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Jun 22, 2006 5:27 pm US/Pacific
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Homestore Founder Convicted In 'Book Cooking' Case
LOS ANGELES (CBS) ―
The founder and former chief executive officer of Homestore was found guilty Thursday of insider trading and falsifying the Westlake Village company's books.
A federal jury deliberated about a day and a half before finding Stuart Wolff guilty on all counts, including insider trading, lying to the company's accountants, lying in Securities and Exchange Commission filings and conspiracy.
Wolff, 42, was taken into custody Thursday to await his sentencing. He faces 25 to 35 years in prison, according to Assistant U.S. Attorney Douglas Fuchs.
Defense attorney Lawrence Barcella, meanwhile, said he plans to appeal.
Wolff was CEO of the online real estate listings company from its founding until early 2002, when he departed amid a probe of its finances.
During the two-month trial in Los Angeles, federal prosecutors laid out evidence to back their claim that Wolff engaged in conspiracy to commit securities fraud, insider trading and falsifying the books of the company, which earlier this year changed its name to Move Inc.
Fuchs said during his closing argument Tuesday that "common sense" showed Wolff had to have known about the $86 million in deals other company executives have acknowledged were means through which the company recorded its own money as new revenue.
In the deals, Homestore would make a purchase from an outside vendor, which would then pay a third party, such as AOL or Cendant, money that would be returned to Homestore in the form of advertising revenue.
Of the $86 million Homestore used to initiate the deals, $67 million came back, making it appear on paper as though the company had healthy advertising income even though it was actually losing a cut of the money, according to prosecutors.
The deals were fraudulent, Fuchs said. "You can't buy your own revenue," he told the jury.
Wolff's lawyers questioned whether he knew about the deals. They blamed Wolff's employees, including several of the 10 executives and salespeople who pleaded guilty in the case.
But Fuchs said the defendant was too involved in his company's day-to-day operations, from signing off on employee ID badges to approving much smaller transactions of $10,000 or $25,000, for him not have known all about the multimillion-dollar "round-trip" deals.
One of the deals was the single biggest quarterly revenue deal in the company's history, Fuchs stressed.
Fuchs said the deals, particularly large transactions with AOL,helped Homestore meet or beat projections during the first two quarters of 2001. That kept its stock afloat, according to the government.
Meanwhile, prosecutors contend, Wolff was cashing in his stock in the company, bringing himself a total of more than $8 million in profit in transactions in April, May, July and August of that year.
However, in the third quarter, AOL was no longer engaging in a round-trip deal with Homestore. As a result, those inside Homestore knew the company was going to miss its earnings projections for the quarter, Fuchs said.
Then came the terrorist attacks of Sept. 11, 2001, and the turbulence in the stock market that followed -- particularly in industries dependent on advertising revenue.
On Sept. 12, 2001, an executive sent Wolff an email suggesting the 9/11 strikes could be advantageous because they could be blamed for Homestore's poor financial performance that quarter.
Wolff said he agreed. Later, in a news release, the company blamed the terror attacks for being some $20 million below estimates for the quarter.
In a move that seems likely to draw attention to the case, U.S. District Judge Percy Anderson set Wolff's sentencing for Sept. 11.
Those who pleaded guilty in the case include ex-Homestore Vice President Peter Tafeen, former Chief Operating Officer John Giesecke and ex-Chief Financial Officer Joseph Shew. Seven other employees have also entered guilty pleas in the case.
In their plea bargains, two of the company's ex-executives acknowledged that when news of the investigation into the company's accounting became public in 2002, the stock price dropped enough that its shareholders lost at least $100 million.
In addition to the criminal case, Wolff faces civil charges filed by the SEC. Last March, Time Warner Inc. settled related SEC charges against its AOL division for $300 million.
(© 2006 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)