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Three Former Homestore Execs Plead Guilty To Fraud

Sep 25, 2002 | Bloomberg News

Three former executives at Homestore Inc., the biggest online home-listings firm, agreed Wednesday to plead guilty to fraud charges for inflating revenue.

As part of the agreements, the three said they'll share their knowledge of Homestore's dealings with AOL Time Warner Inc., a business partner, in federal investigations of AOL Time Warner, people familiar with the matter said.

Federal prosecutors and securities regulators are trying to determine whether AOL Time Warner improperly listed advertising revenue at its America Online unit, people said.

As part of the agreement:

Joseph Shew, Homestore's former chief financial officer, will plead guilty of conspiracy to commit wire fraud.

John Giesecke, its former chief operating officer, will plead guilty of conspiracy to commit securities fraud and wire fraud.

John DeSimone, its former director of finance, will plead to insider trading.

Attorney General John Ashcroft announced the plea agreements at a news conference. The three men will enter their pleas next week in U.S. District Court in Los Angeles.

The Homestore case is "a warning to corporate executives that the Department of Justice will pursue allegations of corporate fraud regardless of the size or prominence of the company under scrutiny," Ashcroft said. The maximum prison term on each fraud charge is five years; for insider trading, it is 10 years.

Homestore lost $1.5 billion last year. Its shares have lost 99 percent of their value since July 2001. The company was accused of overstating advertising revenue by $46 million, or 64 percent, for the first three quarters of last year.

America Online spokesman John Buckley said AOL's transactions with Homestore were accounted for properly.

"We have been cooperating in the investigation into AOL's dealmaking and we view the complaints as separate from that investigation," Buckley said before Ashcroft's announcement.

Ashcroft declined to comment on other possible targets of what he said is a continuing investigation. The New York Times earlier reported that the Homestore officials were cooperating in the government's investigation of AOL Time Warner.

The three Homestore defendants also agreed not to work as executives of a public company and to pay $5 million in penalties to settle civil fraud charges filed by the Securities and Exchange Commission.

Giesecke, 42, of Malibu, Calif., will pay $3.8 million; Shew, 37, of West Chester, Pa., will pay $1 million; DeSimone, 33, of Hermosa Beach, Calif., will pay $177,796.

The SEC said it plans to turn most or all of the money over to Homestore's shareholders.

Prosecutors claim that Homestore had an advertising partnership with a major media company and a second company that funneled money back to Homestore to boost revenue. AOL Time Warner is the only major media company that had a joint advertising sales agreement with Homestore. The government's criminal complaint did not identify either company by name.

The SEC "has determined not to bring charges against Homestore because of its swift and extensive cooperation," said Stephen M. Cutler, the SEC's enforcement director.

Cutler said the three executives devised sham transactions to "artificially raise revenues" in order to "beat Wall Street analysts'" earnings expectations. "While the fraud was ongoing, they exercised stock options and sold their stock at inflated prices," he said.

The defendants also lied to PricewaterhouseCoopers LLP, Homestore's auditor, and exercised stock options that yielded gains of $4.6 million during the time of the alleged fraud, the SEC said.

Homestore investors sued in March, claiming the company inflated revenue through an advertising agreement with AOL Time Warner. AOL Time Warner isn't named as a defendant in the investors' suit.

The AOL executive in charge of deals with Homestore was David Colburn, who has since been fired for his involvement in questionable transactions.

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