Risk Management

Insider-Trading Conviction Scrapped

The ex-CEO of Homestore gets a new trial because the judge had a finanical interest in the case, an appeals court rules.
Kate PlourdJanuary 15, 2008

A federal appeals court has overturned the conviction of Homestore Inc. founder Stuart Wolff, who had been sentenced to 15 years in prison for insider trading, ruling that the trial judge should have recused himself because he had a financial interest in the case, the San Francisco Chronicle reported.

Wolff was convicted in June 2006 for his role in 23 “triangular” transactions that created phony revenue for the online real estate company. The government Homestore bought unneeded products from other companies with the understanding that those companies would use the proceeds to buy adverting space on Homestore’s website through America Online. It also charged that AOL served as a counterparty in 17 of the transactions.

U.S. District Judge Percy Andersen had a conflict of interest because he owned AOL stock, the appeals court opined. Andersen had disclosed the stock ownership in a pretrial hearing but did not reveal how much of the stock he owned, when he purchased it, or if he had made any transactions involving his shares, according to court documents.

Wolff had moved to remove Anderson from the case in November 2005. The motion was sent to a higher judge, who dismissed it six days later, saying that AOL’s involvement in the case didn’t establish that Judge Anderson had a financial interest in it.

However, the appeals court ruled that because AOL was later criminally charged in Virginia for its role in one of the Homestore transactions, charged with fraud by the Securities and Exchange Commission, and the subject of a class-action shareholder lawsuit over the Homestore transactions, there “was no dispute that Judge Anderson’s ownership of AOL stock constitutes requisite financial interest.”

Wolff was convicted on five counts of insider trading, four counts of lying to auditors, three counts of filing false statements with the SEC, and one count of conspiracy. In addition to the prison sentence he was fined $5 million and ordered to pay $8.64 million in restitution to Homestore shareholders. He now has the right to a new trial.

A total of 11 Homestore employees were convicted in the scandal. Three other executives, including the company’s former CFO, Joseph Shew, pled guilty and were sentenced in December 2006. Shew received six months in prison and six months of home detention. John DeSimone, a former vice president of finance, got six months of home detention, three years of probation, and 300 hours of community service. John Giesecke Jr., a former chief operating officer, received a year behind bars and six months of home detention.