Three former Homestore executives plead guilty to criminal and civil securities fraud charges, and offer to repay monies earned through the exercise of stock options for the period. The SEC also says it will not pursue any charges against Homestore.

Attorney General John Ashcroft explained in a conference that the executives John Giesecke, Joseph Shew and John DeSimone, engaged in "round-tripping," an illegal practice which enabled Homestore to report cash as revenue.

"Through this trickery, Homestore was able to meet or exceed Wall Street expectations in the last two quarters of 2001" even as other dot-coms were collapsing, said Steve Cutler, director of enforcement for the Securities and Exchange Commission. During this period, ad revenue was overstated by $46 million, or 64 percent.

John Giesecke, former chief operating officer of Homestore, faces up to 10 years in prison for his involvement in the scheme, said Debra W. Yang, U.S. attorney for the Central District of California. Former chief financial officer Joseph Shew and former director of operations for the finance department John DeSimone face up to five years in prison.

Mr. Giesecke has agreed to repay $3.3 million earned when he exercised stock options during the period. Mr. Shew will repay $1.4 million and Mr. DeSimone, $170,000.

Federal securities regulators said that charges would not be filed against Homestore, Inc., because of its "swift and extensive cooperation in this case."

"When Homestore discovered that accounting irregularities may have occurred it promptly self-reported the problems to us," Securities and Exchange Commission Enforcement Chief Stephen Cutler Cutler told a news conference.

The round-trip transactions, from which the former executives profited indirectly in higher stock values when they sold their personal shares, could be causing problems for Homestore partner AOL.

AOL is also under investigation by the SEC, but Attorney General Ashcroft would not confirm whether its investigation of the media giant is because of its involvement with Homestore.

An earlier story, published by the Wall Street Journal, stated that Homestore was able to recognize income by requiring some of its suppliers to purchase about $45 million in ads from AOL.

In response to the actions taken today by the government, Homestore issues the following:

Joe Hanauer, chairman of Homestore, stated, "The actions announced today by the United States Attorney's Office and the SEC are against three former employees, not against Homestore itself. These actions do not relate to Homestore's ongoing operations. In fact, U.S. Attorney General, John Ashcroft, today stated, `the Board of Directors and new management of Homestore are to be commended for fully cooperating with government investigators in their efforts to uncover and prosecute the illegal conduct of the defendants.'

"Homestore's Board of Directors, along with independent counsel and outside accountants, proactively initiated an accounting inquiry late last year. During our investigation we provided preliminary and final reports to the SEC. Since the conclusion of Homestore's internal investigation in April, we have continued to work closely and cooperate fully with the SEC in its investigation.

"Additionally, we acknowledge the SEC's comments regarding the conduct of the Board and our new management team. Today's SEC release stated, `The Commission also announced today that it would not bring any enforcement action against Homestore because of its swift, extensive and extraordinary cooperation in the Commission's investigation. This cooperation included reporting its discovery of possible misconduct to the Commission immediately upon the audit committee's learning of it, conducting a thorough and independent internal investigation, sharing the results of that investigation with the government (including not asserting any applicable privileges and protections with respect to written materials furnished to the Commission staff), terminating responsible wrongdoers, and implementing remedial actions designed to prevent the recurrence of fraudulent conduct. These actions, among others, significantly facilitated the Commission's expeditious investigation of this matter.'"

Mike Long, CEO of Homestore, said, "The Board should be commended for its diligence and swift action. The Audit Committee of Homestore's Board of Directors upheld its corporate governance obligations vigorously and worked closely with the SEC, following the SEC's guidelines meticulously.

"As the undisputed leader in the online real estate market, we are proud of the tremendous strides our team has made during the past nine months to focus on our customers and strengthen our financial position. We are steadfastly committed to creating value for our customers, shareholders, employees and partners."

Published: September 25, 2002

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