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KAREN MATTESON, Cal. Bar No. 102103 Attorneys for Plaintiff UNITED STATES DISTRICT COURT
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Securities and Exchange Commission, Plaintiff, v. SOPHIA M. KABLER, THOMAS VO, SAILESH PATEL, JESSICA MCLELLAN, ADAM S. RICHARDS, DAVID SLAYTON and BRIAN WIEGAND, Defendants. |
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Case No. CV 03-6716 JFW (VBKx) Complaint For Violations Of The Federal Securities Laws |
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows:
1. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d)(1) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d)(1) & 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(1), 78u(d)(3)(A), 78u(e) & 78aa. Defendants have, directly orindirectly, made use of
the means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, in connection with the transactions, acts, practices, and courses of business alleged in this Complaint.
2. Venue is proper in this district pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), and Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain of the transactions, acts, practices and courses of conduct constituting violations of the federal securities laws occurred within this district.
3. This action concerns a massive financial fraud perpetrated on the investing public by the management executives of a public company and others. Defendants Sophia M. Kabler, Thomas Vo, Sailesh Patel, Jessica McLellan, and Adam S. Richards are five former senior or mid-level managers of Homestore, Inc., a Delaware corporation ("Homestore" or the "Company") located in Westlake Village, California. At the time of the alleged violations, Homestore was a top Internet portal for real estate and related services.
4. Defendants David Slayton and Brian Wiegand are the former Chief Financial Officer and Chief Executive Officer, respectively, of NameProtect, Inc., a private company headquartered in Wisconsin, which provides trademark research, brand protection, and brand monitoring services. Slayton and Wiegand were also on the board of directors and part owners of Business Filings, Inc., a closely held Wisconsin corporation, which was in the business of providing incorporation services.
5. From at least March 2001 through November 2001, employeesof Homestore engaged in a fraudulent scheme to inflate the Company's revenues to exceed Wall Street analysts' expectations. The scheme involved a complex structure of "round-trip" transactions using various third-party companies for the sole purpose of generating advertising revenues for Homestore. The essence of these transactions was a circular flow of money by which Homestore fraudulently recognized its own cash as revenue. Specifically, Homestore paid inflated sums to various vendors, including NameProtect, for services or products, and, in turn, the vendors used these funds to buy advertising from two media companies, sometimes through another company, such as Business Filings. The media companies then bought advertising from Homestore either on their own behalf or as agents for other advertisers. Homestore recorded the money it received from the sale of such advertising as revenue in its financial statements that were included in its Forms 10-Q for the quarters ended March 31, June 30 and September 30, 2001, materially inflating its revenue for these periods by $119 million (64%).
6. While the fraud was ongoing, Defendants Kabler, Vo, McLellan, and Richards exercised Homestore stock options, reaping profits ranging from approximately $455,000 to $1,770. Also, during the course of the fraud, Defendants Kabler, Vo, and McLellan received commissions for their sales performance ranging from approximately $42,000 to $18,000. Finally, Vo and Patel obtained undisclosed kickbacks totaling $7,000 and $138,900, respectively, from third parties to the fraudulent transactions.
7. Sophia M. Kabler is a resident of Mill Valley, California. Kabler was the Senior Vice President of Advertising Sales in Homestore's Strategic Alliance Group ("SAG") throughout 2001. SAG was the group within the Company which sold advertising on Homestore's variouswebsites.
8. Thomas Vo is a resident of Los Angeles, California. In January 2001, Vo became a Manager of Sales in SAG. Throughout 2001, Vo's primary responsibility was to sell advertising on Homestore's website.
9. Sailesh Patel is a resident of Los Angeles, California. During the relevant period, he was a Director of Business Development at Homestore. Patel was responsible for developing business through strategic long-term partnerships, mergers, and advertising sales.
10. Jessica McLellan is a resident of San Francisco, California. During 2001, she worked as one of Homestore's Business Development Managers. Her responsibilities included advertising sales and development of business strategies to generate revenue.
11. Adam Richards is a resident of Oak Park, California, and is licensed by the State of California as a Certified Public Accountant. In June 2000, Richards joined Homestore as a Senior Analyst and was promoted to Manager of Financial Planning in February 2001.
12. David Slayton is a resident of Waunakee, Wisconsin. During 2001, he was a director and the Chief Financial Officer of NameProtect. During the relevant period, Slayton was a part owner of both Business Filings and NameProtect.
13. Brian Wiegand is a resident of Waunakee, Wisconsin. In 1996, he formed NameProtect and Business Filings. During 2001, Wiegand was the Chief Executive Officer and a director of NameProtect. Additionally, during the relevant period, he was the Chief Executive Officer and Chairman of the Board of Business Filings.
14. Homestore, Inc., previously known as Homestore.com, Inc., is a Delaware corporation headquartered in Westlake Village, California. Homestore was one of the top portals for on-line real estate and related services in 2001. Homestore provides Internet real estate listings to consumers on Realtor.com and also markets services and products to real estate brokers. The Company's stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and trades on the Nasdaq SmallCap Market.
15. Throughout 2000 and 2001, Homestore had two primary sources of revenue. The Company generated approximately 60% of its revenue from the sale of subscriptions, products, and services to real estate agents. The remaining 40% was derived from the sale of on-line advertisements that appeared on the Company's website. Because advertising revenue was one of the key components of Homestore's overall financial results and because Wall Street analysts covering Homestore consistently focused on such advertising revenue, the Company separately disclosed that revenue in its financial statements.
16. During the first quarter of 2001, various Homestore officers and employees devised a fraudulent scheme involving round-trip transactions to circumvent the accounting rules for barter transactions. The essence of the fraud was to inject one or more third parties into transactions which were, in reality, two-way barter deals involving the exchange of advertising between Homestore and a second company. Specifically, these Defendants and others devised three legs in the round-trip transaction to (a) effect a circular flow of money; and (b) create an illusion that each leg of the transaction was independent of the other(s). The following diagram illustrates the structure of these transactions:
17. Generally Accepted Accounting Principles ("GAAP") do not permit companies to recognize revenue on transactions without any economic substance, such as the round-trip transactions. Further, GAAP requires that barter revenue be recorded based on the fair value of the assets or services involved. Additionally, under GAAP,barter transactions must be disclosed as such in the financial statements. As explained below, in structuring various round-trip transactions, the Defendants caused Homestore to fraudulently recognize its own cash as revenue in violation of GAAP.
18. As a result of Homestore's significant revenue shortfall in the first quarter of 2001, Homestore officers and employees devised a plan to use a major media company (the "Media Company") to act as an intermediary in one overall round-trip transaction. To carry out the scheme, Homestore paid vendors inflated prices for goods and services. The vendors were then required to purchase on-line advertisements from the Media Company. The Media Company then purchased on-line advertising from Homestore on behalf of entities for which the Media Company acted as a media buyer. Homestore recognized revenue on this amount of on-line advertising purchased by the Media Company. In effect, Homestore recycled its own money to generate revenue.
19. As a result of a shortfall in Homestore's estimated revenues in the second quarter of 2001, Homestore conducted a second similar round-trip transaction with the Media Company. Kabler played a substantial role in negotiating and structuring this transaction and in concealing its true nature from Homestore's auditors. In particular, Kabler worked closely with Homestore's legal and finance departments in drafting the second quarter Ad Representative Agreement between Homestore and the Media Company, which governed the terms of the Media Company's purchase of on-line advertising from Homestore.
20. Homestore paid a total of $49.8 million to sixteen vendors in the first two quarters of 2001. These vendors then collectively paid $45.1 million to the Media Company to purchase on-line advertisements. Homestore, in turn, recorded $36.7 million in revenue that it received from the Media Company for the purchase of Homestore on-line advertisements. Homestore was thereby able to surpass the revenue estimates of securities analysts covering Homestore in the first two quarters of 2001.
21. Homestore had no business need to enter into the transactions with the vendors. Homestore paid inflated amounts for the services and products and then improperly justified these amounts as the "fair market value." In all instances, Homestore paid the vendors the entire purchase price up-front while agreeing to receive the goods or services over a period of two to five years. As an unwritten condition of these transactions, Homestore required the vendors to buy on-line advertisements at the Media Company with most or all of the money the vendor received from Homestore. Beginning in the second quarter of 2001, the Media Company agreed to pay Homestore a 5% fee for referring the vendors to the Media Company.
22. Kabler directed members of the SAG organization to execute round-trip transactions and worked closely with them to ensure that the transactions were accomplished. Kabler instructed SAG staff as to the steps that they should take in order to structure the deals so that Homestore's auditors could not determine that they were round-trip transactions and void of economic substance. Kabler understood that the value Homestore paid to the vendors for the purpose of starting the circular flow of money was inflated and that members of her staff created false justifications to support the inflated values that were provided to the auditors. Kabler knew the round-trip deals resulted in the improper recognition of revenue and tooksteps to hide the true nature of the transactions from the auditors.
23. Richards assisted Homestore senior executives by working with sales people to structure the vendor deals so that the auditors could not determine the round-trip nature of the transactions. To this end, Richards instructed sales personnel to seek out vendors who could use other entities as conduits to purchase advertising at the Media Company so as to conceal the circular structure of the transaction. Additionally, Richards encouraged sales personnel to use vendors that were not audited by Homestore's accounting firm to avoid detection.
24. As explained below, Richards, Patel, McLellan, Slayton and Wiegand each played a significant role in one or more of the fraudulent round-trip transactions involving the Media Company.
25. One of the sixteen vendor deals with the Media Company was a significant four-party round-trip transaction in the second quarter of 2001 involving Slayton and Wiegand's companies, NameProtect and Business Filings. As part of the deal, Homestore paid an inflated price of $5.2 million to NameProtect for various services such as establishing Internet domain names, incorporation assistance, and email forwarding. As a condition to the transaction, Homestore required that a conduit company, Business Filings, purchase $4.45 million worth of advertising from Homestore and the Media Company.
26. The use of Business Filings for purchase of the advertising concealed the true nature of the transaction and made it appear that the transactions involving NameProtect and Business Filings were independentfrom each other. To create this appearance, NameProtect transferred funds that it received from Homestore to Business Filings under the guise of a services agreement. Eventually, the Media Company transferred the bulk of these funds back to Homestore through purchase of on-line advertising as a media buyer. Homestore recorded this revenue in full without informing their auditors of the overall round-trip nature of the deal.
27. As with its other transactions involving the Media Company, Homestore personnel did not tell the auditors that Business Filings' purchase of advertising was directly related to Homestore's payment to NameProtect. McLellan was the primary Homestore salesperson who negotiated this transaction. In order to conceal the true nature of the transaction from the auditors, McLellan and others, including a Homestore officer, instructed Slayton and Wiegand that: (a) Business Filings and NameProtect use different business addresses on the documentation; (b) the executives signing the NameProtect-Homestore agreement be different from those signing the purchase orders, termed "insertion orders," for the purchase of the ads; (c) Wiegand remove any links or content on the websites of NameProtect and Business Filings that might identify their relationship to each other; and (d) Business Filings create a backdated letter of solicitation to give the appearance that Business Filings had independently sought the purchase of advertising from Homestore, which letter McLellan assisted in preparing. Slayton and Wiegand complied with all of these instructions in order to facilitate Homestore's improper revenue recognition.
28. Slayton additionally provided a confirmation on behalf of NameProtect to Homestore's auditors which concealed that the Media Company was a party to the transaction and that NameProtect and Business Filings had common owners.
29. Pursuant to instructions from a Homestore officer, McLellan, with substantial assistance from Wiegand, also prepared a memorandum for Homestore's auditors falsely justifying the inflated price that Homestore paid for the services from NameProtect. McLellan knew at that time that the price paid to NameProtect was inflated and that the purpose of the false memorandum she prepared was to mislead Homestore's auditors into believing that the purchase was a legitimate arms-length transaction.
30. In order to further conceal the transaction from Homestore's auditors, Richards "scrubbed" both NameProtect's and Business Filing's websites to determine whether the auditors could detect the relationship between the entities. This involved searching both companies' Internet sites to determine if there were any apparent links between NameProtect — the entity that was paid by Homestore, and Business Filings — the entity that purchased advertising from the Media Company. When Richards discovered that several references on both websites did in fact link the companies, he took steps to have the references deleted. In addition, Richards prepared an internal memorandum supporting the inflated value paid by Homestore to NameProtect for the various services.
31. In another of the sixteen vendor deals involving the Media Company, McLellan worked on a deal in the second quarter of 2001 in which (a) Homestore purchased a software license worth at most $200,000 for an inflated price of $1.2 million from a third company; and (b) Homestore required the third company to purchase advertising from the Media Company for $1 million — the difference between the $1.2 million paid by Homestore for the software license and the $200,000 that the vendorretained.
32. In connection with this transaction, McLellan prepared a written justification memorandum for the inflated value paid by Homestore knowing that the real cost of the products purchased was substantially lower. McLellan knew that her written justification memorandum would be provided to Homestore's auditors in connection with their quarterly review of Homestore's financial statements and that the justification would assist Homestore in improperly recognizing revenue on the round-trip transaction.
33. During 2001, Homestore improperly recognized more than $12 million in revenue from four of the sixteen vendor deals utilizing the Media Company and vendor companies owned and operated by Patel's friends and former co-workers.
34. In order to accomplish the round-trip deals and conceal their fraudulent nature from Homestore's auditors, Patel specifically targeted companies that did not use the same auditing firm that Homestore used, instructed the vendors to use sister entities and/or shell companies to purchase advertising from the Media Company, and directed vendors to use false names and addresses on contract documents and insertion orders. Moreover, Patel knowingly prepared and provided false justifications for these vendor transactions to Homestore's finance staff with the understanding that they were to be provided to Homestore's auditors.
35. During 2001, Patel structured and implemented two vendor deals totaling $6.23 million. In the first quarter vendor deal, Homestorepaid inflated prices for technology from Patel's friend's consulting company, which then purchased $2 million of advertising from the Media Company.
36. In the second quarter vendor deal, Homestore purchased technology from the consulting company that Patel knew Homestore would not use. Without giving any explanation to his friend, Patel insisted that a company other than his friend's consulting company sell the technology to Homestore. Patel directed that this third entity be inserted into the transaction in order to conceal the true nature of the transaction from Homestore's auditors.
37. Based on Patel's false representations that the transaction was legal, Patel's friend proceeded with the transaction and injected a second one of his companies into the transaction. That company then purchased ads for $4 million from the Media Company. Patel's friend then paid a $69,450 kickback to Patel for referring the transaction to him, which Patel did not disclose to Homestore or its auditors.
38. In order to more fully ensure that the true nature of this round-trip transaction was concealed from the auditors, Richards prepared an internal memorandum supporting the inflated value paid for by Homestore for the technology.
39. During a second quarter of 2001, Patel also structured two separate round-trip transactions totaling $6.4 million with a friend who was an ex-employee of Homestore. This friend's entities purchased $6 million of advertising from the Media Company. Like the other circular transactions, Homestore paid grossly inflated prices for technology that itdid not need. For example, in the first transaction, Homestore paid $3.7 million for a software program, which Patel's friend had originally purchased for only $21,000.
40. Patel received $69,450 as a kickback from his friend for facilitating these transactions. Patel did not disclose this kickback to Homestore or its auditors.
41. Patel and his friend used four different shell companies to implement these transactions, including one that was set up solely for facilitating the circular flow of money. Because his friend had left Homestore on unfavorable terms, Patel ensured that neither his friend's name nor his friend's father's name appeared on any of the documents relating to the transaction. Instead, Patel caused his friend's married sisters, his friend's father's former partner, and a fourth individual to sign the relevant contracts. Patel thus not only assisted Homestore in improperly inflating revenues, he also misrepresented key facts to Homestore and its auditors for his personal gain.
42. In the second and third quarters of 2001, Homestore engaged in round-trip transactions using a second media company, L90, Inc. ("L90"). These transactions also had no economic substance and were executed solely to inflate Homestore's revenue. Vo negotiated these transactions on behalf of Homestore.
43. In the second quarter of 2001, Homestore paid $4.55 million to a vendor to acquire on-line marketing data. The vendor then transferred most of that money to L90 in exchange for advertising. Simultaneously, a subsidiary of L90 purchased $4 million of on-line advertising fromHomestore. Homestore recorded this amount as revenue and reported it in its financial statements, in violation of GAAP. Vo, in conjunction with Homestore's finance department and SAG, caused L90's insertion order to be backdated so that the transaction could be improperly represented in the financial statements as a cash transaction supporting a "true barter" transaction that took place later in the quarter.
44. Vo also drafted a false justification memorandum for the inflated value of the marketing data purchased during the course of the second quarter L90 round-trip transaction, knowing that the memorandum would be presented to Homestore's auditors during the course of their quarterly review to mislead them regarding the true nature and terms of the transaction.
45. In the third quarter of 2001, Homestore entered into a second round-trip deal with L90. In September 2001, Homestore paid approximately $5.7 million to a different vendor. After circulating the funds to various conduit entities of the vendor, they were subsequently transferred to L90. Thereafter, a subsidiary of L90 bought $5.65 million in advertising from Homestore. Homestore recorded this transaction as advertising revenue and reported it in its financial statements, in violation of GAAP.
46. Vo received an improper $7,000 kickback from an executive at L90 for his role in brokering the third quarter transaction between Homestore and L90. Vo did not disclose the receipt of this kickback to Homestore or its auditors.
47. During the course of the third quarter L90 transaction, Richards became aware that Homestore salespeople improperly backdated insertion orders to support other "true barter" deals that had been presented to the auditors. Richards did not disclose to the auditors that the insertion ordershad been backdated.
48. As with the transactions with the Media Company, Homestore management, including Defendants Vo and Richards, did not tell the auditors of the relationship between Homestore's payment to these vendors and the revenue generated from the sale of advertising to L90. In fact, as explained above, Defendants Vo and Richards took steps to obfuscate the true nature of the transactions from the auditors, and thereby assisted Homestore in recording inflated revenues in the second and third quarters of 2001 of about $9.6 million related to the round-trip transactions with L90.
49. As a result of the above fraudulent conduct by the Defendants, Homestore misrepresented its revenues in Commission filings, analysts' conference calls, and press releases. Specifically, Homestore's financial statements included in its quarterly reports filed on Forms 10-Q with the Commission for the first three quarters of 2001 and also in an S-8 Registration Form filed in October 2001 included the revenue derived from the round-trip transactions described above. As a result of the fraudulent conduct of the Defendants and others, Homestore overstated its advertising revenue by 64% and its total revenue by 15% for the first three quarters. The following chart shows the materiality of the advertising revenue as part of Homestore's financial statements:
| The Media Company Revenue | L90 Revenue | Reported Advertising Revenue | % Over-stated | Reported Total Revenue | % Over-stated | |
|---|---|---|---|---|---|---|
| Q1 2001 10-Q | $15,000,000 | 0 | $40,119,000 | 60% | $105,491,000 | 16% |
| Q2 2001 10-Q | $18,445,000 | $4,000,000 | $50,615,000 | 80% | $129,283,000 | 21% |
| Q3 2001 10-Q | $3,315,000 | $5,650,000 | $28,574,000 | 46% | $116,135,000 | 8% |
| Total | $36,760,000 | $9,650,000 | $119,308,000 | 64% | $350,909,000 | 15% |
50. Kabler also misled auditors by drafting an Ad Referral Letter that accompanied the second quarter Ad Representative Agreement between Homestore and the Media Company. The Ad Referral Letter included a list of entities that Homestore could potentially refer to the Media Company in return for a referral fee. However, Kabler deliberately included in the list not just several of the vendors and conduit entities that Homestore used in the round-trip deals, but also numerous other entities Homestore had no intention of referring to the Media Company. Kabler's purpose in doing so was to make it more difficult for the auditors to detect the various legs of the round-trip transactions.
51. Richards misled the auditors during quarterly reviews when he requested and reviewed justification memoranda from McLellan, Patel, Vo, and others that improperly supported inflated values of the goods andservices Homestore acquired from vendors in the round-trip transactions, knowing that the auditors would receive them. By these actions, Richards misrepresented material facts to the auditors and helped conceal the true nature of the round-trip transactions.
52. The Defendants profited from their fraudulent conduct through trading Homestore securities, receiving commissions for the fraudulent round-trip transactions, and, in the case of Vo and Patel, receiving the kickbacks described above. Specifically:
a. Kabler received a total of $497,958, consisting of $455,000 in profits from exercising Homestore stock options and $42,958 in commissions;
b. Vo received a total of $25,308, consisting of $308 in profits from exercising Homestore stock options, $18,000 in commissions and the $7,000 kickback he received from L90;
c. Patel received the $138,900 in kickbacks alleged above;
d. McLellan received a total of $31,030, consisting of $18,530 in profits from exercising Homestore stock options and $12,500 in commissions; and
e. Richards received a total of $1,770 in profits from selling Homestore stock.
53. The Commission realleges and incorporates by reference ¶¶ 1 through 52 above.
54. Defendants Kabler, Vo, Patel, McLellan and Richards, and each of them, by engaging in the conduct described above, directly or indirectly, in the offer or sale of securities by the use of means or instruments of transportation or communication in interstate commerce or by use of the mails:
a. with scienter, employed devices, schemes or artifices to defraud;
b. obtained money or property by means of untrue statements of a material fact or by omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
c. engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchaser.
55. By engaging in the conduct described above, Defendants Kabler, Vo, Patel, McLellan and Richards violated, and unless restrained and enjoined will continue to violate, Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a).
56. The Commission realleges and incorporates by reference ¶¶ 1 through 52 above.
57. Homestore and Defendants Kabler, Vo, Patel, McLellan and Richards, and each of them, by engaging in the conduct described above, directly or indirectly, in connection with the purchase or sale of a security, by the use of means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, with scienter:
a. employed devices, schemes or artifices to defraud;
b. made untrue statements of a material fact or omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
c. engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other persons.
58. By engaging in the conduct described above, Homestore and Defendants Kabler, Vo, Patel, McLellan and Richards violated, and unless restrained and enjoined Defendants Kabler, Vo, Patel, McLellan and Richards will continue to violate, Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5.
59. Defendants Wiegand and Slayton, and each of them, knowingly provided substantial assistance to Homestore's violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, and, pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), thereby aided and abetted those violations.
60. The Commission realleges and incorporates by reference ¶¶ 1 through 52 above.
61. Homestore violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, by filing with the Commission materially false and misleading quarterly reports on Form 10-Q for the first three quarters of 2001.
62. Defendants Kabler, Vo, Patel, McLellan, Richards, Slayton and Wiegand, and each of them, knowingly provided substantial assistance to Homestore's violation of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
63. By engaging in the conduct described above and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), Defendants Kabler, Vo, Patel, McLellan, Richards, Slayton and Wiegand aided and abetted Homestore's violations, and unless restrained and enjoined Defendants Kabler, Vo, Patel, McLellan and Richards will continue to aid and abet violations, of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20 and 13a-13 thereunder, 17 C.F.R. §§ 240.12b-20 & 240.13a-13.
64. The Commission realleges and incorporates by reference ¶¶ 1 through 52 above.
65. Homestore violated Section 13(b)(2)(A) of the Exchange Act by failing to make or keep books, records and accounts that in reasonable detail accurately and fairly reflected its transactions and disposition of its assets.
66. Defendants Kabler, Vo, Patel, McLellan, Richards, Slayton and Wiegand, and each of them, knowingly provided substantial assistance to Homestore's violation of Section 13(b)(2)(A) of the Exchange Act.
67. By engaging in the conduct described above and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), Defendants Kabler, Vo, Patel, McLellan, Richards, Slayton and Wiegand aided and abetted Homestore's violations, and unless restrained and enjoined Defendants Kabler, Vo, Patel, McLellan and Richards will continue to aid and abet violations, of Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A).
68. By engaging in the conduct described above, Homestore and Defendants Kabler, Vo, Patel, McLellan and Richards violated Exchange Act Rule 13b2-1 by, directly or indirectly, falsifying or causing to be falsified Homestore's books, records, and accounts subject to Section 13(b)(2)(A) of the Exchange Act. Unless restrained and enjoined, Defendants Kabler, Vo, Patel, McLellan and Richards will continue to violate Rule 13b2-1, 17 C.F.R. § 240.13b2-1.
69. Defendants Slayton and Wiegand, and each of them, knowingly provided substantial assistance to Homestore's violations of the ExchangeAct Rule 13b2-1, and, pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), thereby aided and abetted those violations.
70. The Commission realleges and incorporates by reference ¶¶ 1 through 52 above.
71. By engaging in the conduct described above, Homestore and Defendants Kabler, Vo, Patel, McLellan and Richards violated Section 13(b)(5) of the Exchange Act, by circumventing or failing to implement a system of internal accounting controls, or by knowingly falsifying any book, record or account described in Section 13(b)(2) of the Exchange Act. Unless restrained and enjoined Defendants Kabler, Vo, Patel, McLellan and Richards will continue to violate Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5).
72. Defendants Slayton and Wiegand, and each of them, knowingly provided substantial assistance to Homestore's violation of Section 13(b)(5) of the Exchange Act, and, pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e) thereby aided and abetted those violations.
73. The Commission realleges and incorporates by reference ¶¶ 1 through 52 above.
74. By engaging in the conduct described above, and in connection with audits or examinations of the financial statements of Homestore and the preparation and filing of statements and reports required to be filed with the Commission, Defendant Kabler, directly or indirectly, made or caused to be made materially false or misleading statements to accountants and omitted to state, or caused another person to omit to state to accountants, material facts necessary in order to make statements made to the accountants, in light of the circumstances under which such statements were made, not misleading.
75. By engaging in the conduct described above, Defendant Kabler violated, and unless restrained and enjoined will continue to violate, Exchange Act Rule 13b2-2, 17 C.F.R. § 240.13b2-2.
76. Defendants Vo, Patel, McLellan, Richards, Slayton and Wiegand, and each of them, knowingly provided substantial assistance to Homestore's officers' violations of Exchange Act Rule 13b2-2.
77. By engaging in the conduct described above and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), Defendants Vo, Patel, McLellan, Richards, Slayton and Wiegand aided and abetted Homestore officers' violations, and unless restrained and enjoined Defendants Vo, Patel, McLellan and Richards will continue to aid and abet violations, of Exchange Act Rule 13b2-2, 17 C.F.R. § 240.13b2-2.
WHEREFORE, the Commission respectfully requests that the Court:
Issue findings of fact and conclusions of law that the Defendants committed the alleged violations.
Issue judgments, in a form consistent with Fed. R. Civ. P. 65(d), permanently enjoining Defendants Kabler, Vo, Patel, McLellan and Richards and their agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Section 17(a) of the Securities Act, and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13, 13b2-1 and 13b2-2 thereunder.
Order Defendants Kabler, Vo, Patel, McLellan, Richards, Slayton and Wiegand to disgorge all ill-gotten gains from their illegal conduct, together with prejudgment interest thereon.
Order Defendants Kabler, Vo, Patel, McLellan, Richards, Slayton and Wiegand to pay civil penalties under Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).
Enter an order, pursuant to Section 20(e) of the Securities Act, 15 U.S.C. § 77t(e), and Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2), permanently prohibiting Defendant Kabler from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 781, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d).
Retain jurisdiction of this action in accordance with the principles ofequity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
DATED: September 18, 2003
____ S/ __________
Jessica Rigley Marren
Attorney for Plaintiff
Securities and Exchange Commission
http://www.sec.gov/litigation/complaints/comp18355.htm
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