Homestore, which has already paid out about $4.2 million to support the legal defense of a former executive, has reached an agreement that could drain up to $11 million more to pay the legal costs of another former executive, the company announced today.

Stuart Wolff, the company’s former chairman and CEO who resigned in 2002 amid an internal investigation, has already incurred about $7.6 million in fees and expenses, Homestore officials said in a statement today.

Wolff’s legal costs relate to a federal criminal indictment, a Securities and Exchange Commission lawsuit, a shareholder class-action lawsuit, and another action, according to the Homestore announcement.

Though past management problems continue to plague Homestore, the public company’s financial results have improved this year to achieve profitability. Homestore operates several online home-search sites, including Realtor.com, HomeBuilder.com and RentNet.com.

“In the absence of a settlement, the company faced the possibility of having to advance substantial amounts to Wolff with respect to these matters, while maintaining only an uncertain potential claim for repayment,” Homestore announced.

The civil and criminal cases also allege that Wolff misled investors and analysts about Homestore’s true financial condition and used the Sept. 11, 2001, terrorist attacks as a pretense for Homestore’s financial decline. Wolff and Tafeen both exercised stock options during the course of the alleged fraudulent scheme, obtaining millions of dollars in proceeds.

Under the terms of the settlement agreement, Homestore will pay Wolff the $7.6 million he has already incurred. In December 2005, the company will make an additional payment for additional amounts incurred up to that date. In January 2006, the company will deposit the remaining balance, if any, of the $11 million in a trust account, out of which additional reimbursement payments will be made to Wolff, according to the Homestore announcement.

As of June 30, the company had accrued an estimated $6.3 million for Wolff’s legal costs, Homestore said. If Wolff’s legal costs total less than $11 million, the remaining funds will be returned to Homestore, the company stated. If the costs are higher, Wolff has agreed not to seek additional compensation from Homestore, the company announced.

Homestore has already paid for about $4.2 million in legal expenses for Peter Tafeen, who served as executive vice president of business development for the company until his departure in November 2001.

The SEC and U.S. Department of Justice in April announced criminal and civil cases against Wolff and Tafeen.

Tafeen has requested an additional $700,000 from Homestore, though the company has appealed a court order that requires the company to pay for Tafeen’s legal costs.

Also, the company’s former general counsel, David Rosenblatt, is seeking about $700,000 for fees and expenses to pay for his defense against SEC and Justice Department investigations and actions, Homestore officials announced earlier this year.

The civil lawsuit and criminal indictment filed by federal authorities allege that Tafeen orchestrated the fraud scheme, and that Wolff and Tafeen participated in executing fraudulent “round-trip” transactions to artificially inflate Homestore’s revenue in order to exceed Wall Street analysts’ expectations. Wolff and Tafeen allegedly knew that the transactions fraudulently generated a circular flow of money in which Homestore recognized its own cash as revenue and concealed the scheme from the company’s auditors.

Also, the cases allege that Wolff misled investors and analysts about Homestore’s true financial condition and used the Sept. 11, 2001, terrorist attacks as a pretense for Homestore’s financial decline. Wolff and Tafeen both exercised stock options during the course of the alleged fraudulent scheme, obtaining millions of dollars in proceeds.

Homestore accounting irregularities of 2000 and 2001 led to the restatement of several quarterly earnings reports and prompted an SEC investigation, federal fraud charges against a number of former Homestore executives and a class-action shareholder lawsuit.

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

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