Homestore Execs Key to Lawsuit
The former Homestore Inc. executives who have linked AOL Time Warner Inc. to a massive accounting fraud were a study in stress last month while waiting to plead guilty in Los Angeles federal court.
John M. Giesecke Jr. sat with his face reddened, his jaw clenched. Giesecke’s protege, Joseph J. Shew, was ashen-faced and subdued.
The two, highly regarded for their accounting knowledge, had built tandem careers since the 1980s, working side by side in ever more responsible roles.
From the accounting firm now known as PricewaterhouseCoopers, they moved to top jobs in Walt Disney Co.’s controller’s office, then to Westlake Village-based Homestore, the Internet’s No. 1 real estate site.
But when U.S. District Judge Percy Anderson accepted their guilty pleas to fraud and conspiracy charges, Shew and Giesecke took on new roles as government witnesses with the potential to send their former bosses and business partners to prison; provide fresh evidence of wrongdoing by media giant AOL; and perhaps help recover more than $1 billion that shareholders lost when Homestore revealed that its founding executive team had fabricated nearly $200 million in revenue.
The former executives are in this position because of a deal between defense attorneys and federal officials interviewing Giesecke, Shew and John DeSimone, another former Homestore executive who pleaded guilty to lesser charges of insider trading.
With the government’s blessing, the lawyers are sharing the trio’s version of events with attorneys for Homestore shareholders, according to people involved in the Homestore criminal case and investor litigation.
That version portrays a constellation of online companies struggling to pump up one another’s revenues in 2000 and 2001 as the Internet craze faded -- and often clashing in distrust even as they conspired together.
The clearest picture yet of Giesecke and Shew’s account emerged Friday, when the nation’s third-largest pension fund, the California State Teachers’ Retirement System, amended its class-action lawsuit in Los Angeles federal court on behalf of Homestore investors.
The 244-page suit seeks damages from Homestore and 16 other firms with large Internet presences, notably deep-pocketed defendants AOL and Cendant Corp., the franchiser of real estate brands Century 21, ERA and Coldwell Banker.
AOL has restated its books to eliminate $190 million in revenue it acknowledges should not have been recorded. However, it has portrayed the Homestore deals as the work of a rogue former employee at its America Online unit.
AOL has declined to comment on the new suit, which contends that at least four America Online executives knew about the fraud, including Joseph A. Ripp, who was then America Online’s chief financial officer and is now a vice chairman of the Internet unit.
The Justice Department and the Securities and Exchange Commission already are probing AOL’s accounting practices. The teacher pension fund lawsuit, with its wealth of detail, provides clues to the areas that government investigators are looking into.
A Cendant spokesman said Sunday that the allegations in the suit -- that the New York company helped arrange improper deals to boost Homestore’s revenue -- “are meritless and reckless.” He said the company intends to “aggressively defend against this spurious and egregious lawsuit.”
The professional path that led Giesecke and Shew to the L.A. courtroom where they admitted their crimes Oct. 21 began during the six years the two accountants worked at the Century City offices of the accounting firm then known as Price Waterhouse. When Giesecke left Price Waterhouse for Disney in 1994, Shew followed seven months later, according to a Homestore SEC filing.
Giesecke aspired to be Disney’s chief financial officer, according to the lawsuit, but when that failed to materialize, he joined what was then Homestore.com in 1998. Shew followed two months later.
When Homestore promoted Giesecke from chief financial officer to chief operating officer, Shew became Homestore’s CFO. That was in February 2001, just as Homestore began concocting the revenue-inflating deals that led to the criminal charges against Giesecke and Shew.
Shew resigned in December, followed a month later by the firings of Giesecke and other top managers. Shew also was first to strike a plea bargain with federal prosecutors, receiving a five-year maximum prison sentence. Giesecke was given a 10-year maximum sentence. By cooperating with investigators, the men hope to earn reduced sentences.
The suit alleges a number of schemes, including barters disguised as sales, stock issued to business partners so they would buy ads and Homestore services, and the use of small companies as intermediaries in deals that in reality were just Homestore passing cash back and forth with AOL and other partners.
It could take years for attorneys and juries to decide whether to accept Giesecke and Shew’s version of events. If they are caught lying or obstructing justice, the sentencing limits come off and they could be sent to prison for decades.
On the other hand, many of the executives they have implicated in their statements have yet to tell their side of the story in public.
They include Homestore founder Stuart H. Wolff, who made $33.7 million on allegedly illegal stock sales, and his former No. 2 at the company, business-development executive Peter B. Tafeen, who allegedly made $18 million on what the suit calls illegal insider trading. Sources involved in the criminal investigation said prosecutors have met with attorneys for Wolff and Tafeen, explaining evidence against them and raising the prospect of stiff prison sentences if they don’t cooperate.
Lawyers for Wolff and Tafeen have maintained their clients, an engineer and a deal-maker respectively, weren’t accounting experts and were unaware of any improper recording of revenue. They couldn’t be reached for comment.
Tafeen was closely involved with two other defendants in the civil suit: former America Online deal-makers Eric Keller and his boss David Colburn, both of whom have been fired over questionable accounting. The suit says the three men devised suspect transactions, called “Peter specials,” to be used when it appeared Homestore would fall short of its all-important quarterly revenue target -- known as the “bogie.” Keller and Colburn didn’t return phone calls.
The suit suggests the revenue inflation was nearly exposed in late 2000, when Homestore called off an improper deal with GlobeXplorer Inc., a seller of satellite and aerial photos that is one of the defendants in the suit. GlobeXplorer in response threatened to reveal the deals at an investor conference sponsored by Robertson Stephens Inc. in San Francisco, at which Shew was scheduled to appear.
“To avoid the threat of exposure,” the suit contends, $100,000 to $200,000 changed hands “to appease GlobeXplorer.”
Shew then attended the conference without any questions raised publicly, the suit says. GlobeXplorer couldn’t be reached for comment.
As the Nov. 14 deadline approached for filing Homestore’s third-quarter financials for 2001, bigger cracks were appearing in the company’s facade.
PricewaterhouseCoopers auditors wanted proof that L90 Inc., a small marketing company that is a defendant in the suit, was spending a huge chunk of its budget on Homestore ads, and “Shew was caught off-guard and did not know the answers,” the suit says.
When L90’s founder balked at signing a confirmation letter, Giesecke told Shew he should get help from Tafeen, the “Prince of Deals,” who had quit as head of business development and was working for Homestore in Florida.
Tafeen replied that “it was not his job anymore,” according to the suit.
Shew got the documents from L90 the night before the financials were due, but told Giesecke the next morning he had reservations about signing the quarterly report, the suit says.
Nonetheless, Shew signed the report. Three weeks later, he resigned from Homestore, and two weeks after that Homestore announced to investors that it was conducting an investigation of its accounting practices and would have to restate its revenue.
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Times staff writers Edmund Sanders and Thomas S. Mulligan contributed to this report.
