Three former executives from Homestore Inc. agreed to plead guilty to criminal fraud charges yesterday and plan to cooperate with the government’s investigation into the company’s dealings with AOL Time Warner Inc. and others.
Under the agreement, announced yesterday by Attorney General John D. Ashcroft, the three will plead guilty to charges that they fraudulently inflated Homestore’s revenues by engaging transactions known as round-tripping, in which the online real estate listing giant bought and sold services only to pump up revenue.
Ashcroft did not mention AOL by name, but the Justice Department and the Securities and Exchange Commission referred to the corporation in court filings as “a major media company,” according to sources familiar with the government’s investigation.
The three former Homestore officials — former chief operating officer John Giesecke, former chief financial officer Joseph Shew and a former vice president, John Desimone — face prison terms of five to 10 years.
Attorneys for Giesecke, Shew and Desimone said the three are sorry for their actions and will cooperate with the government.
The three executives also settled civil charges from the SEC by agreeing, without admitting or denying guilt, to repay $4.6 million in what the government termed “ill-gotten gains.” The gains came when the three sold shares in the company at a profit at a time they knew the “fraud was going on” to inflate revenue by $46 million during the first three quarters of 2001, the SEC and Justice Department said.
In their continuing investigation of Homestore and AOL, government investigators are focusing on whether AOL executives knowingly “aided and abetted” Homestore in the fraudulent transactions and, if so, whether that relationship was part of a broader pattern of behavior by AOL to inflate revenues, according to sources familiar with the probe.
“We’re confident that our deal with Homestore and the accounting for that deal with Homestore was appropriate,” said AOL spokesman John Buckley. “We have cooperated fully with the government in its investigation of Homestore. We are cooperating with the government in its investigation of AOL and have previously disclosed an investigation of a number of deals AOL has with other parties.”
According to sources, government investigators believe that information from the three will help them understand what involvement former Homestore executive Peter Tafeen, who was in charge of business development until leaving last year, and former Homestore chief executive Stuart Wolff, had in negotiating the deals with AOL.
Tafeen’s attorney, Robert Friese, said Tafeen was not an accountant and had no control over how the transactions were booked.
“We have cooperated with the SEC and have offered to come in months ago to talk to the Department of Justice, and we look forward to hearing what they have to say,” Friese said. “We are unaware of any specific actions which did not have an appropriate business justification.”
Wolff’s attorney, E. Lawrence Barcella Jr., implied others were to blame. “Like most chief executives, Stuart Wolff, an engineer by education, relied on the expertise and integrity of his officers and employees. Unfortunately it appears that reliance was in some instances misplaced,” Barcella said.
Homestore, the Internet’s largest provider of real estate listings, is based in Westlake Village, Calif. Its investors include the National Association of Realtors and Fannie Mae.
SEC Enforcement Director Stephen M. Cutler said the agency would not bring any enforcement action against Homestore because of the company’s “extraordinary cooperation” in the investigation, including disclosing the transactions to the government as soon as it learned of them.
W. Michael Long, who joined Homestore in January as chief executive, said the company is moving forward with a solid business plan and that, while it will cooperate with the government if needed, its accounting problems are behind it.
According to the U.S. attorney’s office in Los Angeles, which is handling the Homestore probe for the Justice Department, Giesecke and Shew, along with other former “high-ranking corporate officers of Homestore and others, participated in a scheme from March 2001 to December 2001 to defraud investors and the SEC by manipulating Homestore’s reported revenues to make them appear higher than they really were.”
During 2001, Wall Street analysts measured the success of many profitless Internet companies by their revenue growth, a trend that sent executives at Homestore and other Web companies scrambling for ways to pump up sales, government investigators said.
According to government and industry sources, Homestore had an agreement with AOL to refer companies to AOL to buy online advertising. At the same time, AOL agreed to buy online ads from Homestore in an amount that varied depending on how many ads Homestore steered to AOL.
“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,” Ashcroft said. “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.”