If the wheels of justice appeared to move slowly in the federal indictments of former Homestore executives, CEO Stuart Wolff and VP of business development Peter Tafeen, it's obvious from related news from Time Warner just a few days ago, that justice was simply waiting for the right grease. Three days after Time Warner finalized the terms of agreement with the SEC, including a $300 million settlement payable to the US government, Wolff and Tafeen were indicted.

According to news reports, Time Warner Inc. has agreed to pay the Securities and Exchange Commission $300 million to settle a complaint that its subsidiary America Online (AOL) overstated online advertising revenue over a period of two years from the fourth quarter of 2000 through 2002. In its 10-K for 2004, Time Warner restated financials for the years 2000 through 2003. The company neither admits nor denies any of the allegations made in the complaint, which was filed in federal district court in the District of Columbia.

The revised results, according to reports, "reduced Time Warner's reported online ad revenues by about $500 million, and will properly reflect the consolidation of AOL Europe in the company's 2000 and 2001 financial statements."

The charges included "abetting" fraud at three other companies, including Homestore, and that beginning in 2000, AOL "effectively funded its own online advertising revenue" by indirectly giving customers like Homestore fraudulent funds to pay for ads they wouldn't have purchased (or had the money to purchase) otherwise (Other charges don't impact Homestore or the case against former CEO Stuart Wolff and Peter Tafeen, former VP of business development for Homestore).

In the agreement, Time Warner will also hire an independent examiner to determine whether its accounting for certain transactions between June 2000 and December 2001 actually met generally accepted accounting principles, also known as GAAP, which industry watchers say will possibly add to the already mounting evidence against Wolff and Tafeen.

Peter and the Wolff were indicted on April 27 by a federal grand jury in Los Angeles on insider-trading charges. The restatements of revenues by Time Warner can only support the evidence against the pair, accused of 19 counts, including conspiracy to violate securities laws and lying to accountants. Each man faces a maximum possible sentence of 185 years in prison if found guilty of "entering into sham transactions" with companies such as AOL, which boosted Homestore's revenues in late 2000 and 2001.

The charges stem from the Department of Justice and the SEC, so a settlement of the civil charges may go far in softening the penalties for each man.

Tafeen's attorney, Brian J. Hennigan of Irell & Manella in Los Angeles, told reporters that his client intends to fight the charges. "He's not guilty, and we expect a jury to conclude that," Hennigan told reporters.

Wolff, according to his attorney Howard M. Privette, is another innocent CEO. Privette called the government's case "a prime example of the pendulum swinging too far in one direction in the post-Enron world." Privette argues that prosecutors "are focusing on a CEO who has no finance or accounting background and who trusted his accounting personnel to handle the company's books in an accurate and honest way."

Some may say this disingenuous argument belittles Wolff's educational background and work history -- a doctorate in electrical engineering from Princeton and research stints at AT&T and IBM. It also reduces Wolff's accomplishments to a kind of good and bad dumb luck. Further, what his attorneys may not know, but soon will, is that Wolff is a micro-manager from way back, and there is probably a stiff paper trail, if not dozens of employees, who are willing to testify that nothing went on at Homestore that he didn't control.

The executives are accused of essentially buying their own revenues for Homestore. The company spent nearly $50 million buying software and other products from 16 different vendors in late 2000 and early 2001, and those vendors were required to spend most of the money on advertising with AOL, which then spent $40 million purchasing ads from Homestore, otherwise known as a "round trip" in advertising circles.

The scheme, when uncovered, sent Homestore's stock plummeting to depths from which it has never recovered. In addition, nine other executives have pled guilty to participating in the fraud, and are presumably willing to testify against their former bosses as part of their plea bargains.

Under new management since 2002, Homestore went through its own forgiveness by fire, agreeing to pay back millions of dollars to shareholders and issuing new stock to keep them happy, among other actions.

Homestore was exonerated by the SEC in September 2002, most probably in exchange for information, and for "cooperating fully" as new management was commended by investigators at the time.

"Homestore was informed today that the United States Attorney's Office (USAO) and the Securities and Exchange Commission (SEC) have brought actions against two former company officers. These actions relate solely to these individuals and do not implicate Homestore, nor impact the company's current ongoing operations," the company reminds the public.

"In September 2002, both the USAO and the SEC announced that no charges would be brought against Homestore. The SEC stated at that time that 'it would not bring any enforcement action against Homestore because of its swift, extensive and extraordinary cooperation in the Commission's investigation.'"

"Homestore will continue to cooperate fully with the government in these matters."

Against the evidence supplied by AOL, Homestore, and former employees, Tafeen and Wolff will have a tough time playing innocents.

Published: May 2, 2005

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