The Background

Securities fraud class actions do not go to trial very often, and when they do, the stakes are always high. When lead plaintiff California State Teachers Retirement System decided to go to trial against the founder and former Chairman and CEO of Homestore.com, Inc., it sought up to $1.25 billion in class-wide damages. Homestore, an investor favorite among early Internet start-ups, had seen its stock price hit more than $200/share before the dot-com bubble burst, only to come crashing down two years later to less than $2/share. The plaintiff class claimed that a significant part of their class-wide losses was attributable to fraud reflected in the company’s later restatement of almost $200 million of revenues.

The defendant, Stuart Wolff, was already serving over four years in prison after pleading guilty to conspiracy to commit securities fraud. A dozen others, including Homestore’s former COO and CFO, had also pleaded guilty. All of the other defendants in the civil class action had been allowed to settle out. Now, with trial of the civil class action looming against him alone, Mr. Wolff turned to Paul Hastings to defend him.

In the face of these daunting circumstances, Paul Hastings achieved a stunning victory for its client.

The Team

Howard Privette, II Partner, Litigation Department

William F. Sullivan Partner, Litigation Department

D. Scott Carlton Associate, Litigation Department

THE CHALLENGE

The plaintiff class sought to leverage Mr. Wolff’s guilty plea into a backbreaking civil money judgment, and to do so it expanded the claims far beyond the scope of the plea itself. At trial, the Paul Hastings strategy was to keep the jury focused on the facts, so as to prevent the jury from becoming confused and deciding the case based on innuendo rather than the evidence. In addition, to properly assess Mr. Wolff’s potential liability for any shareholder losses, Paul Hastings advocated for the jury to make numerous specific findings related to complicated issues under the securities laws and, in particular, under never-before-litigated provisions of the Private Securities Litigation Reform Act of 1995 (PSLRA). Under the circumstances, a unique combination of savvy courtroom skills and a deep, nuanced understanding of the securities laws were required to guide the jurors through these complex factual and legal issues, and ultimately persuade them to reach a fair and proper result in the case.

THE RESULT

The jury rejected the vast majority of the plaintiffs’ claims of wrongdoing against Mr. Wolff, and in a special verdict, the jury made additional findings that drastically reduced Mr. Wolff’s potential liability for civil damages. Ultimately, the only shareholder losses for which Mr. Wolff could possibly be liable were far outweighed by the money the plaintiff class had already collected from settlements with the other defendants in the case prior to trial. In short, Paul Hastings established that Homestore’s shareholders had already been more than fully compensated for any losses in the case, and were not entitled to anything more from Mr. Wolff.

At the end of the trial, the final judgment entered in this landmark case was that the plaintiff class could “take nothing” from Mr. Wolff. The class action claims against Mr. Wolff were all dismissed, with prejudice.

Read More in Law360’s recent feature, "How They Won It: Paul Hastings Saves Ex-Homestore CEO $1.3B."