October 8, 1999

NAR faces stock option scandal

By TOM KELLY
The Real Estate Advisor

Years ago, when covering the National Football League, I traveled out of town for a game. I stayed in the home of a friend who was also a sportswriter. The Saturday before the big game, a huge box arrived at the front door. It was a console television set, a present from the team my friend was covering.

"Well, this will just have to go back," my friend said. "I'm sure the club was very genuine in its intentions, but there's no way I can keep it. I can't afford there to be even the slightest perception of a conflict of interest."

I thought about that experience the other day when I read how some National Association of Realtors executives were offered thousands of stock options before, or near, the initial public offering of HomeStore.com, which governs Realtor.com, the official NAR website.

What's the big deal? It all has to do with perception, disclosure and doing the right thing. The NAR is a not-for-profit trade organization yet members of its top echelon figure to profit from an offshoot that is now a publicly traded company. The average dues-paying members of NAR did not get the same treatment, nor did they know of the tendered offers to their national leaders.

"From what I understand, all members were given the option to buy 100 shares," said John Wallace, executive director of the Washington Association of Realtors. "I'm not quite sure how they were notified of this, but that's my understanding. I did not buy any shares."

Reportedly, Sharon Millett, NAR president, bought 15,000 shares at the IPO price of $20 each and sold the shares two weeks later for a huge gain. In most every situation, executives and owners are banned from selling shares during the cooling off period following a public offering. To compound the confusion, Millett reportedly sold the shares quickly because of concern over a conflict of interest.

Millett was not alone. According to an internal NAR report acquired by Inman News Features, NAR executives acquired thousands of shares in the company, prompting the association to develop standards for dealing with conflicts of interest. Incoming president Dennis Cronk bought 16,500 shares at $20 at the time of the IPO. In August, HomeStore also provided him with options to buy 15,000 shares, exercisable over 10 years, at the IPO price of $20.

A growing number of Realtors have asked for Millett's resignation and the subject will be the center of focus at the NAR annual convention, Nov. 11-15 in Orlando, Fla. A Realtor since 1979, Millett is broker-owner of Millett-Potvin Realty, in Auburn, Maine, a real estate brokerage firm specializing in residential and commercial properties.

HomeStore shares remained in the low to mid-$20 range for about 10 days. Shares closed at $40 4/5 on Aug. 16, before breaking the $50 ceiling on Aug. 25. While its all-time high is $59 7/8, the stock has been hovering this past week at $48 3/4. The stock trades on Nasdaq under the symbol HOMS.

"As Realtors, we are committed to very high professional standards, particularly when the issues involve matters of disclosure, fair play or conflict of interest," wrote Sam Pace, president of the Washington Association of Realtors, in response to a request for a comment on the matter. "Our Realtor members, and the public, have a right to expect the conduct of our national, state and local Realtor leaders to be exemplary in such matters.

"It's fair to say the reports of the situation with the IPO raise questions, and I think it's important that we obtain the facts. At this point, all I've seen are some stories on the Web. In fairness to Sharon and Dennis, I want to hear their personal explanations of exactly what transpired. They've both worked very hard for our members, and for the public. Realtors and homeowners alike are better off today because of their efforts. But for now, questions remain and I anticipate the Board of Directors will want some answers."

Rank-and-file Realtors may have had the option to purchase up to 100 shares of HomeStore.com before the company went public Aug. 5, but not all of them got the word. Several contacted in a random local survey had "no idea about the offer" or "thought they may have seen something in the mail." Even broker-owners of several franchises did not know the rank-and-file members had option rights.

"The only options were to Multiples Listing Services and brokers who became Gold Members," said Bill Riss, broker-owner of 12 Coldwell Banker Bain offices in the Puget Sound area. "We did not choose to have our listings exclusively on the site, so we were not involved in the options."

Riss was referring to a program offered earlier this year. In February, HomeStore (then known as RealSelect) closed a private equity offering and issued warrants to buy up to 143,326 shares of common stock to real estate brokers who signed up under RealSelect's Broker Gold program. Under the program, brokers agreed to use Realtor.com as their exclusive national listing provider, preventing them from distributing their listings to other national sites such as HomeAdvisor or HomeSeekers.

While the strategy was criticized for restricting exposure for seller's homes, the lure of potential cash brought by a successful Internet initial public offering was very convincing for some broker-owners. HomeStore.com has "exclusive" listing deals in Boston, Cleveland, Dallas, Denver, Long Island, Philadelphia, Pittsburgh and St. Louis and "preferred" deals in Chicago, Detroit, parts of Los Angeles, New York City and Washington, D.C., according to its Securities and Exchange Commission filing.

Riss, and others, say the NAR started down the wrong road when it chose to keep so many strings attached to HomeStore.com even after the organization knew that HomeStore was headed for Wall Street.

Sometimes it's just best to say "no" and return the whole package.

Previous columns:

• Taking on a partner in buying a house, 10-01-1999
• Do you really need a broker?, 09-24-1999
• Two new options for homebuyers, 09-17-1999
• Sears kit houses are still around, 09-10-1999
• Feng shui analysis hits home, 09-03-1999
• New book shows the lighter side of lending, 08-27-1999
• A new way to hunt for a home, 08-20-1999
• Mortgage rates up, but why?, 08-13-1999