Three former executives of the nation’s largest Internet-based provider of residential real estate listings have agreed to plead guilty to cooking the books at Homestore.com, prosecutors said.
Two former Homestore.com executives — chief operating officer John Giesecke and chief financial officer Joseph Shew, agreed to plead guilty to conspiracy to commit securities fraud, prosecutors said. They said Giesecke also agreed to plead guilty to wire fraud.
“We will prosecute those individuals and companies that seek to take advantage of the information technology boom in the economy to steal other people’s money,” Attorney General John Ashcroft said Wednesday.
The former executives also have agreed to repay $4.6 million from the sale of company stock to settle a separate civil lawsuit brought by the Securities and Exchange Commission. Former vice president John DeSimone will plead guilty to insider trading charges, Ashcroft said.
Giesecke’s lawyer, Jan Handzlik, confirmed his client would plead guilty.
Giesecke is “deeply sorry for his conduct and he intends to fully cooperate with the government,” Handzlik said. The lawyer said no plea agreement has been reached, but his client hopes his cooperation will lead to favorable consideration when he is sentenced.
Homestore CEO Mike Long said the government’s decision not to prosecute the company vindicates Homestore’s cooperation with authorities. “It is gratifying to have the government officially remove the cloud that was hanging over our head,” Long said.
Ashcroft said Giesecke and Shew, together with other high-ranking Homestore officers, were part of a scheme from March to December 2001 to defraud investors and the SEC by manipulating Homestore’s reported revenues through sham transactions to make revenues appear greater than they actually were.
Stephen Cutler, the SEC’s director of enforcement, said the transactions “had no economic substance,” but allowed the three executives to reap millions of dollars from stock sales.
A government source said the investigation includes AOL Time Warner Inc.’s America Online Unit, which had an agreement with Homestore that was central to the fraudulent scheme.
Homestore, headquartered in Westlake Village, Calif., runs a network of realty-related Web sites including Realtor.com, the official Web site of the National Association of Realtors. Earlier this year, Homestore said it had overstated revenue in the first three quarters of 2001 by as much as $95 million.
Ashcroft refused to identify “the major media company” he said was involved in the deals, citing the ongoing investigation.
But the source said Homestore entered into an agreement with AOL in which Homestore agreed to refer companies to AOL for purchase of online advertising. AOL then agreed to purchase online advertising from Homestore, dependent on the amount of advertising purchased by Homestore’s referrals, said the source, speaking on condition of anonymity.
Homestore included about $36.7 million in revenue from the scheme in its financial statements. Homestore used similar transactions with another media company to claim an additional $9.7 million in revenue last year, the SEC said.
John Buckley, an AOL spokesman, said, “AOL’s dealings with Homestore were appropriate and were accounted for appropriately.” AOL has been cooperating with the SEC in the Homestore investigation, he said.
Long said that the company is on track to report positive cash flow by the end of the year and has already raised its cash on hand to $100 million by the end of the second quarter.
Accounting problems and accusations of shading financial dealings have recently hit other companies, including Enron Corp., Tyco International Ltd., Global Crossing, Adelphia Communications, ImClone Systems and WorldCom, Inc.