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Homestore.com: Now The Class Actions Begin

After Homestore.com, Inc. handed bad news to investors this week, some shareholders replied in kind by slapping the online real estate site with a class action lawsuit.

The Westlake Village, Calif.-based company issued a preliminary report Wednesday saying it overstated its earnings for the first three quarters of 2001 by as much as $95 million.

Now lawyers for New York and Los Angeles-based Weiss & Yourman filed with United States District Court for the Central District of California on behalf of investors who purchased Homestore securities between July 20, 2000 and December 21, 2001.

The complaint charges defendants with violations of the Securities Exchange Act of 1934 and the Securities Act of 1933. The suit says Homestore.com issued false and misleading statements and failed to disclose that it was overstating its revenues and assets, causing its common stock to trade at artificially inflated prices.

The law firm says it has until February 25, 2002 to look for a "lead plaintiff." More class action suits are expected.

Homestore.com is currently in the middle of an internal probe of its accounting practices, which will require that it restate its first-, second- and third-quarter results -- and potentially, its full-year 2000 results as well.

Under Securities and Exchange Commission rules, barter transactions -- which occur when a company trades ads for goods or services -- must be recorded separately from "real" revenue. Otherwise, companies could report barter ads as having been "sold," even though no cash changed hands.

Evidently, that appears to be the case with Homestore. The firm said it "overstated its online advertising revenues in the first three quarters of 2001 by between $54 million and $95 million in connection with certain advertising transactions that should have been accounted for as barter transactions because they were related to purchases by the company of goods and services from third parties."

As a result, Homestore would be reporting 15.4 to 27.1 percent less revenue for the three quarters ended Sept. 30 -- down from its previously-posed $350.9 million. After the readjustment, and assuming operating costs remain unchanged, the company would post losses from operations of from $271.9 million to $312.9 million for the period -- down from $245.8 million.

After the Audit Committee, independent legal counsel and independent accountants announced the probe on December 21, NASDAQ officials halted Homestore's stock from being traded publicly just before Christmas.

The auditors expect to complete the inquiry by the end of the first quarter of 2002.