this fall, pending the outcome of his retrial on criminal charges.
Both sides said the settlement between Cendant and Homestore shareholders, reached through mediation, was preferable to dragging out a legal battle that resulted in the production of more than a million pages of documents and 52 witness depositions.
The claims against Smith and Cendant were originally dismissed in 2003 on the grounds that there was no evidence they contributed to any statements made by Homestore executives that might have misled investors.
That decision that was upheld by an appeals court more than three years later. The appeals court left room for Homestore investors to amend their complaint, but a second amended complaint was also rejected.
Last year, however, in another case addressing whether "secondary actors" can be held liable for another company’s violations of securities law, the U.S. Supreme Court issued a ruling that sent the Homestore case back to the original trial court for reconsideration.
In April 2008, Realogy expressed interest in settling the claims against Cendant and Smith through mediation. Within three months, an agreement had been reached, subject to approval by Homestore investors and the trial court. …CONTINUED
After the Supreme Court ruling, attorneys for Homestore investors prepared a third amended complaint against Cendant and Smith. The complaint summed up everything they’d learned about Cendant’s dealings with Homestore, in language tailored to address the issues raised by the Supreme Court ruling.
Attorneys for Homestore investors claimed Cendant was not merely a secondary actor, but had committed "primary violations" that deceived investors, such as providing $95 million to a "sham company" that funneled revenue to Homestore.
Those claims related to Cendant’s relationship with Real Estate Technology Trust, or RETT, and lawyers for Realogy and Smith point to public statements that disclose the purpose of RETT and the relationship of RETT to Cendant.
A Nov. 29, 2000, proxy statement, filed by Homestore, identified RETT as an affiliate of Cendant: "In connection with the mergers, we will enter into a number of additional agreements with Cendant with Real Estate Technology Trust, or RETT, with Cendant Mortgage Corp. and with NRT Inc., or NRT. RETT, Cendant Mortgage Corp. and NRT are each affiliates of Cendant."
Two agreements described in the proxy statement — a "Software License Agreement" and "iLead Agent Services Agreement" — accounted for $40 million of RETT’s purchase commitment and a third agreement mentioned in the proxy statement accounted for an additional $40 million, according to Samuel Kadet, a lawyer for Realogy and Smith.
The proxy statement refers to a purchase agreement that Homestore and RETT entered into "under which (RETT) will purchase some of our products and services for Cendant franchisees. RETT agreed to purchase these products and services through 2002."
The proxy statement, released more than one month after the Move.com deal was announced (Homestore’s share price shot up 31 percent on that day) — did not disclose how much Cendant stood to receive from RETT.
Kadet noted that Cendant’s CEO publicly stated in April 2001 that all of the funding for RETT "was intended for the purchase of products from Homestore."
Kadet also identified comments by U.S. District Judge Ronald Lew related to RETT.
In a Dec. 19, 2006, order related to a second amended complaint in the now-resolved litigation, the judge stated that a Cendant press release in October 2000 "suggests that there was no potential for the investing public to be deceived as to the nature of Cendant’s relationship with the RETT."
And in a separate statement related to the second amended complaint: "Given Cendant’s disclosure regarding its intention to purchase technology from Homestore," a shareholder allegation about the purpose of RETT "suggests that no false appearance was created as to either Cendant’s funding of the RETT or its use of the RETT to buy technology products."
Cendant was "a critical factor" in Homestore’s "rapid ascendancy into the highest ranks of Wall Street’s Internet darling companies," the latest shareholder complaint had alleged.
Uncertainty over whether the trial court would allow a case against Cendant to proceed in light of the Supreme Court’s ruling "helped frame the negotiations and settle the case," said Nancy Fineman, an attorney representing Homestore investors, in a court filing.
Fineman represented the lead plaintiff in case, the California State Teachers’ Retirement System, which claimed losses of more than $9 million on its $13.4 million investment in Homestore.
With courts having rejected two previous complaints against Cendant and Smith, "Their argument is we never had an operative complaint, which is true," Fineman told Inman News.
But with the Supreme Court ruling providing new clarity on a critical area of the law, and the original trial court being asked to rule on a third complaint against Cendant and Smith, "We could have probably gone through another few years of litigation," Fineman said.
A spokesman for Realogy, Mark Panus, said the settlement "was simply a way for Realogy to bring this matter to conclusion without further litigation or expense and to get the funds that belonged to the company on a quicker basis."
There was "no validity whatsoever" to the allegations made by Homestore investors, Panus said.
Next: In Part 2, "Realogy quietly exits Homestore scandal," lawyers for Homestore investors reveal details obtained from confidential sources about the "incestuous" nature of deals between Cendant and Homestore that were allegedly concealed from investors.
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