SEC and United States Attorney Charge Former Homestore Executives With Scheme To Inflate Advertising Revenue

FOR IMMEDIATE RELEASE
2003-120

United States Attorney Central District of California

U.S. Securities and Exchange Commission Pacific Regional Office

SEC files charges against five former Homestore executives and the former CEO and CFO of a Homestore vendor for engaging in fraudulent round-trip transactions

Three former Homestore executives to plead guilty to criminal charges

Washington, D.C., September 18, 2003 — The United States Securities and Exchange Commission, the United States Attorney's Office for the Central District of California, and the Federal Bureau of Investigation today jointly announced the filing of civil and criminal charges against former executives of Homestore, Inc., the Westlake Village, Calif., company that provides real estate listings and related services on the Internet. The SEC also announced the filing of civil charges against the former CEO and CFO of a Homestore vendor for assisting in the fraudulent scheme at Homestore.

With these charges, the SEC has now charged a total of 11 individuals for their roles in a financial fraud scheme at Homestore, 7 of whom have been criminally charged by the United States Attorney in Los Angeles.

The civil and criminal actions allege that the defendants structured and negotiated fraudulent "round-trip" transactions for the purpose of artificially inflating Homestore's on-line advertising revenues to exceed Wall Street analysts' expectations, even though these transactions had no economic substance. In these round-trip transactions, Homestore paid inflated sums to various vendors for services or products, and, in turn, the vendors used these funds to buy advertising from two media companies. The media companies then bought advertising from Homestore, and Homestore improperly recorded the money it received from the sale of such advertising as revenue in its financial statements. The essence of these transactions was a circular flow of money by which Homestore recognized its own cash as revenue.

All of the Homestore employees charged today were directly involved in setting up these illegal round-trip transactions. These defendants also participated in misleading Homestore's outside auditors to prevent discovery of the true nature of the round-trip transactions. This included altering websites and press releases of vendor companies to eliminate incriminating information, preparing and backdating documents, and using false addresses for related businesses. In addition, several salespeople charged today personally profited from the illegal transactions by accepting "kickbacks" from vendors or by engaging in insider trading in Homestore's stock. In one case, a former Homestore salesperson routed payment of a kickback through offshore bank accounts in Lebanon and Uganda in an effort to avoid detection.

The Civil and Criminal Charges

The SEC's civil complaint and the United States Attorney's criminal information, filed today in United States District Court in Los Angeles, charges the following three defendants.

• Thomas Vo, 29, of Westwood, Calif., was a manager in Homestore's Strategic Alliances Group (SAG) from January 2001 until January 2002.
   
• Sailesh Patel, 36, of Los Angeles, Calif., was a Director of Business Development at Homestore from August 2000 until October 2001.
   
• Jessica McLellan, 29, of San Francisco, Calif., was a manager in Homestore's SAG from January 2001 through April 2002.

In addition, the SEC's civil complaint also charges the following four defendants.

• Sophia M. Kabler, 37, of Mill Valley, Calif., was Homestore's Senior Vice President of Advertising Sales throughout 2001.
   
• Adam S. Richards, 34, of Oak Park, Calif., was Homestore's Manager of Financial Planning from February 2001 through January 2002. Richards is a certified public accountant licensed by the State of California.
   
• David Slayton, 34, of Waunakee, Wis., who was the chief financial officer and a director of NameProtect, Inc., a private company headquartered in Madison, Wis., that provides trademark research, brand protection, and brand monitoring services. According to the SEC's complaint, NameProtect was one of the vendors that participated in the round-trip transactions.
   
• Brian Wiegand, 34, of Waunakee, Wis., was the chief executive officer and is a director of NameProtect.

The SEC charged the defendants variously with violating or aiding and abetting violations of numerous provisions of the federal securities laws, including the antifraud provisions, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; reporting provisions, Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; record-keeping provisions, Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder; internal controls provisions, Section 13(b)(5) of the Exchange Act; and lying to the auditors provisions, Rule 13b2-2 under the Exchange Act.

The Justice Department's criminal action charges Thomas Vo and Sailesh Patel with one count of wire fraud, in violation of Title 18, United States Code, Section 1343, and Jessica McLellan with one count of securities fraud, in violation of Title 15, United States Code, Sections 78j(b) and 78ff, and Title 17, Code of Federal Regulations, Section 240.10b-5.

Debra W. Yang, United States Attorney for the Central District of California and a member of the President's Corporate Fraud Task Force, stated, "This latest series of charges in the Homestore case reflects this Office's policy of prosecuting everyone involved in an accounting fraud scheme. Where the facts warrant, the government will prosecute lower- and mid-level business executives and sales representatives who engage in this type of crime."

Randall R. Lee, Regional Director of the Commission's Pacific Regional Office, stated, "Today's actions demonstrate that no matter who you are, you will be held accountable if you betray the trust of the investing public by participating in a scheme to inflate a company's true financial results. That's true whether you're a senior executive, a sales person or even a customer or vendor."

Louis Caprino, Assistant Special Agent in Charge, F.B.I. Los Angeles, stated, "Individuals who engage in criminal corporate fraud will be vigorously investigated by the F.B.I. and prosecuted by the U.S. Attorney's Office."

The Settlements and Guilty Pleas

Vo, Patel and McLellan have agreed to settle the SEC's lawsuit, to plead guilty to the criminal charges, and to cooperate with the government in its ongoing investigations. Kabler, Richards, Slayton and Weigand, who were not charged in the criminal case, have also agreed to settle the SEC's lawsuit. All seven individuals settled the SEC lawsuit without admitting or denying the allegations, simultaneously with the filing of the complaint. Vo, Patel and McLellan are expected to appear in court on the criminal charges in October 2003.

In the SEC case, Kabler will be enjoined from committing future violations of the charged federal securities laws, will repay $530,119 in profits from her exercise of Homestore stock options and commissions she earned during the fraud, plus interest, and will pay a $120,000 civil penalty. Kabler will also be permanently barred from serving as an officer or director of a public company.

In the SEC case, Vo will be enjoined from committing future violations of the charged federal securities laws; and will pay $31,377 representing profits from trading in Homestore stock, commissions, an improper kickback from a customer, interest and a civil penalty. In the criminal case, Vo faces up to five years in prison and a $250,000 fine.

As part of his SEC settlement, Patel will be enjoined from committing future violations of the charged federal securities laws and will pay $170,806, consisting of improper kickbacks he received from customers, interest and a civil penalty. In the criminal case, Patel faces up to five years in prison and a $250,000 fine.

In her SEC settlement, McLellan will be enjoined from committing future violations of the charged federal securities laws and will pay $38,160, representing her profits from trading in Homestore stock, commissions, interest and a civil penalty. In the criminal case, McLellan faces up to ten years in prison and a $1 million fine.

In his SEC settlement, Richards will be enjoined from committing future violations of the charged federal securities laws and will pay $11,894, representing his profits from trading in Homestore stock, interest and a civil penalty. Richards will also be suspended from appearing or practicing before the SEC as an accountant.

Slayton settled the SEC's action by consenting to the entry of an administrative cease-and-desist order prohibiting him from committing or causing future violations of the charged federal securities laws. He also consented to the entry of a district court judgment ordering him to pay $35,001 in civil penalties and disgorgement.

Weigand also settled the SEC's action by consenting to the entry of an administrative cease-and-desist order prohibiting him from committing or causing future violations of the charged federal securities laws. He also consented to the entry of a district court judgment ordering him to pay $35,001 in civil penalties and disgorgement.

The civil penalties and disgorgement will be paid by the defendants to a distribution fund established for the benefit of defrauded Homestore shareholders pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002.

Previously in this matter, Homestore's former Chief Operating Officer, John Giesecke, its former Chief Financial Officer, Joseph Shew, its former Vice President of Transactions, John DeSimone, and its former Finance Department Manager, Jeffrey Kalina, pleaded guilty to criminal charges brought by the Department of Justice and settled SEC actions.

The civil case is the product of an ongoing investigation by the SEC. The criminal investigation by the Federal Bureau of Investigation is also ongoing.

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