Three former executives of the nation’s largest Internet-based provider of residential real estate listings have agreed to plead guilty to criminal charges in a scheme to fraudulently inflate the earnings of Homestore.com Inc., a publicly traded company, the Justice Department announced Wednesday.
The charges were filed in Los Angeles shortly before the announcement.
Meanwhile, The Washington Post reported that some of the deals that led to Wednesday’s charges involved America Online Inc., and that the executives were cooperating with the government probe of AOL.
“Today’s charges are the latest in a sustained series of law enforcement actions taken under the coordination of the President’s Corporate Fraud Task Force, aimed at prosecuting corporate law-breakers and protecting American investors,” Attorney General John Ashcroft said in prepared remarks. “Our actions in this case in particular stand as a warning to corporate executives: The Department of Justice will pursue allegations of corporate fraud regardless of the size or the prominence of the company under scrutiny.”
Former Homestore Chief Operating Officer John Giesecke and former Chief Financial Officer Joseph Shew were charged with conspiracy to commit securities fraud. In addition, the government is charging Giesecke with wire fraud, and former Homestore Vice President John Desimone with insider trading.
In plea agreements also filed Wednesday in Los Angeles, all three defendants have agreed to cooperate with the government’s ongoing investigation.
Homestore, headquartered in Westlake Village, Calif., was a member of a leading stock market index of Internet companies, and ran a network of realty-related Web sites, including Realtor.com, the official Web site of the National Association of Realtors, the Justice Department said.
Homestore, which has changed its management team since the time of the criminal fraud, has cooperated with the government’s investigation.
According to the government filing, defendants Giesecke and Shew, together with high-ranking corporate officers at Homestore and others, allegedly participated in a scheme from about March 2001 to December 2001 to defraud investors and the Securities and Exchange Commission by manipulating Homestore’s reported revenues to make them appear higher than they really were.
The conspiracy involved an illegal practice known as “round-tripping,” by which Homestore fraudulently inflated the revenues it reported to the investing public, the government charged. The illegal transactions allegedly enabled Homestore to use its own cash to “buy” revenue, in violation of fundamental accounting principles.
The transactions involved the circular flow of money out of Homestore through various middlemen, and then back to Homestore so that the company could improperly recognize that money as new revenue even though the transactions had no economic effect on the company, the government charged.
In one example outlined in the criminal information, Homestore allegedly entered into an agreement in the first and second quarters of 2001 with a major media company, whereby Homestore agreed to refer advertisers to the media company to purchase online advertising.
The unnamed major media company, in turn, allegedly agreed to purchase online advertising from Homestore, dependent on the amount of advertising purchased by Homestore’s referrals.
In the first and second quarters of Homestore’s fiscal year 2001, the company paid approximately $49.8 million to the advertisers in 16 separate transactions. The advertisers then paid approximately $45.1 million to the major media company to purchase online ads, the government said.
Homestore, in turn, recognized approximately $36.7 million in revenue from the major media company’s related purchase of online advertising, and Homestore included the bogus revenue from the fraudulent “round-trip” transactions in its financial statements.
The charges allege that the scheme was carried out by causing fraudulent entries to be made in the company’s books and records, misleading the company’s outside auditors about the existence of the fraudulent scheme, and filing false financial statements with the SEC.
The defendants and other high-ranking corporate officers at Homestore then allegedly exercised stock options and sold stock in the company for their own benefit.
The three former executives face a maximum sentence of five years in prison on the charge of conspiracy to commit securities fraud, five years on the charge of mail fraud, and 10 years on the insider trading charge. They will be summoned to appear in federal court in Los Angeles for an arraignment next month, the department said.
In addition to the criminal charges filed by the Justice Department, the SEC filed a civil securities fraud action against the three men named in the criminal information.