LOS ANGELES, Nov. 17 -- AOL Time Warner Inc. and Cendant Corp. were named as defendants in an amended shareholder suit against Homestore Inc. that claims the two companies helped the Internet real-estate site artificially inflate revenue.
Driving the transactions was Homestore's need to look favorable in the eyes of Wall Street analysts, and for departments within AOL and Cendant to look profitable, according to the suit, originally brought in August by the California State Teachers' Retirement System.
"Within the corporate ranks of AOL and Cendant, top executives were motivated to make their own departments' bottom line look good," the suit states.
The plaintiffs also added 14 other Internet-based firms to the suit and claim that the fraudulent transactions caused Homestore to restate $192.6 million in 2000 and 2001, making its share price collapse. Calstrs, the nation's third largest pension fund, says it lost more than $9 million on Homestore.com shares from May 2000 to December 2001.
AOL spokeswoman Tricia Primrose declined to comment. A message left for Homestore spokesman Dan Wool was not returned today.
"We believe the claims are meritless and reckless, and we will aggressively defend against this spurious and aggregious suit," said Elliot Bloom, a Cendant spokesman.
Homestore, which had a loss of $1.5 billion last year, is under investigation by federal prosecutors and government regulators. Last month, former chief financial officer Joseph Shew and former chief operating officer John Giesecke pleaded guilty to charges related to inflating revenue. Both executives are assisting prosecutors with further investigations into whether AOL improperly listed advertising revenue from Homestore at its America Online unit.
In the amended suit filed Friday, the plaintiffs cite information from unidentified executives who were members of Homestore's senior management to outline three revenue-building plans that involved barter transactions, buying revenue through stock sales, and "round-tripping" with hidden third parties. The last of these involved AOL, which had an advertising agreement with Homestore, and Cendant, the suit alleges. In each case, AOL or Cendant paid money to Homestore, which was booked as revenue by the Internet company.
Homestore repaid the money by buying unnecessary goods or services, or by paying inflated prices for goods, from third-party companies that returned the funds to AOL or Cendant through another set of transactions, in return for "kickbacks," the plaintiffs allege.
At the close of its transactions, Cendant owned 20 percent of Homestore through stock that the real-estate company had issued, making it "critical that revenues continued to flow to Homestore," the suit states.
The Los Angeles Times and New York Times reported the amended lawsuit Saturday.
Shares of Homestore shares closed Friday at $1.02, up 2.1 cents, on the Nasdaq Stock Market. AOL Time Warner closed at $15.42, up 12 cents, on the New York Stock Exchange. Cendant shares closed at $11.91, up 25 cents, on the NYSE.