Securities
Aug. 14, 2002
Firm Announces $23 Million Securities Settlement
LOS ANGELES - In a possible sign of things to come in the era of corporate accounting scandals, the San Francisco business law firm Jacobs & Ferraro announced Monday it had won a $23 million settlement in a securities fraud case against Homestore Inc.
Former iPlace Inc. shareholders alleged they were fraudulently induced to sell their company to Homestore in exchange for Homestore stock that was artificially inflated. MemberWorks Inc. v. Homestore.com Inc., 02-3553 (D. Conn., filed March 1, 2002). Homestore had restated part of its financial results for 2001 because of accounting irregularities.
The Westlake Village-based Internet firm admitted no wrongdoing in the settlement.
"This is really a private dispute, and Homestore thought this is the best way to resolve it," said Homestore lawyer Robert C. Vanderet of O'Melveny & Myers. "It was a very amicable and quickly resolved settlement."
"Although we do not know what impact the current corporate environment had on Homestore's analysis, hopefully Homestore can be an example of moving aggressively to correct its accounting problems and to compensate those shareholders who may have been injured," said Micah R. Jacobs, lead counsel for the minority shareholders.
Marshall B. Grossman of Alschuler Grossman Stein & Kahan, which specializes in commercial and securities litigation, said many more securities fraud lawsuits are being filed. And given the highly publicized example of corporate wrongdoing at Enron, Adelphia and other big companies, more settlements could be on the way.
"In the current climate, the prospects for settlement are clearly enhanced," Grossman said. "There are risks in going in front of a jury today that simply didn't exist a year ago."
iplace, a real estate information provider, was formed in April 2000 through the merger of QSpace Inc., ConsumerInfo.com Inc. and eNeighborhoods Inc. In August last year, Homestore agreed to buy iPlace for $150 million.
About $72 million was to be paid in cash and the remainder in common stock worth $78 million at the time of the sale, according to Jacobs & Ferraro, which represented QSpace. But Homestore's share price dropped dramatically after the real estate services business disclosed accounting irregularities.
After Homestore announced in February that it intended to sell iPlace for $130 million in cash, MemberWorks Inc., which owns ConsumerInfo.com, filed suit in U.S. District Court for the District of Connecticut. QSpace shareholders intervened.
The plaintiffs asked the court to block the sale of iPlace or order Homestore to place some of the proceeds in a constructive trust, QSpace lawyer Eric K. Ferraro said. Homestore had not yet paid its stock purchase price for acquiring iPlace.
The case was transferred to U.S. District Court in Los Angeles, where HomeStore faces 20 proposed shareholder class actions. The settlement is subject to court approval.
"We believe this is an excellent result for all the parties in light of the complex nature of this litigation and the fact that our clients remain shareholders of Homestore," Ferraro said.
Joan Osterwalder
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