Late in 2001, an employee at what was then Homestore.com noticed some irregularities in the company’s accounting. What the audit committee of Homestore’s board would soon learn would usher in an onslaught of investigations and lawsuits that nearly buried the Westlake Village based Internet real estate services company. The accounting problems, related to improprieties in the way in which Homestore officials at the time accounted for revenues, would dog the company for the next five years, require a battery of attorneys, cost hundreds of millions in cash and stock shares and ultimately affect nearly every facet of its business. The crisis, which mirrored several other corporate accounting scandals playing out across the country at the time, could well serve as a case study. A number of other firms in similar situations did not survive, but Homestore, now known as Move Inc., was able to navigate its problems to a conclusion that allowed the company to rebuild and prosper in the wake of the scandal. Thanks largely to its responses both to the federal inquiry that ensued and the internal investigation it launched independently, Homestore itself was never charged with any wrongdoing. After seeing its stock price plummet to less than a dollar during the worst days of the crisis, Move Inc. shares these days are trading in the high $5 range. The company has a completely new business model since its inception as an advertising vehicle for realtors and now provides real estate listings and relocation and home-buying tools for consumers along with software and other products for agents. But that wasn’t how things looked back when the problems were still unfolding. “I think the biggest problem is you’re under attack,” said Terry Kontonickas, vice president, litigation and administration. “Our insurance companies filed declaratory relief to rescind our insurance. We had some companies suing us. Former shareholders of companies we acquired were suing us. You have to manage the anxieties of your current employees and at the same time you’ve got these former employees saying pay my bills. So it’s very complex and it can be overwhelming because you have to put everything in a compartment and yet look at it as a whole.” Upon learning of the improprieties, the audit committee of Homestore’s board of directors immediately began an investigation and reported the problems to the Securities and Exchange Commission. The former executive team soon left, and with a new team in place led by W. Michael Long, CEO, a new general counsel, Michael Douglas (who resigned last year) came on board. The company hired outside counsel and auditors as well, and Kontonickas was recruited to manage the litigation unfolding. By the time she and Douglas arrived in late 2001 and early 2002, the SEC and U.S. Dept. of Justice were knee deep into their investigations concerning charges that some of Homestore’s former executives had inflated the company’s revenues and engineered bogus schemes to boost advertising revenues. When the investigations became public, Homestore’s problems quickly escalated. A number of shareholder groups filed suit, and there were contract disputes arising from several of Homestore’s marketing partnerships. Others came forward charging Homestore with misdeeds in the state courts as well, and pretty soon, no less than seven of the insurance companies that provided liability policies to the company’s officers and directors began actions to rescind some of those policies. “What the company was facing was shareholders saying they were negatively impacted by what occurred. Then there were third party companies that also brought suit saying they were negatively impacted by what occurred,” said Jim Caulfield, who joined Move in 2004 and has since replaced Douglas as executive vice president and general counsel. (Douglas did not return calls for comment for this story.) By the second quarter of 2002 Homestore’s internal inquiry was completed and its revenues restated. For the year ended Dec. 31, 2000, Homestore saw its revenues reduced from a previously reported $230 million to $181.3 million and its net loss increased from $115.2 million previously to $146.1 million. The following month, Homestore restated its revenues for the first three quarters of 2001, reducing its revenues for that period to $227.9 million versus $350.9 million previously reported and increasing its net loss from $245.8 million to $359 million for the period. But Homestore was still facing some 20 lawsuits that threatened to become class actions. Class Action In August, 2002 those lawsuits were consolidated into a single Securities Class Action as it became known with California State Teachers’ Retirement System named lead plaintiff. Meanwhile, however, other lawsuits deriving from the class action had also been filed, and some of the company’s former executives were facing criminal charges. “When you have all of these people knocking at your door, and you have a mountain of attorneys fees you have to pay to defend yourself, you have to come up with a strategy of what brick do you let fall first,” said Kontonickas. “It was important for us to get rid of the CalSTRS lawsuit. That was the biggest liability.” The company’s problems were exacerbated by its financial position. Homestore, which emerged during the Internet bubble, was not generating any revenue to speak of at the time, a fact that ultimately helped at the negotiating table. “We were able to go to mediation with the class plaintiff and plead poverty,” Kontonickas said. “If they pursued it, we could not have kept up with the litigation.” The Securities Class Action went to arbitration where Homestore was able to persuade the litigants that their best interests were served by helping to keep Homestore afloat. Under the terms of an agreement reached in August, 2003, Homestore settled the CalSTRS class action for $13 million in cash along with 20 million shares of stock valued at the time at $50.6 million. The company took a charge of $63.6 million in the year ending Dec. 31, 2003 due to the settlement. The settlement also required the company to institute a number of corporate governance reforms. But Homestore was facing fires on other fronts as well. Criminal charges Several of its former officers, Peter Tafeen and Stuart Wolff among them, were facing criminal charges, and they too filed lawsuits against their former employer hoping to get Homestore to foot their legal bills. Those suits did not help as Homestore sought to resolve other disputes with companies it had acquired using Homestore stock, a standard M & A; play at the time. “The people who had sold their company to us and had gotten shares in return saw those shares plummet,” said Caulfield. “Part of the trickiness of defending those suits was, keep in mind, we had two senior executives who had negotiated those deals and who were facing criminal charges. Imagine having to go to trial where the plaintiff says we’re going to call Peter Tafeen to the stand, and he shows up and pleads the fifth with a jury there. Luckily we never had to get to that point, but that was what the plaintiff’s attorneys knew they had in their pocket.” With the likelihood that its former employees would become embroiled in a protracted defense, Homestore cut its losses, and agreed to pay up to $11 million for Wolff’s legal expenses and $11.85 million for Tafeen’s. The additional so called “derivative” lawsuits were also consolidated into two suits and settled with agreements that included some corporate governance reforms and payments in cash and stock shares to the plaintiffs’ attorneys. The company’s cash position made the settlements particularly difficult to negotiate. “It was a balancing act, because you didn’t want to bleed out so many shares as to make them worthless and obliterate the value of the company,” said Caulfield. With the lawsuits behind it, the company moved to stabilize its position, both financially and with respect to its corporate governance. In November, 2005, Move secured a $100 million investment from Elevation Partners, funding it is using for growth and development. Last June, one of the last pieces of the puzzle was put into place. Move, which under the terms of the settlement with CalSTRS agreed to search for an independent board director, appointed Geraldine Laybourne, the founder of Oxygen Media, to that post. In 2006, Move recorded net income of $18.6 million or $0.10 per diluted share on revenues of $290.4 million compared to earnings of $234,000 or $0.00 per share on revenues of $252.6 million for 2005. And while the company’s strategic initiatives have helped it to overcome the problems of its past, officials also point to the way in which the company handled those issues as a deciding factor in its success. As the SEC said at the time, “it would not bring any enforcement action against Homestore because of its swift, extensive and extraordinary cooperation in the Commission’s investigation.” The Long Road Back 12/01: Homestore announces accounting inquiry; reports to SEC. 3/02: Internal accounting inquiry completed. 8/03: Reaches agreement to settle Securities Class Action with CalSTRS. 4/05: Former Homestore officers Stuart Wolff and Peter Tafeen charged with defrauding investors. 9/05: Homestore agrees to pay up to $11 million for legal fees incurred by Wolff. 11/05: Elevation Partners announces $100 million investment in Homestore. 2/06: Homestore agrees to pay up to $11.85 million in legal fees incurred by Tafeen. 3/06: Tafeen pleads guilty to securities fraud. 6/06: Wolff convicted of accounting fraud. Shareholders approve name change to Move Inc. 10/06: Wolff sentenced to 15-year prison term.
