By Christopher Palmeri
The founder of a pioneering company in real estate Web sites was indicted by a federal grand jury in Los Angeles on Apr. 27 on insider-trading charges. Stuart H. Wolff, the 42-year-old former chairman and chief executive of Homestore (HOMS ), and a co-defendant, Peter B. Tafeen, a 36-year-old former executive vice-president for business development, were charged with 19 counts, including conspiracy to violate securities laws and lying to accountants. Each faces a maximum possible sentence of 185 years in prison.
The criminal indictment and a related civil complaint by the Securities & Exchange Commission alleges that Wolff and Tafeen entered into sham transactions with companies such as Time Warner's AOL unit (TWX ) that boosted Homestore's revenues in late 2000 and 2001 as online industry advertising began to slide. The pair are expected to appear in court on May 16 to enter their pleas.
Tafeen's attorney, Brian J. Hennigan of Irell & Manella in Los Angeles, says his client intends to fight the charges. "He's not guilty, and we expect a jury to conclude that," Hennigan says.
In a prepared statement, Howard M. Privette, an attorney for Wolff, called the government's case "a prime example of the pendulum swinging too far in one direction in the post-Enron world." Privette argued 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." Wolff, who holds a doctorate in electrical engineering from Princeton, worked in research at AT&T and IBM before founding Homestore.
According the government, Homestore spent nearly $50 million buying software and other products from 16 different vendors in late 2000 and early 2001. As part of those purchases, the vendors were required to spend most of the money on advertising with AOL, which in turn spent $40 million of it purchasing ads from Homestore. "They were essentially buying their own revenues," says Douglas M. Fuchs, an assistant U.S. Attorney prosecuting the case. "The transactions were actually money-losing and unsustainable."
The SEC complaint states that Wolff and Tafeen were warned by Homestore's auditors, PricewaterhouseCoopers, that such transactions were inappropriate but that the pair concealed the true nature of the transactions from the accountants.
According to Fuchs, a former Homestore employee has told prosecutors that Tafeen declared the transactions were necessary because Homestore "needed to live to fight another day." Adds Randall R. Lee, director of the SEC's Los Angeles office: "Although the fraudulent scheme at Homestore was persistent and widespread, it could not have occurred without the direction of Homestore's highest management."
Homestore has already restated nearly half of its revenues for 2001 and set aside $13 million and 20 million shares of its stock to settle shareholder suits. In March, Time Warner paid $300 million to settle charges with the SEC regarding allegedly fraudulent transactions with Homestore and other companies.
Nine former Homestore executive have pleaded guilty to related charges. They're expected to cooperate in the government's case against Wolff and Tafeen.
Homestore, which sprung out of the online efforts of the National Association of Realtors, was a highflier in the early days of the dot-com boom. It compiles listings from local Realtor associations, putting them in one easy-to-search site, and makes money by selling ads to local Realtors and to related businesses such as mortgage brokers.
Its best-known site is Realtor.com, but it also operates Homebuilder.com for the National Association of Home Builders and Welcome Wagon. Under new management, Homestore is on something of a rebound. Last year it lost $7.8 million on revenues of $216 million, but that was a sharp improvement from prior years. Homestore shares closed at $1.71 on Apr. 28. It reached a 52-week high last year of $5.01.
Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau