Full story on ex-Homestore execs' criminal indictment

April 29, 2005

Wolff and Tafeen each face 185 years in federal prison

Inman News

The Securities and Exchange Commission and the U.S. Justice Department have filed criminal and civil cases against Stuart Wolff, the former CEO of Homestore, and Peter Tafeen, the company's former executive vice president of business development, for their alleged participation in a scheme to inflate the company's online advertising revenues.

The two former company officials were named in an indictment returned yesterday by a federal grand jury in Los Angeles.

The SEC has now sued a total of 16 individuals for their roles in the Homestore scheme. Wolff and Tafeen have become the 10th and 11th defendants to face criminal charges in relation to the scheme. All of the defendants except Wolff and Tafeen have settled the SEC charges, pleaded guilty to the criminal charges where applicable and agreed to cooperate with the government.

"The criminal charges against the former top two executives at Homestore demonstrate that the Justice Department will pursue corruption to the highest level of the corporate hierarchy. The investigation, which has now reached the company's CEO, went up the ladder to expose coordinated corruption across a broad spectrum," commented U.S. Attorney Debra W. Yang, a member of the President's Corporate Fraud Task Force.

The civil lawsuit and criminal indictment allege that Tafeen orchestrated the fraud scheme, and that Wolff and Tafeen participated in executing fraudulent "round-trip" transactions to artificially inflate Homestore's revenue in order to exceed Wall Street analysts' expectations. Wolff and Tafeen allegedly knew that the transactions fraudulently generated a circular flow of money in which Homestore recognized its own cash as revenue and concealed the scheme from the company's auditors.

The civil and criminal cases also allege that Wolff misled investors and analysts about Homestore's true financial condition and used the Sept. 11, 2001, terrorist attacks as a pretense for Homestore's financial decline. Wolff and Tafeen both exercised stock options during the course of the fraudulent scheme, obtaining millions of dollars in proceeds.

Homestore.com is now known as Homestore Inc., a Westlake Village, Calif.-based company that provides real estate listings and related services on the Internet. The company also operates Realtor.com, a home listings Web site for the National Association of Realtors.

Wolff, 42, of Westlake Village, was Homestore's CEO and chairman of the board from 1997 until he resigned in January 2002 during an internal investigation into the fraudulent scheme.

Tafeen, 36, of Parkland, Fla., was the executive vice president of business development at Homestore from 1997 until November 2001. During his tenure, Tafeen reported directly to Wolff.

The grand jury indictment charges Wolff and Tafeen with conspiracy to violate the securities laws, insider trading, creating false books and records and lying to Homestore's accountants. Each defendant is charged with 19 counts, and each defendant faces a maximum possible sentence of 185 years in federal prison.

The SEC charged Wolff and Tafeen with violating or aiding and abetting violations of numerous provisions of the federal securities laws, including antifraud, reporting, record-keeping, internal controls and lying to the auditors provisions. The SEC is seeking permanent injunctions, penalties, disgorgement of ill-gotten gains and prejudgment interest and an order permanently barring Wolff and Tafeen from serving as an officer or director of a public company.

Nine defendants previously have pleaded guilty to criminal charges related to the fraudulent "round-trip" transactions, and two defendants have admitted in plea agreements that Homestore shareholders suffered losses of at least $100 million when the company's stock price dropped precipitously in 2002 when news of an investigation into accounting irregularities became public.

"Although the fraudulent scheme at Homestore was pervasive and widespread, it could not have occurred without the direction, participation and complicity of Homestore's highest management," said Randall R. Lee, director of the SEC's Pacific Regional Office.

Brian J. Hennigan, a lawyer representing Tafeen, said Thursday afternoon that he hadn't yet received a copy of the complaint. He said that Tafeen is "not guilty of any criminal conduct. I expect the jury will agree with the defense that there was no criminal conduct by Mr. Tafeen."

Hennigan said he knew that the government investigation has been ongoing for over two years.

"The U.S. Attorney's Office had been very professional with regard to keeping us notified (on) the status of the investigation. We've been in touch with (that) office, and they've been in touch with us." Hennigan said that the arraignment date for the case has been set for May 16 in federal district court in Los Angeles

Copyright 2005 Inman News

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