CalSTRS Sets Sights on Homestore Shenanigans

August 5, 2002 (PLANSPONSOR.com) - Its $9 million lost investment may be a fraction of its total assets, but the California State Teachers' Retirement System (CalSTRS) is taking investor fraud seriously.

The Wall Street Journal reported that the $100 billion CalSTRS claimed that the loss resulted from complex third-party transactions involving AOL which CalSTRS alleged allowed Homestore to boost its revenue numbers.  AOL, a unit of AOL Time Warner, is not named as a defendant.

Even though the reported loss is a tiny portion of the fund’s assets, the Homestore suit is another signal that institutional shareholders are wearying of reported corporate wrongdoing and the losses it produces and are increasingly ready to fight back.

Unconventional Dealings

Homestore, which operates real estate Web sites such as Realtor.com, is a once-high dot-com stock whose share price had soared above $100 in 2000.

The Securities and Exchange Commission (SEC) is investigating AOL for a series of unconventional transactions that occurred in 2000 and 2001, which were highlighted in a series of Washington Post articles last month.

According to the WSJ, one issue in the probe is whether AOL’s online division improperly booked revenue from some of its dot-com partners. For example, America Online booked as advertising revenue $27 million that it received from cashing in stock warrants of a small Las Vegas software company called PurchasePro.com Inc. AOL says its accounting was appropriate.

The pension-fund lawsuit points the finger for at least one revenue-boosting transaction at SFX Technology, a small technology company, the WSJ said. According to the lawsuit, a director of business development at Homestore called a friend at SFX Technology and agreed to buy $2.03 million of “worthless technology” during the first quarter of 2000. The cash expenditure was put on the balance sheet as a technology asset.

SFX then allegedly bought $2 million in advertising on AOL, keeping $30,000 for itself. AOL then gave $1 million of the $2 million it received from SFX to Homestore, through a revenue-sharing advertising agreement it had with Homestore.

This allowed Homestore to recognize $1 million in revenue without disclosing that acquiring that revenue cost $2.03 million. The complaint states that the SFX transaction was one of many third-party revenue-boosting arrangements at Homestore.

SEC Inquiry

The SEC has been investigating Homestore since January, when Homestore said it had likely overstated its online-advertising revenue by booking revenue for transactions that should have been considered barter.

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