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'Club Fed' closed to former Homestore execs

December 10, 2002

Corporate criminals now face prospect of hard life in federal prison


Inman News Features

Three of Homestore's former executives are facing prison time now that they've pleaded guilty to counts of securities fraud, wire fraud and insider trading and signed individual plea agreements with the U.S. Department of Justice. These types of crimes once netted only a slap on the wrist from the criminal courts. But if these executives receive even a portion of their maximum possible prison sentences, they won't be serving their time relaxing in a so-called "Club Fed" penitentiary.

The "Club Fed" image dates back to the days when federal prisons in Eglin, Fla., and Lompoc, Calif., added outdoor tennis courts for inmates' exercise and some legislators were dismayed by the notion of inmates enjoying such Club Med-like amenities. Insider trading mogul Ivan Boesky was among those who served his time—a total of two years--at Lompoc.

But Club Fed is and always was a myth, according to Herb Hoelter, co-founder and director of the National Center on Institutions and Alternatives, a consultancy that specializes in prisons and white-collar criminal sentencing.

In fact, convicted white-collar criminals serve their sentences in federal prison camps alongside such other non-violent offenders as drug dealers. There is nothing resort-like about these places, said Hoelter.

The reality should be quite sobering for any executive contemplating potentially illegal activity.

"A prison is a prison no matter how you cut it," Hoelter said.

Sentencing for Homestore's former COO John Giesecke, CFO Joseph Shew and VP John DeSimone is scheduled for April. Giesecke pleaded guilty to one count of conspiracy and one count of wire fraud and faces a maximum of 10 years in prison. Shew pleaded guilty to one count of conspiracy and faces up to five years in prison. DeSimone pleaded guilty to one count of securities fraud and faces a maximum of 10 years in prison. But DeSimone could be sentenced to home confinement or probation in lieu of prison, according to a Los Angeles Times report.

The three executives admitted to having been involved in an allegedly illegal scheme to inflate Homestore's revenues by millions of dollars in 2000 and 2001 through so-called "round-trip transactions," in which the company recognized its own cash as revenue. The Justice Department closed its investigations of Homestore without bringing any charges against the company, but a massive class-action shareholder lawsuit in connection with the alleged accounting fraud is still working its way through the courts.

Executives sentenced to serve time in federal prison can expect to be stripped and searched upon arrival. Inmates share a room with other inmates and are told when to wake up in the morning, what clothes they can wear, when they can eat, where they can work--for 11 cents an hour--and when they can sleep. Their telephone calls and mail are restricted and monitored. They can see approved visitors on weekends and expect to be strip-searched before entering and after leaving the visitation room.

"The routine and the type of control exerted over one's life in a federal prison camp is very similar to what happens to a person who goes into state penitentiary," said Hoelter. "It's a myth to suggest that simply because there's no fence and barbed wire and chains that it's not a prison."

Hoelter said inmates should be prepared for the culture shock they'll face in their transition from being self-sufficient and productive to being nonproductive and unable to make any decisions for themselves.

"It's a very difficult environment for our clients. They need to be prepared both mentally and emotionally for the transition," he said.

Federal sentences guidelines for securities fraud, illegal accounting schemes, insider trading and the like were toughed considerably in the late 1980s, the late 1990s and again last year. Financial crimes that once carried relatively lightweight penalties now can trigger decades or even life sentences in prison, particularly if more than 50 people were harmed or the scam cost victims more than $100 million.

But signing a plea agreement and cooperating with the authorities still can net a substantial sentence reduction for these types of crimes. Giesecke's, Shew's and DeSimone's settlement agreements with the federal government require them to cooperate with the still-ongoing investigation into other former Homestore executives, who reportedly include former CEO Stuart Wolff and former SVP Peter Tafeen, and other companies that allegedly participated in the round-trip transactions.

Hoelter said defendants working under such agreements typically receive a "5K letter," which recommends to the judge that their sentences should be reduced in recognition of their cooperation.

"It's an effective strategy. A lot of guys who've been involved (in these types of deals) can tell you that once you make a deal with the devil, the devil owns your soul," he said.

But Hoelter cautioned that defendants operating under cooperation agreements face a huge incentive to say what the government needs to hear to convict others and in his view it's "not always the most honest way to go about a trial."

Copyright: Inman News Service



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