In re Homestore. Com, Inc. Securities Litigation
| Decision Date | 07 March 2003 |
| Docket Number | No. C01-11115 MJP (CWx).,C01-11115 MJP (CWx). |
| Citation | 252 F.Supp.2d 1018 |
| Parties | In re HOMESTORE.COM, INC. SECURITIES LITIGATION. |
| Court | U.S. District Court — Central District of California |
Gary S. Soter, Clifford H. Pearson, Wasserman Comden Casselman & Pearson, Tarzana, CA, Jeffrey H. Dasteel, Katherine M. Pratt, Skadden Arps Slate Meagher & Flom, Los Angeles, CA, Joseph W. Cotchett, Bruce L. Simon, Robert G. Retana, Peter E. Borkon, Cotchett Pitre, Simon & McCarthy, Burlingame, CA, Tracey L. Worthington, Bernstein Litowitz, Berger & Grossman, San Diego, CA, for T. Jeffrey Simpson.
Joseph W. Cotchett, Bruce L. Simon, Mark Cotton Molumphy, Steven N. Williams, Nanci E. Nishimura, Robert G. Retana, Peter E. Borkon, Cotchett Pitre Simon & McCarthy, Burlingame, CA, for California State Teachers Retirement System.
Robert C. Vanderet, Seth Alben Aronson, Sharon Louise Tomkins, O'Melveny, & Myers, Los Angeles, CA, for Homestore.com, Inc.
Howard M. Privette, Paul Hastings Janofsky & Walker, Los Angeles, CA, for Stuart H. Wolff.
Robert C. Vanderet, Seth Alben Aronson, O'Melveny & Myers, Los Angeles, CA, Robert Charles Friese, Donna M. Herzing, Zesara Chan, Shartsis Friese & Ginsburg, San Francisco, CA, for Peter B. Tafeen.
Dean J. Kitchens, Lynn Marie Dean, Gibson Dunn & Crutcher, Los Angeles, CA, for PriceWaterhousecoope.
Ana C. Reyes, George Borden, F. Whitten Peters, Ryan T. Scarborough, Williams & Connolly, Washington, DC, John B. Quinn, Thad Alan Davis, Quinn Emanuel Urquhart Oliver & Hedges, Los Angeles, CA, for AOL Time Warner Inc.
Jeffrey H. Dasteel, Katherine M. Pratt, Skadden Arps Slate Meagher & Flom, Los Angeles, CA, Samuel Kader, Stephen P. Warren, Skadden Arps Slate Meagher & Flom, New York, NY, for Cendant Corp.
Stuart A. Shanus, Reed Smith Crosby & Heafey, Los Angeles, CA, for Dorado Corp.
Pamela J. Naughton, Sheppard Mullin Richter & Hampton, San Diego, CA, for Akonix Systems Inc.
INTRODUCTION This Complaint provides one explanation of how the now-infamous internet "bubble" occurred. Plaintiff in this putative class action is a shareholder in Homestore.com, Inc., ("Homestore") an internet-based company that provides links to a wide range of services related to home ownership, including real estate sales, home renovation, and relocation services. Plaintiff alleges in its complaint that several Homestore insiders, with the knowledge of Homestore's auditor and the active participation of various outside business entities, unlawfully created revenue through various types of dubious transactions in order to prop up Homestore's stock price. Plaintiff claims that these transactions, combined with improper accounting and the release of written and oral public statements made to the SEC, analysts, and the general public, perpetrated a fraud on Homestore's shareholders and the investing public in violation of Federal securities statutes and regulations promulgated thereunder. Eventually, Homestore was forced to restate seven quarters of revenue because of the improper transactions and accounting. By this action, plaintiff seeks to recover damages incurred when the market price of Homestore common stock fell dramatically once the need for restatement became public.
This is a massive piece of litigation. In all, plaintiff has named twenty-eight (28) defendants who allegedly made misleading statements or omissions and/or participated in a scheme to defraud investors in contravention of federal securities laws. The Court notes from the outset that two other aspects set this case apart from most securities litigation reported in the case law. First, plaintiff makes allegations based on inside sources who were most probably former executives at Homestore and therefore provide a unique insight not generally available to most private securities litigants. Second, four former Homestore executives have pled guilty to various criminal charges involving securities fraud and insider trading. Thus, this case does not present the question of whether the fraud actually happened, but rather who knew about it, who participated in it, and who can be held liable for it.
Defendants Homestore.com and Peter Tafeen have opted to answer the complaint. All other defendants with the exception of Jeff Kalina and Top Producers Systems have filed motions to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) and the Private Securities Litigation Reform Act ("PSLRA") of 1995, 15 U.S.C. § 78u. Having considered the voluminous pleadings and papers filed by the parties, and having heard oral argument on the issues, the Court rules as follows:
1) The motions of the following defendants are hereby DENIED: Stuart H. Wolff (Dkt. No. 126), Pricewaterhouse Coopers, (Dkt. No. 185);
2) The motions of the following defendants are GRANTED, and the complaint as to each defendant is DISMISSED WITHOUT PREJUDICE: David Rosenblatt (Dkt. No. 116), Allan Merrill (Dkt. No. 104), Catherine Kwong Giffen (Dkt. No. 204), Sophia Losh (Dkt. No. 117);
3) The motions of the following defendants are GRANTED, and the complaint as to each defendant is DISMISSED WITH PREJUDICE: AOL Time Warner (Dkt. No. 122), Eric Keller (Dkt. No. 203), David Colburn (Dkt. No. Ill), Cendant Corporation (Dkt. No. 202), Richard Smith (Dkt. No. 202), 190 (Dkt. No. 205), Akonix (Dkt.Nos.108-109), CityRealty (Dkt. No. 108-113), Classmates Online (Dkt. No. 110), Corner-Hardware (Dkt. No. 108), Dorado Corporation (Dkt. No. 108), GlobeExplorer (Dkt. No. 100), Internet Pictures (Dkt. No. 108), Promise-Mark (Dkt. No. 108), RevBox (Dkt No. 108), SmartHome (Dkt. No. 108), and WizShop (Dkt. No. 153). This order does not include or cover named defendants Privista, Inc, Top Producer Systems, Inc., or Jeff Kalina. Privista's Motion to Dismiss (Dkt. No. 209) was filed on February 24, 2003, and therefore will be noted for consideration on March 21, 2003, unless agreed otherwise by the parties.
Plaintiff makes the following factual allegations, which for purposes of this motion the Court must accept as true and construe in the light most favorable to the plaintiff. No. 84 Employer-Teamster v. America West, 320 F.3d 920, 930 (9th Cir. 2003). The Court evaluates these allegations with the presumption that a complaint should not be dismissed "unless it appears beyond a doubt that the plaintiff cannot prove any set of facts in support of the claim that would entitle him or her to relief." Id., citing Williamson v. Gen. Dynamics Corp., 208 F.3d 1144, 1149 (9th Cir.2000). In this section, the Court gives a brief description of the parties, then an overview of the alleged illicit transactions that form the basis of the fraud, followed by a detailed factual recitation based on the plaintiffs allegations. Allegations specific to each defendant are analyzed separately below.
Lead plaintiff California State Teachers' Retirement System ("CalSTRS"), a pension fund for California teachers, brings this putative class action against the defendants for damages arising from plaintiffs purchase of large amounts of Homestore common stock. These purchases were based on allegedly false or misleading financial statements filed with the SEC, as well as public comments made by the defendants.
For convenience, the Court has grouped the defendants into four general categories: present and former executives of Homestore ("the Insiders"), business partners involved in arranging various "triangular" transactions ("the business partners"), the third party vendors who typically sold services or stock to Homestore and purchased Homestore advertising ("the third party vendors"), and the auditor Pricewaterhouse Coopers ("PWC"). Factual allegations as to each category are similar in some respects, but the Court must consider the allegations made as to each individual defendant when determining whether the requirements of Federal Rules of Civil Procedure 12(b)(6) and 9(b) and the PSLRA have been met.
Insider defendants include Peter Tafeen, former Executive Vice President of Business Development and Sales; Stuart Wolff, former CEO and Chairman; David Rosenblatt, former Senior Vice President and General Counsel; Catherine Kwong Giffen, former Senior Vice President of Human Resources; Allan Merrill, current Executive Vice President of Corporate Development; Sophia Losh, former Senior Vice President of the Strategic Alliance Group ("SAG"); and Jeff Kalina, former Director of Transactions. Other major participants in the scheme include Joseph Shew, former Vice President of Finance and later CFO; John Giesecke, former CFO, and John DeSimione, former Director of Operations, Planning and Transactions in the Finance Department. These last four pled guilty to various criminal charges of corporate financing fraud and insider trading. The Complaint alleges that each and every one of these inside defendants was motivated by personal profit to keep the price of Homestore stock high so that each could reap huge benefits from selling off vested and exercised stock options. Plaintiff alleges that these sales constituted illegal insider trading.
There are three major players in the business partner category, with three individuals closely associated. Plaintiff alleges that America Online Time Warner ("AOL") was a major player in arranging many of the illicit revenue boosting transactions. AOL employees David Colburn and Eric Keller are also named as defendants for their roles as the primary Homestore contacts within AOL and the architects of many of the improper "round trip" transactions. Both were released by AOL under suspicion of certain illegal transactions with Homestore and other companies. Plaintiff does allege, however, that the transactions continued after the two individuals left, further implicating AOL in the scheme to defraud.
Cendant Corporation ("Cendan...
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