The Homestore white-collar scandal

April 29, 2005

Final shoe drops with Tafeen and Wolff indictments

Inman News

In a three-day period in the summer of 2001, executives at Homestore went on an option-selling spree that attracted scant attention even though it occurred two-and-a-half months prior to announcements about the online real estate company's misstatements of prior-year financial results.

On July 30, July 31, and Aug. 1, 2001, former Homestore Chairman Stuart Wolff, former vice president of business development Peter Tafeen, and other company executives indicated their intention to sell multiple large blocks of shares. Each sold two blocks of shares that in aggregate exceeded $11.4 million worth of stock, according to forms filed with the Securities Exchange Commission.

Today's federal indictment of Wolff and Tafeen in part turns on those fateful days, when several executives at Homestore allegedly understood that the online real estate firm faced financial problems that the investment community was not privy to.

Wolff and Tafeen each now face criminal charges for alleged insider trading, falsification of accounting records and violating securities laws.

The Securities and Exchange Commission and U.S. Justice Department have launched criminal and civil cases against the two men.

Today's indictments follow a string of indictments and lawsuits faced by former executives and by the company.

Wolff, Tafeen and others were named individual defendants in the massive shareholder lawsuit against Homestore in which the California teachers retirement fund, known as CalSTRS, was the lead plaintiff. New Homestore management settled these shareholder lawsuits.

Two years ago, former COO John Giesecke pleaded guilty to securities fraud and former Homestore CFO Joseph Shew pleaded guilty to securities fraud and wire fraud charges. Former Homestore VP John DeSimone pleaded guilty to insider trading.

The SEC alleged that Giesecke, Shew and DeSimone arranged fraudulent round-trip transactions for the sole purpose of artificially inflating Homestore's revenues to exceed Wall Street analysts' expectations. The defendants "circumvented applicable accounting principles and lied to Homestore's independent auditors" about the transactions at the same time that they exercised stock options at prices ranging from approximately $21 to $32 per share and reaped profits ranging from approximately $169,000 to $3.2 million, according to the SEC.

Giesecke agreed to repay more than $3.4 million from the exercise of Homestore stock options and to pay a $360,000 civil penalty. Shew and DeSimone agreed to repay more than $1 million and approximately $177,800, respectively.

In January 2003, the SEC filed civil and criminal charges against Jeff Kalina, who was Homestore's senior manager of mergers and acquisitions. The charges alleged that he participated in a financially fraudulent scheme by which Homestore used millions of dollars of its own cash in round-trip transactions to generate revenues and meet Wall Street's expectations, according to the U.S. Attorney's Office.

In 2000 and 2001, Homestore engaged in a series of complex barter transactions designed to inflate revenues and meet Wall Street estimates. The essence of the transactions was a circular flow of money through which Homestore recognized its own cash as revenue, according to the SEC. Homestore then paid inflated sums to various vendors for services or products, and those vendors, in turn, used the funds to buy advertising from two media companies. The media companies then bought advertising from Homestore on their own behalf or as agents for other advertisers. Homestore recorded the funds it received from the media companies as revenue in its financial statements, in violation of applicable accounting principles, according to the SEC.

Homestore in the first two quarters of 2001 paid nearly $50 million to various vendors who paid $45 million to "a major media company" to purchase online advertisements. Homestore recorded $36.7 million in revenue from those transactions, in essence recycling its own money to generate revenues, according to the SEC, which also charged that the same scheme was used with another media company in the second and third quarters of 2001 to fraudulently recognize an additional $9.7 million in revenue.

In late 2001, Homestore admitted to the irregularities and restated its financial results and re-filed its SEC reports to reflect the findings of an investigation by the company's board of directors' audit committee, consultants and outside accountants.

The company has suffered mightily under the blow of the scandal.

In 2001, Homestore announced a net loss of $1.47 billion, or $13.64 per share, including the effects of restating its financial results for the first three quarters of the year. At one time, the stock was trading at $140 a share, today it trades at $1.80 a share.

Copyright 2005 Inman News

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