Homestore, the National Association of Realtors-affiliated company that operates several Internet-based home-search sites, including Realtor.com, will likely be forced to pay much of the $6.3 million that a former executive is seeking to pay his legal defense costs, the company has acknowledged in financial statements.

The Securities and Exchange Commission and U.S. Department of Justice in April announced criminal and civil cases against Stuart Wolff, the company’s former chairman and CEO who resigned in January 2002 amid an internal investigation; and Peter Tafeen, who served as executive vice president of business development for Homestore until November 2001.

The cases allege that Wolff and Tafeen participated in a scheme to artificially inflate the company’s online advertising revenues in order to beat Wall Street analysts’ expectations. The pair allegedly misled investors and analysts about the company’s true financial condition and blamed the company’s financial decline on Sept. 11 terrorist attacks.

Homestore has already paid for about $4.2 million worth of legal fees for Tafeen, and expects to make additional payments, too. Tafeen has submitted a new request for an additional $700,000, Homestore said in an SEC filing, and the company has appealed the original court decision that required payment for Tafeen’s legal costs.

Homestore announced last week in second-quarter financial statements that the company “is unable to estimate the amount of costs it may ultimately have to advance” to Tafeen and Wolff. Though Homestore is still plagued by its past management problems, the company is rebounding thanks to improved financial results. Company officials announced a net income of $3.3 million for the second quarter of the year, compared with a net loss of about $4.3 million for the same quarter in 2004.

The company also announced last week that it received a demand on June 14 from Wolff for advancement of legal fees and expenses purportedly relating to SEC and U.S. Department of Justice investigations and civil actions.

On July 1, Wolff filed a lawsuit in Delaware Chancery Court that “seeks advancement for legal fees and expenses purportedly incurred by Wolff in the amount of approximately $6.3 million. The complaint also seeks an award of expenses and fees incurred in connection with prosecuting Wolff’s claim for advancement,” Homestore said in an SEC filing.

Homestore is reviewing the issues raised in the complaint, according to company financial statements. “It is likely that the company will be required to advance a substantial portion of the $6.3 million and any future costs for (Wolff’s) defense, pending the outcome of the criminal and civil actions,” the company announced.

Also, Homestore received a demand on July 8 from its former general counsel, David Rosenblatt, seeking $690,000 for fees and expenses “in connection with the SEC and DOJ investigations and certain civil actions filed against Rosenblatt,” and the company reported it would likely be required to pay “a substantial portion of his demand.”

The criminal case against Wolff and Tafeen is scheduled for trial in January 2006 and a separate class-action case is also pending, according to Lawrence Barcella Jr., a lawyer who is representing Wolff. Barcella also stated that Homestore may be hard-pressed to deny the request to advance legal costs for Wolff, given the earlier court decision relating to Tafeen’s indemnification request.

Homestore officials had no comment today about the status of the appeal relating to the indemnification payments to Tafeen, and the company has reportedly not yet reached a decision on whether to appeal Wolff’s similar request for indemnification.

The criminal case against Wolff and Tafeen, filed in April 2005, contains charges of securities fraud including falsifying corporate books and records, lying to accountants, insider trading, providing false statements in quarterly reports, and circumventing internal accounting controls, according to the indictment. Bail was set at $250,000 apiece for Wolff and Tafeen in May 2005, and they subsequently posted bond and remain under minimum pretrial supervision, with travel restricted within the state of California.

***

Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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