Three former Homestore executives—including an ex-CFO and a former vice president of finance—were sentenced for their role in the company’s financial fraud scheme.
The executives sentenced were: Joseph Shew, Homestore’s former finance chief, to six months in prison followed by six months of home detention; John DeSimone, a former vice president of finance, to six months of home detention followed by three years of probation, plus 300 hours of community service; and John Giesecke Jr., a former chief operating officer, to 12 months in prison followed by six months of home detention. Shew and Giesecke and were also ordered to serve three years of supervised release following their prison terms.
In 2002, the three former executives pled guilty for their roles in inflating Homestore’s advertising revenues. In their plea agreements, Giesecke, Shew, and DeSimone each admitted to taking part in a scheme during the first three quarters of 2001 to inflate ad sales via the use of illegal round-trip transactions.
The SEC, which found that the three caused the company to overstate its ad revenues by $46 million, or 64 percent, during those three quarters, charged them with securities fraud, lying to the auditors, falsifying Homestore’s books and records, and aiding and abetting the company’s reporting and record-keeping violations.
All three individuals settled with the Commission on Sept. 25, 2002, consenting to permanent injunctions against them besides substantial payments. For example, Giesecke agreed to disgorge $3,445,021, including interest, from the exercise of his Homestore stock options and pay a $360,000 civil penalty. He also agreed to be permanently barred from serving as an officer or director of a public company.
For his part, Shew agreed to disgorge $1,053,751 and to be permanently barred from serving as an officer or director of a public company. DeSimone agreed to disgorge $177,796 and to not serve as an officer or director of a public company for 10 years.
Overall, the commission has settled enforcement actions with 15 people for their roles in the Homestore scheme. In October, Stuart Wolff, the founder and former chief executive of Homestore, was sentenced to 15 years in prison and ordered to pay $8.64 million in restitution and a $5 million fine for his role in the fraudulent scheme.
Homestore’s fraud became the subject of Simpson v. AOL Time Warner, one of the most significant legal cases to come out of the many financial scandals that marked the start of this decade. As CFO.com reported last summer, Homestore’s fraud became the subject of Simpson v. AOL Time Warner, one of the most significant legal cases to come out of the bevy of financial scandals at the start of the decade.
At issue in the case was whether shareholders of a company that commits financial fraud can sue other companies if their financial transactions aided and abetted the fraud. In the Simpson case, the plaintiffs were shareholders in the company that in 1996 launched Homestore.com, a real-estate website now called Move.com.
Homestore took part in a number of “triangular” transactions that created phony revenue, buying products it didn’t need from other companies with the understanding that those firms would use the proceeds from the sale to buy ad space on Homestore’s website through America Online.
That enabled Homestore to report higher earnings than most web-based businesses—and made it, however briefly, a favorite of Internet investors. When news broke in 2001 that the company was under investigation for fraud and its stock price plummeted, shareholders lost more than $100 million in market value.