Homestore Accounting Woes Spread to Partner

While Homestore.com (Nasdaq: HOMSE) tries to move on from its accounting woes, which led to the restatement of millions of dollars worth of income over a two-year period, at least one of its online partners is now sharing the company’s pain.

L90 Inc. (Nasdaq: LNTY), an online marketing firm, was slapped with a lawsuit Thursday that charged the company used bartered marketing agreements with Homestore to inflate its revenue and help keep its stock price high.

The suit was filed by New York-based law firm Milberg Weiss, which also is pressing a suit against Homestore and has led the charge on a host of other accounting-related lawsuits, including those against telecom firm Global Crossing, Tyco and the now-infamous Enron.

Cancelled Merger

The complaint charges that L90 violated U.S. Securities and Exchange Commission rules by “engaging in improper roundtrip transactions with HomeStore.com and its customers.

These transactions had the effect of dramatically overstating revenues and assets.”

The lawsuit came just hours after L90 announced it had formally terminated a planned merger with eUniverse and said its chief financial officer, who previously had been placed on administrative leave, had formally resigned. A week earlier, L90 CEO John Bohan resigned from his post.

Caught in Web

Homestore, by far the dominant company in the online real estate space, has made a series of revelations about its own accounting practices. The focus has been on Homestore’s recording of bartered advertising — providing space on its family of sites in exchange for ad space from its customers — as revenue.

Early this year, Homestore admitted it reported artificially inflated revenue for the first nine months of 2001 by nearly $100 million.

Last month, the company said an internal inquiry found that 2000 revenue had been overstated by nearly $40 million, lowering the actual revenue total to $180 million and widening Homestore’s fiscal loss for that year from $115 million to $146 million.

Moving On

After announcing that several employees connected to the overstatement were fired and that several key executives resigned, Homestore has tried to focus on moving past the scandal.

Earlier this week, the company said it will sell its profitable ConsumerInfo.com unit to a British online company for US$130 million in cash. Homestore said the transaction will allow it to focus on its core real estate business but admitted the deal will prevent it from generating positive cash flow for the year.

“The sale of ConsumerInfo.com is consistent with our stated objective of focusing on our core real estate businesses,” CEO Mike Long said in a statement. “This transaction divests Homestore of a business that is not central to our real estate focus and allows us to redeploy substantial resources to our primary business objective.”

Despite the battering, Homestore shares have rebounded. The stock was trading at $2 early Friday, well above its low of 50 cents reached at the height of the accounting revelations last month.