Homestore Faces New Legal Woes

Legal trouble continues to dog Homestore Inc., the country’s largest Internet-based provider for homes-for-sale listings.

With several of its former employees already convicted on criminal charges in the wake of a book-cooking scheme, the Westlake Village company and two of its former high-ranking executives are being sued by the onetime owners of Top Producer, a Canadian company that was acquired by Homestore in May 2000. Wall Street firm Merrill Lynch & Co. is also named as a defendant.

The plaintiffs allege that Stuart H. Wolff, Homestore’s former chairman and chief executive, and Peter Tafeen, Homestore’s former executive vice president of business development, lied about their company’s financial health in the months leading up to the acquisition of Top Producer.

Under the terms of the merger, Top Producer’s owners received cash and nearly half a million shares of Homestore stock that Top Producer executives were led to believe was valued at about $12.1 million, according to the suit.

The value of Homestore’s stock plunged more than $1 billion as the Internet boom cooled and a major accounting fraud was exposed at the company, forcing it to restate its earnings in late 2001.

The lawsuit alleges that Wolff and Tafeen embellished the company’s stability and profitability in face-to-face meetings as well as during phone conferences leading up to the merger. The plaintiffs also allege that they relied in part on Merrill Lynch research reports that contained “false and misleading” information about Homestore.

The lawsuit seeks unspecified damages and restitution.

Attorneys for Wolff and Tafeen said they were unaware of the suit, which was filed March 4 in state court in Los Angeles. Although the attorneys for both Wolff and Tafeen confirm that their clients remain under investigation by the Justice Department and the Securities and Exchange Commission, neither man has been charged with a crime in connection to Homestore.

“If and when he’s served, we would challenge the pleadings and the allegations,” said Tafeen’s attorney, Robert C. Friese.

E. Lawrence Barcella Jr., an attorney for Wolff, said the complaint was filed by shareholders who chose not to participate in the massive class-action lawsuit filed two years ago.

“New plaintiffs, same old allegations,” Barcella said. “They take wholesale paragraphs and quotes from the class action filed two years ago.”

The lead plaintiff in that class-action lawsuit was the California State Teachers’ Retirement System. This week, a federal judge approved a $93-million settlement.

The plaintiffs’ attorney, Francis Gregorek of San Diego, didn’t return phone calls seeking comment. Merrill Lynch also couldn’t be reached.

For the current management at Homestore, the lawsuit is another reminder of the company’s recent troubles, even as it attempts to make a comeback.

“Our goal is still to resolve these legacy issues while operating the ‘other’ Homestore, which is focusing on our customers,” Homestore spokeswoman Erin Campbell said.

Homestore shares fell 29 cents to $3.75 on Nasdaq on Friday.