Three former executives of Homestore Inc. will plead guilty to criminal charges and pay $4.6 million to settle civil charges in connection with a phony-revenue scam and cooperate with investigators as the probe moves forward, officials said Wednesday.
The cases against the executives of the Westlake Village Internet company were announced by U.S. Atty. Gen. John Ashcroft, who said the case was an example of the Bush administration’s pledge to crack down on corporate corruption.
Ashcroft and Securities and Exchange Commission officials suggested that others are already targets in the probe.
“Whether you are an executive at a Fortune 100 firm or an Internet start-up, if you victimize investors and employees, you will face investigation, prosecution and prison for your crimes,” Ashcroft said.
In a complaint filed in federal court in Los Angeles on Wednesday against the three former executives, prosecutors allege that a “major media company,” identified by federal sources as AOL Time Warner Inc.’s America Online unit, was involved in “round-trip” financial transactions in 2001 that allowed Homestore to inflate its financial results by booking its own money as advertising revenue.
“We are confident that our deal with Homestore and our accounting for it was appropriate,” AOL spokesman John Buckley said.
As reported Wednesday in The Times, former Homestore executives John Giesecke Jr., Joseph J. Shew and John DeSimone have agreed to plead guilty to conspiracy, fraud and insider trading.
Giesecke, 42, of Malibu, a former chief financial officer who was Homestore’s chief operating officer at the time of the offenses, will plead guilty to one count of conspiracy and one count of wire fraud. In agreements with the SEC, he also will repay $3.4 million in stock option gains and pay a $360,000 fine.
Shew, 37, of West Chester, Pa., a former Homestore CFO, will plead guilty to one conspiracy count and repay $1.1 million in stock gains. Giesecke and Shew also will be barred for life from serving as officers or directors of a public firm.
DeSimone, 33, of Hermosa Beach, a former vice president of Homestore, will plead guilty to one count of securities fraud for selling stock while knowing about the accounting fraud. He agreed to repay the $177,796 profit from the stock sales and will be barred from serving as an officer or director of a public company for 10 years.
Giesecke’s attorney, Jan Handzlik, said his client “did not concoct or suggest the scheme” and feels remorse for his role. Shew’s attorney, Terry Bird, said Shew would cooperate with the government and private plaintiffs.
DeSimone’s lawyer, John Vandevelde, said his client is “fully cooperating.” Vandevelde said DeSimone acted at the direction of higher-ups.
Debra Yang, the U.S. attorney for Los Angeles, said that even with their agreements to cooperate, Giesecke could be sentenced to as many as 10 years in prison, and Shew and DeSimone could each face five years.
Officials said Homestore wasn’t charged because of its “extraordinary” cooperation with criminal and civil probes once it discovered the revenue-inflating scheme.
Law enforcement sources and defense attorneys said those under investigation include former Homestore Chief Executive Stuart H. Wolff, who resigned in January, and Peter Tafeen, a former executive vice president who coordinated the advertising deals that led to the charges. Tafeen left the company about a year ago.
Wolff’s attorney, Howard M. Privette of Los Angeles, declined to discuss the investigation. Wolff, an engineer who co-founded Homestore and remains a major shareholder, “relied on folks around him to do their jobs with integrity,” Privette said.
Tafeen’s lawyer, Robert C. Friese of San Francisco, said Tafeen was “one of the earliest to cooperate with the SEC” and has offered to cooperate fully with the federal criminal probe as well.
Friese said Tafeen is not an accountant and wasn’t knowledgeable about details of how Homestore booked its revenue. Friese said investigators are looking into whether there was a legitimate business purpose for the ad deals, but said Tafeen regards the complex transactions as legitimate.
AOL is facing probes into its own accounting by the SEC and the U.S. attorney in Alexandria, Va. Earlier this year, Dulles, Va.-based AOL was assured that it was not the target of the Homestore probe, but government investigators now want more details about AOL’s role, sources said.
AOL executives have told investigators that one of its former managers, Eric Keller, might have participated in the Homestore scheme, according to sources at the company. He resigned under pressure last year after an internal investigation of his dealings with Homestore and PurchasePro, a Las Vegas software firm that also is the target of a government probe.
Keller could not be reached for comment Wednesday.