Risk & Compliance

Homestore on the Range

Shew, two others, settle charges they booked dot-com's cash as revenues; but who's the mysterious ''major media partner'' in the scheme? Also: Fast...
Stephen TaubSeptember 26, 2002

As expected, Homestore’s former CFO and two other former senior executives settled charges by the Securities and Exchange Commission and the U.S. Attorney’s office that they inflated advertising revenues in 2001.

The commission Tuesday filed charges in U.S. District Court in Los Angeles against Joseph J. Shew, Homestore’s former chief financial officer; John Giesecke Jr., former chief operating officer; and John DeSimone, former vice president of transactions.

In the suit, the SEC charged that three men caused Homestore to overstate its advertising revenues by $46 million, or 64 percent, for the first three quarters of 2001. The U.S. Attorney’s office for the Central District of California simultaneously announced related criminal charges against the three individuals, who agreed to cooperate with the government in its investigation.

The commission’s complaint charges Giesecke, Shew, and DeSimone with arranging fraudulent “round-trip” transactions for the sole purpose of artificially inflating Homestore’s revenues to help the company exceed Wall Street analysts’ forecasts.

The SEC charged Shew, Giesecke, and DeSimone with securities fraud, lying to the auditors, falsifying Homestore’s books and records, and aiding and abetting Homestore’s reporting and record-keeping violations.

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.

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.

While agreeing to settle the case, the three men neither admitted nor denied the charges.

(Editor’s note: You can compare Homestore’s cost management against its peers—and see how your company measures up—with the CFO PeerMetrix interactive scorecards.)

The Westlake Village, California-based Homestore, known at the time of the violations as Homestore.com, was one of the top Internet portals for real estate and related services.

The commission alleged that the three former executives circumvented accounting principles and lied to Homestore’s independent auditors about these transactions. While the fraud was ongoing, the defendants exercised stock options at prices ranging between roughly $21 and $32 per share, reaping profits ranging from approximately $169,000 to about $3.2 million, the SEC added.

The commission elaborated that in 2000 and 2001, Homestore engaged in a series of complex round-trip barter transactions to inflate revenues and meet Wall Street estimates. “The essence of these transactions was a circular flow of money by which Homestore recognized its own cash as revenue,” the regulatory agency added.

The SEC said Homestore paid inflated sums to various vendors for services or products; in turn, the vendors used these funds to buy advertising from two media companies. The media companies then bought advertising from Homestore either 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,” the commission added.

As a result of a significant revenue shortfall in the first quarter of 2001, the company devised a plan to use a major media company as an intermediary in some round-trip transactions, the SEC stated.

It did not name the major media company. But as part of an internal investigation into its own accounting practices, Homestore has been looking into deals with AOL Time Warner Inc.’s America Online division, according to published reports.

Some media outlets thought AOL’s name would come up in the complaint or at Wednesday’s press conference. But Attorney General John Ashcroft and Homestore refused to comment on whether AOL was being investigated in connection with the Homestore case.

In further explaining the scheme, the SEC said Homestore would “refer” vendors to the media company, and the vendors would purchase online advertisements from that company. In return, the major media company purchased online advertising from Homestore, for which the media company acted as a media buyer.

Using this structure, Homestore paid a total of $49.8 million to various vendors in the first two quarters of 2001. These vendors then paid $45.1 million to a major media company to purchase online advertisements. Homestore, in turn, recorded $36.7 million in revenue from the major media company’s related purchase of Homestore online advertisements.

“In short, Homestore recycled its own money to generate revenues,” the SEC said.

Homestore used this same general plan with another media company in the second and third quarters of 2001 to fraudulently recognize an additional $9.7 million in revenue, the commission added.

Interestingly, the commission noted that it would not bring any enforcement action against Homestore because of the company’s “swift, extensive and extraordinary cooperation” in the investigation. Apparently, that cooperation included reporting its discovery of possible misconduct to the SEC immediately upon the audit committee’s learning of it. The commission also indicated that Homestore management conducted a thorough and independent internal investigation—and quickly shared the results of that investigation with the government.

Report: Fastow to Be Charged

Former Enron CFO Andrew Fastow will be indicted as soon as next week, according to USA Today, which cited two legal sources close to the investigation.

Fastow would be the first former top Enron executive to be indicted.

The onetime Enron finance chief helped devise, then managed, the controversial off-balance-sheet, special-purpose entities that enabled Enron to hide more than $1 billion in losses. Those liabilities ultimately led to Enron’s bankruptcy filing.

The paper reported that a source close to the investigation says the government has recently secured a sealed grand jury indictment with fraud charges and other allegations against Fastow and subordinates who enriched themselves through Enron’s partnership deals.

Michael Kopper, Fastow’s onetime protégé, last month pleaded guilty to fraud as part of a plea pact with the government. The newspaper said he has provided much more information to investigators than was disclosed in the Justice Department’s charges against him.

According to USA Today‘s source, Kopper provided a road map of partnership schemes. Apparently, prosecutors have learned far more from Kopper than they made public in court when he entered his plea last month.

The question remaining now: Will Fastow be the highest-ranking former Enron executive to be charged with criminal conduct in the case? Or will federal prosecutors be able to convince him to roll over on his ex-bosses, former CEO Jeffrey Skilling and former chairman Kenneth Lay?

That could be a tough sell—particularly where Skilling is concerned. By all accounts, Fastow regarded the onetime Enron CEO as his mentor.

In a related story, yesterday officials at the SEC disputed a report in the Wall Street Journal that several Enron Corp. board members may avoid disciplinary action.

“Recent press speculation about purported [SEC] decisions with respect to ‘forgoing’ enforcement actions in connection with ongoing investigations is factually inaccurate and irresponsible,” said SEC chairman Harvey Pitt.

In fact, when asked by a reporter whether the agency was pursuing directors of companies embroiled in the recent accounting scandals, SEC enforcement director Stephen Cutler reportedly sent out this warning: “Let me be clear about this. There is no accounting or financial reporting case that we are investigating in which we don’t closely scrutinize the conduct of the board of directors, including outside directors. And we will not hesitate to bring enforcement actions against outside directors if they are culpable.”

Deloitte’s Copeland to Retire

The changing of the guard is now complete at the Big Four accounting firms.

James E. Copeland Jr., chief executive officer of Deloitte Touche Tohmatsu and Deloitte & Touche, said he would retire from both positions at the end of his term on May 31, 2003.

As a result, the top executives at all four firms will have been replaced in less than two years.

Last July, Ernst & Young named James Turley as global chairman, replacing Phil Laskawy. In November 2001, PricewaterhouseCoopers hired senior partner Samuel DiPiazza as its new CEO, replacing James Schiro.

In January of this year, KPMG announced that CEO and chairman Stephen Butler would retire at the end of this year. KPMG promoted Eugene O’Kelly in April, ahead of schedule, to head its U.S. operations. The accountancy subsequently named Mike Rake as the head of its international network of accounting firms.

Butler, Copeland, and former Andersen CEO Robert Grafton were reportedly singled out in former SEC chairman Arthur Levitt’s new book as among those most opposed to the regulator’s proposals at the time.

Indeed, the people who recently left the Big Four were the same ones who opposed stringent auditor-independence rules.

“It just makes sense; we’re in a totally new era now,” Lehman Brothers accounting analyst Robert Willens told a wire service reporter. “It probably makes sense to have people with a fresh outlook whose experience aren’t formed by the pitch battles with the SEC over the years.”

Indeed, the accounting industry is now on the defensive and facing a number of new laws designed to scrutinize its activities. Perhaps the most significant one: firms no longer can offer consulting services to their auditing clients. (Editor’s note: In October, CFO.com will detail how the recent troubles at the marquee accounting firms have led to an increase in business—and cache—for the second-tier accounting firms.)

Copeland joined Deloitte in 1967 and was admitted to the partnership in 1977. In 1992 he was selected as vice chairman of Deloitte & Touche.

The firm’s U.S. partners elected Copeland to serve as national managing partner in November 1994. He was elected chief executive officer of Deloitte & Touche and Deloitte Touche Tohmatsu in 1999.

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