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Homestore Fraud

During the latter half of the year 2006, the former chief executive and founder of the online real estate listings company, Homestore Inc. , was sentenced to fifteen years in prison. Moreover, he was ordered to pay a fine worth $5 million for devising a scheme that was meant to defraud investors. The man was convicted for insider trading, for false statements to company accountants as well as federal regulators, and for conspiracy in a scheme that falsely inflated advertisement revenues in order to fool investors (Homestore. com).

Homestore did not only disturb its investors after it was found that the persons running the business were engaged in fraudulent accounting practices. The company was a partner to America Online in addition to Cedant and other important e-commerce organizations. All of Homestore’s partners found regulators scrutinizing their own books in the wake of the discovery of the Homestore fraud (Regan, 2005). Shareholders lost at least $100 million in market value around the same time (Taub, 2006). The Homestore fraud was publicized for the first time in the year 2001.

The following year, the Sarbanes-Oxley Corporate Act of 2002 was introduced to check corporate fraud. Indeed, Homestore found itself in the company of Worldcom, Enron, Global Crossing and Arthur Anderson that had all failed to meet the American expectations of straightforward transparency in financial affairs (Whalen, 2003). Fortunately for investors, the U. S. Securities and Exchange Commission considered distributing the civil penalty paid by Homestore’s CEO among the shareholders of the company under the Fair Funds provision of the Sarbanes-Oxley Act soon after it was introduced (SEC Files, 2002).

HOMESTORE FRAUD Page # 2 Homestore was known as one of the very best Internet portals for real estate services and other related services. In 2002, however, the SEC reported the following: The Commission’s complaint charges Giesecke (Homestore’s former chief operating officer), Shew (former chief financial officer), and DeSimone (former vice president of

transactions) with arranging fraudulent “round-trip” transactions for the sole purpose of artificially inflating Homestore’s revenues in order to exceed Wall Street analysts’ expectations. The defendants circumvented applicable 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 approximately $21 and $32 per share, reaping profits ranging from approximately $169,000 to approximately $3. 2 million (SEC Files).

The complaint made by the SEC claimed that during the years 2000 and 2001, Homestore’s ad revenue was one of its primary sources of revenue. The company engaged in various “barter transactions” in order to inflate its revenues and thereby meet the estimates of Wall Street. Homestore was actually recognizing its cash as its revenue in this process. In particular, the company was paying inflated sums of money to several sellers of products and services. The sellers, in turn, invested the sums paid to them in ads with two media companies.

Those media companies bought ads from Homestore, and the latter recorded the amounts paid to its own financial statements as revenue. This was in violation of “applicable accounting principles,” HOMESTORE FRAUD Page # 3 seeing that Homestore was recycling its own money to show big business to Wall Street and to all of its investors, whereas all of the incoming money was its own to begin with (SEC Files).

According to SEC, the above mentioned transactions of Homestore were “bogus deals. ” All of the three main business officers also lied to the independent auditors of the company with regards to the “round-trip transactions. ” They sought to withhold records of their business from auditors. Furthermore, the men were charged with the misrepresentation of the company’s revenues to security analysts that covered the company. Inflated revenue figures were also publicized by the company through press releases.

The CEO of the company, now sentenced to fifteen years in prison, was known to have approved the fraudulent press releases (SEC Filed). HOMESTORE FRAUD Page # 4

References

1. “Homestore. com – Ex-Homestore CEO Gets 15-Year Sentence. ” Scripophily. Retrieved from http://www. scripophily. net/cp-about. html. (6 April 2007). 2. Regan, Keith. (2005, March 7).“Homestore Finalizes Settlement of Suits from Dot-Com Bust. ” E-Commerce Times. Retrieved from http://www. ecommercetimes. com/story/41151. html. (6 April 2007). 3. “SEC Files Financial Fraud Case Charging Three Former Homestore Executives; Defendants Agree to Repay $4. 6 Million in Illegal Trading Profits. ” (2002). U. S. Securities and Exchange Commission. Retrieved from http://www. sec. gov/index. htm. (6 April 2007). 4. Taub, Stephen. (2006, December 6). “Two Ex-Homestore Finance Execs Sentenced. ” CFO. Retrieved from http://www. cfo. com/. (6 April 2007).

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