FOR IMMEDIATE RELEASE|
WEDNESDAY, SEPTEMBER 25, 2002
TDD (202) 514-1888
THREE FORMER EXECUTIVES OF HOMESTORE.COM, INC. AGREE TO PLEAD GUILTY IN CORPORATE FRAUD CASE
WASHINGTON, D.C. - Three former executives of the nation's largest Internet-based provider of residential real estate listings have agreed to plead guilty to federal criminal charges for their role in a scheme to fraudulently inflate the earnings of Homestore.com, Inc., a publicly traded company, Attorney General John Ashcroft announced today.
The Justice Department filed a criminal information this morning in United States District Court in Los Angeles charging former Homestore Chief Operating Officer John Giesecke and former Chief Financial Officer Joseph Shew with conspiracy to commit securities fraud. In addition, the information charges Giesecke with wire fraud, and former Homestore Vice President John Desimone with insider trading. In plea agreements also filed this morning in Los Angeles, all three defendants have agreed to cooperate with the government's ongoing investigation.
The investigation into Homestore is being led by the office of United States Attorney Debra W. Yang of the Central District of California. Yang is a member of the Justice Department's Corporate Fraud Task Force, created by President Bush this summer to combat corporate crime.
"In only the past month, prosecutors in my office have filed four corporate fraud cases in which high-ranking corporate officers and directors have disseminated false financial information to public investors," United States Attorney Debra Yang said. "Such misconduct at the highest levels of corporate management is troubling, and I am committed, both as U.S. Attorney and as a member of the President's Task Force, to continuing our efforts to combat these and other financial crimes that endanger the health of the American economy."
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. Homestore, which has changed its management team since the time of the criminal fraud, has cooperated with the government's investigation.
According to the criminal information, defendants Giesecke and Shew, together with high-ranking corporate officers at Homestore and others, 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 illegal transactions enabled Homestore to use its own cash to "buy" revenue, in violation of fundamental accounting principles. These round-trip 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.
In one example outlined in the criminal information, Homestore 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 major media company, in turn, 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. 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. It is further alleged that, knowing Homestore's revenues and earnings were fraudulently overstated, the defendants and other high-ranking corporate officers at Homestore exercised stock options and sold stock in the company for their own benefit.
The defendants 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. The defendants will be summoned to appear in federal court in Los Angeles for an arraignment next month.
In addition to the criminal charges filed today, the SEC today filed a civil securities fraud action against the three men named in the criminal information.