According to news reports, three former executives with Homestore.com have agreed to plead guilty to criminal charges of securities fraud. The complaint is filed in the United States District Court for the Central District of California. The three persons will also cooperate with continuing inquiries into Homestore and one of its traffic partners, AOL.

John Giesecke, Homestore.com's former chief operating officer, has agreed to plead guilty to conspiracy and wire fraud, and faces a possible sentence of up to ten years in prison. Joseph Shew, the former chief financial officer; is expected to plead guilty to one count of conspiracy to inflate Homestore revenues. John DeSimone, former director of operations in the finance department, is expected to plead guilty to insider trading.

The former officers' misconduct is related to the engineering of "complicated transactions to funnel company money back to itself through a joint advertising sales program with 'a major media company,' according to a news report.

These actions had the result of inflating the company's stated revenues in a practice called round-tripping which enables the company to report an advertising barter transaction as sales, which encouraged investors to pour money into the company with the notion that the company was healthier than it really was.

AOL spokespersons stated that the Homestore plea agreements are separate from the SEC's investigation into AOLs agreements, and that AOL is cooperating with investigators, but had no comment for the news reporters.

According to reports, the S.E.C. and Justice Department investigations into Homestore.com began last December when Homestore's audit committee uncovered $54 million to $95 million in inflated online ad revenue. People involved in the investigation said that the inflated revenue stemmed from round-trip transactions, including a questionable arrangement with AOL.

Said one report, "At least one of Homestore's questionable transactions involved AOL. Investigators are looking into the possibility that Homestore inappropriately funnelled money to itself through a Web site design company called FX Consultants in Aventura, Fla., which bought $2 million of advertisements from a venture between Homestore and AOL. Under the terms of the venture, AOL then paid half that revenue back to Homestore.com. AOL executives have said the company was unaware that the payment from FX Consultants might have been bogus.

"AOL Time Warner disclosed in August that it might have inflated its revenue by $49 million over 18 months. Company executives have said the questionable transactions involved round-trip deals, but none involved Homestore."

The investigation into AOL began this summer.

Published: September 25, 2002

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