Three former Homestore Inc. executives are expected to plead guilty to charges involving an alleged phony revenue scheme at the Internet home seller in a federal case focusing on advertising transactions with AOL Time Warner Inc. and other business partners, sources said Tuesday.
Plea bargains have been reached with former executives John Giesecke and Joseph Shew, both of whom had served as chief financial officer of Homestore, and former finance department executive John DeSimone, the sources said.
Government officials said they expect details of the case to be announced today in Washington, at a meeting of the national “financial crimes SWAT team” that was hastily created by the Bush administration in July.
The former executives are expected to plead guilty to a variety of charges including conspiracy, securities fraud and wire fraud, and to continue to cooperate with investigations of Homestore and its business partners, including AOL, people familiar with the case told The Times.
Giesecke and Shew, along with unidentified co-conspirators, are accused of concocting a scheme to ensure that Homestore revenue met or exceeded expectations during the first three quarters of 2001. According to the federal conspiracy charges, Homestore made nearly $50 million in fraudulent purchases from software, advertising and other service companies, which then used $45 million of the money to buy online ads from a “major media company,” which sources identified as AOL.
AOL allegedly then purchased nearly $37 million in online ads from Homestore, which booked the money as revenue even though it was really just the return of Homestore’s own funds, according to the government’s charges.
Giesecke and Shew also are expected to admit deceiving Homestore’s auditor, PricewaterhouseCoopers, and the Securities and Exchange Commission about the company’s financial results. In addition, Giesecke is expected to admit that he misrepresented the company’s finances to securities analysts during a conference call, while DeSimone will admit involvement in insider trading, sources said.
Jan Handzlik, Giesecke’s lawyer, declined to comment directly on the expected charges, but said his client “deeply regrets his past mistakes and will cooperate fully to bring this matter to a conclusion.” Shew’s attorney didn’t return a call and DeSimone’s lawyer declined to comment.
Government sources, who spoke on condition of anonymity, said the case involving Homestore, which is based in Westlake Village, will be used as an example of the federal commitment to pursue corporate wrongdoing.
Homestore, which operates Realtor.com, the dominant home-sales site on the Internet, and Homestore.com, a home-information site, admitted this year that it had improperly used ad-bartering deals to overstate revenue by $81.6 million. Previous civil lawsuits have accused the company of engaging in “round-tripping” transactions, allowing it to book bogus revenue and thus meet or exceed its quarterly projections.
Specifically, the company is accused in the lawsuits of using third-party companies such as SFX Technologies and L90, now known as MaxWorldwide Inc., to funnel money to AOL and then back to Homestore, where it could be counted as revenue.
In August, Homestore agreed to pay $23 million to settle a lawsuit filed by telemarketing company MemberWorks Inc. that accused Homestore of securities fraud in connection with its acquisition of an Internet company from MemberWorks.
The SEC and the Justice Department are continuing to investigate the deals between Homestore and AOL. AOL spokesman John Buckley said Tuesday that his company has “cooperated fully with law enforcement agents in their investigation of Homestore.com.”
Homestore executives said Tuesday that an internal inquiry turned up the accounting irregularities, which the company handed over to the SEC.
The company in January installed an entire new layer of top management, hiring a new chief executive and chief financial officer and filling the vacant position of chief operating officer.
Former Chief Executive Stuart Wolff, who resigned to pursue an unspecified new venture, couldn’t be reached for comment.
Joe Hanauer, who was named Homestore’s chairman in January, said the company has had no official contact with the SEC or federal prosecutors since it turned over the evidence from its inquiry in April.
At the meetings this week in Washington, white-collar prosecutors from Los Angeles, New York, San Francisco and other major cities, along with officials from the SEC, will share their expertise in corporate corruption cases with federal prosecutors from scores of smaller cities, Justice Department spokesman Bryan Sierra said. Fraud investigators from the Treasury Department and Postal Service also will take part.
Underscoring the numbers and complexity of cases involving executives who enriched themselves by inflating corporate sales and profits, the task force also will call in experts from the Federal Energy Regulatory Commission, the Federal Communications Commission and other agencies that have rarely been associated with criminal prosecutions.
With energy, telecom and cable companies among those under scrutiny, the administration wanted “to enlist whatever expertise we can,” Sierra said.