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Homestore's Former CEO Under Scrutiny

Nov 18, 2002 | USA Today

As former Homestore executives pleaded guilty in federal court here last month to defrauding investors, the most noteworthy part of the court appearances was who wasn't there: Stuart Wolff.

The mastermind of the online home listing business founded Homestore and was its CEO until January. He ran Homestore during a period in which the company has since admitted it inflated revenue by $160.4 million a third of its reported sales in 2000 and 2001. And as belief in Homestore's fake financials kept the company's stock price high, Wolff was the insider who sold the most. Now:

Homestore stock is nearly worthless, with more than $7 billion in shareholder wealth erased.

Three former Homestore executives chief operating officer John Giesecke, chief financial officer Joseph Shew and vice president John DeSimone pleaded guilty with hopes of lenient sentences. They face up to 10 years in prison.

Wolff lives in a $2 million home outside Los Angeles and is planning his next business, called Scinovate, with a fellow ex-Home-store executive.

Wolff hasn't been charged with a crime. He quit Jan. 7, just days before Homestore's audit committee finished a report spelling out his role, if any, in the fabricated revenue. Because he resigned, Wolff was automatically dropped from the inquiry because the probe's purpose was to establish which employees should be fired, people close to the investigation say.

But while Homestore's probe might not be focused on Wolff any longer, he is still firmly in regulators' cross hairs. Federal investigators who are trying to build a case against him have interviewed him and his lawyers, people close to the investigation say.

Wolff was in charge when this once-hot firm, and its even hotter stock, were at the center of a web of deception born out of the dot-com boom, investigators say. They suspect the ruse was simply too big for Wolff not to be aware of it.

A class-action lawsuit filed Friday in federal court alleges that Wolff knew that Homestore's marketing deals with AOL Time Warner and others were improper. When Homestore's board launched its investigation last year, a worried Wolff asked other executives what they planned to tell the audit committee, according to the lawsuit.

Homestore allegedly booked bogus barter transactions and counted revenue it hadn't yet earned. While the company reported glowing results, a USA TODAY analysis found, Wolff dumped nearly $34 million in Homestore stock that was riding high on what turned out to be fake revenue and earnings.

The class-action lawsuit alleges Wolff was obsessed with inflating Homestore's stock price so he could cash in his Homestore shares -- even telling colleagues that he wanted to ''get more bang out of his buck'' for his stock options.

Wolff did not return multiple e-mails and phone calls, but through his lawyer he says he didn't know about the fraud at Homestore and was a victim of rogue employees.

Classic Internet success story

Until Wolff left, he and Homestore were so closely intertwined that they were almost one and the same. The company appeared to be a classic success story from the Internet boom and Wolff the type of brash entrepreneur who personified the New Economy's stars.

Working as a business-development executive at Telecommunications Inc. (TCI), Wolff was sent by the cable giant to look at the money-losing real estate Web site operated by the National Association of Realtors (NAR). Although TCI was unimpressed, Wolff was hooked. He teamed with an NAR computer guru and lined up venture capital funding for the December 1996 purchase of the site.

In what would be Wolff's biggest coup, in 1998 he locked up exclusive rights to the NAR's multiple-listing service. That launched Homestore into the big time, because no other real estate sites, not even Microsoft's, could compete. It also came just as Homestore was preparing for its initial public offering in August 1999.

Just before the IPO, Wolff started recruiting to help build his empire. Wolff made it clear to executives that he wouldn't accept failure. He'd quote Japanese literature to push executives and coined the company slogan: ''We will win.''

Homestore's success stoked Wolff's ego. People near him say he felt almost unstoppable as he sought to accelerate the company's growth by gobbling up online real estate companies. ''Wolff and Homestore were ruthless,'' says Jody Lane, CEO of Realty Times, which Homestore tried to buy. ''They were the typical powerful, young, got-money, let-me-show-the-world-how-it's done types. It was out of control.''

Working at Homestore was like working at any other dot-com, only more so. Employees relished the playful environment at the company's campus in Westlake Village, Calif. A giant fiberglass cave, created as a prop in a commercial, sat in the offices. Company-sponsored paintball wars were common.

But those who worked at Home-store say there were trouble signs as early as the summer of 2001. Employees recall wondering how Homestore could possibly gain from some of the convoluted deals it struck in 2001 with other dot-coms such as Cendant's real-estate portal and iPlace, which compiled neighborhood statistics.

There was also growing suspicion that management was buying companies just to boost revenue even while the rest of the business was struggling. Companies such as iPlace and assets from real estate photo company Internet Pictures were bought but never integrated into Homestore's operations, employees say.

Employees left wondering

At a July 2001 meeting at a ranch near the company's office, executives tried to quiet the employee rumblings that things weren't going well. Former CFO Shew told managers that business was strong and that there was nothing to worry about, according to a person who attended the meeting.

But executives' continued stock sales had employees concerned. ''You always have to wonder why Stuart (Wolff) was selling,'' says Roosevelt Simmons, a salesman who was laid off from Homestore's Little Rock office in May. ''At the rate he was selling, you wonder if he knew something we didn't.''

There was a lot Wall Street didn't know, too. In July 2001, at the height of the dot-com depression, Wolff reported second-quarter results that he called Homestore's ''eighth consecutive public quarter of strong top- and bottom-line results.'' Revenue was up 79% to $129.3 million, and pro forma net income grew for the fourth straight quarter to $14.5 million. And defying the common idea that online ads were suffering, Wolff thanked strong ''subscriptions and advertising'' for the results.

While exuding confidence, Wolff acted much differently with his own money, selling stock 22 times since the company went public, according to the Nasdaq. A particularly heavy bout of selling came in late April and early May 2001 when Wolff unloaded $5.5 million in stock right after declaring that Homestore turned its third quarterly profit.

It turns out the company never earned a dime. All those results were restated this year, after an employee tipped off Homestore's board about accounting chicanery.

Regulators have not produced any wrongdoing by Wolff. Investigators hope former executives who pleaded guilty will provide the details of what Wolff knew and when. But, as Wolff himself put it in an April 2001 press release criticizing Microsoft's claims about its success in online real estate listings: ''Obviously it's important that the data be presented fairly and accurately.''

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