Ex-Homestore.com Officials
Plan to Plead Guilty to Fraud
Former CFO, COO and Director of Operations
Will Help Ongoing Probe, Justice Officials Say
By LAURIE P. COHEN and JULIA ANGWIN
Staff Reporters of THE WALL STREET JOURNAL
Justice Department officials are expected to announce Wednesday that three former top officers of Homestore.com, an operator of real-estate Web sites, have agreed to plead guilty Wednesday to criminal charges in connection with accounting improprieties, people with knowledge of the matter said.
The case could have implications for the government's continuing investigation of accounting practices at AOL Time Warner Inc.'s America Online unit. Those investigations, which have focused on the actions of former America Online executives, have cast a cloud over the media company and helped drag down its stock.
The former chief financial officer, chief operating officer and director of finance-department operations for Homestore, based in Westlake Village, Calif., have agreed to plead guilty to a variety of charges and to cooperate with the government's continuing investigation into Homestore and some of its business partners, including AOL.
John Giesecke, the former chief operating officer of Homestore, who resigned in January, has agreed to plead guilty to conspiracy and wire fraud for his involvement in "round tripping," a practice in which a company engages in sham transactions to boost revenue, according to people with knowledge of the plea agreement.
Joseph Shew, Homestore's former chief financial officer, is expected to plead guilty to one count of conspiracy to inflate Homestore revenue, while John DeSimone, the company's former director of operations in the finance department, is expected to plead guilty to insider trading. Mr. Giesecke faces up to 10 years in prison, while Mr. Shew and Mr. DeSimone could be sentenced to up to five years.
HOMESTORE.COM
Headquarters: Westlake Village, Calif.
CEO: W. Michael Long
Employees: About 2,800 (1)
2001 Revenue: $325.1 million
2001 Net Loss: $1.47 billion
Business: Operates Realtor.com and other real-estate Web sites; provides media and technology tools to real-estate professionals
(1) As of December 31, 2001
Source: the company
Jan Handzlik, a lawyer for Mr. Giesecke, said his client "looks forward to putting this matter behind him and will do what he can to remedy his past mistakes." John Vandeveld, a lawyer for Mr. DeSimone, declined to comment. Terry Bird, a lawyer for Mr. Shew, and Robert Vanderet, a lawyer for Homestore, didn't return calls seeking comment.
People with knowledge of the Homestore probe, which began in January, said the three men have agreed to tell the government what they know about a variety of other former Homestore executives who may have had knowledge of illegal accounting practices at the company. These people said that at least two of the three men may also be able to help the government with its America Online probe.
In the plea-bargain agreement, expected to be announced at a press conference by U.S. Attorney General John Ashcroft Wednesday, AOL will be alluded to, though not by name. People familiar with the planned charges say that AOL will be referred to as a "major media company." They said prosecutors will charge that Homestore used an arrangement with the media company to create sham accounting transactions.
Homestore, like many dot-coms, paid for the exclusive right to promote itself on America Online. According to people with knowledge of the criminal charges, America Online promised to buy ads on Homestore if Homestore referred advertisers to AOL.
People familiar with the plea agreement said it will allege that Homestore paid about $50 million to third-party companies for software and other goods in the first and second quarters of 2001. Homestore allegedly required those companies, in turn, to buy about $45 million of ads from AOL. Homestore then recognized more than $35 million in revenue from AOL.
These complex transactions -- 16 in all -- allowed Homestore to convert cash on its books into revenue on its income statement, in violation of generally accepted accounting principles. The goods Homestore bought from third-party companies were capitalized -- meaning they did not show up on Homestore's income statement.
Homestore allegedly booked the fraudulent revenue during the first three quarters of 2001. In April, Homestore said it had overstated advertising revenue by $46.4 million -- or 39% of total ad revenue -- during the first three quarters of this year. At 4 p.m. on the Nasdaq Stock Market, shares of Homestore, which traded at more than $120 nearly two years ago, rose eight cents to 43 cents.
America Online spokesman John Buckley says the company is cooperating with investigators, but he declined to comment further. America Online's accounting for certain advertising transactions is under investigation by the Securities and Exchange Commission and the U.S. attorney's office in Alexandria, Va.
The SEC will be filing its own parallel civil case against the three defendants, according to people with knowledge of the matter. The three defendants have also agreed to settle civil charges and to cooperate with the SEC.
A spokeswoman for the SEC didn't return calls seeking comment.
Write to Laurie P. Cohen at laurie.cohen@wsj.com and Julia Angwin at julia.angwin@wsj.com
Updated September 25, 2002 1:15 a.m. EDT |
