Two former top executives of Homestore.com Inc., the Westlake Village-based online real estate firm that rode the Internet stock craze to dizzying heights, were accused Thursday of defrauding investors by inflating advertising revenue in 2001.
Stuart Wolff, the company's former chief executive and chairman, and Peter Tafeen, who was executive vice president of business development, were named in a 19-count criminal indictment returned by a federal grand jury in Los Angeles.
Prosecutors allege that the two men intentionally exaggerated Homestore's revenue from its websites by tens of millions of dollars in 2001 in an attempt to feed Wall Street's hunger for fast-growing dot-com stocks.
Wolff and Tafeen are the 10th and 11th former employees to be targeted in the aftermath of Homestore's rise and fall. Sentencing is pending for the nine others -- including former Chief Financial Officer Joseph Shew -- who have pleaded guilty to various charges, prosecutors said.
"We've charged people responsible for criminal conduct all the way from the sales level to the CEO," said Michael R. Wilner, assistant U.S. attorney. "The accounting fraud at Homestore.com cost investors a tremendous amount of money."
In addition to the criminal charges against Wolff and Tafeen, the Securities and Exchange Commission filed a civil suit against the pair over their roles in the alleged conspiracy.
Wolff, 42, of Westlake Village, and Tafeen, 36, of Parkland, Fla., face 19 counts each, including conspiracy to violate securities laws, creating false books and records and lying to Homestore's accountants. They were also charged with insider trading for allegedly pocketing a combined $14 million by selling Homestore stock while concealing the company's true financial condition.
If convicted of all charges, each could receive up to 185 years in prison, according to the U.S. attorney's office. The defendants, who were not taken into custody, are expected to be arraigned in May.
Lawyers for both men said their clients would be vindicated.
"Over 90% of what the government is describing is a 'conspiracy' to conduct business," said Wolff's attorney, Howard Privette.
Brian J. Hennigan, an attorney representing Tafeen, said his client had maintained his innocence since talks with federal prosecutors began in October 2002. "We believe that when the matter is presented to a jury, the jury will conclude as well that Mr. Tafeen is not guilty," he said.
Now known as Homestore Inc., the formerly highflying company saw its stock zoom to a peak of $122.25 in 2000 as it reported rising sales. But the stock sank in late 2001, shortly before the departures of Tafeen and Shew. In early 2002, Wolff quit amid an internal probe and the firm restated its 2000 and 2001 sales. Its stock closed unchanged Thursday at $1.71 on Nasdaq.
Prosecutors allege that Tafeen, who was hired by Wolff in 1997 and reported directly to him, orchestrated the scheme, which inflated Homestore's sales by $67 million in the first three quarters of 2001. The scheme involved three-way transactions with America Online Inc. and other companies that did business with Homestore, prosecutors claim.
The deals involved three steps in which Homestore "essentially transferred money to itself," prosecutors allege. The company overpaid vendors for products or services with the understanding that much of the cash would be forwarded to an "intermediary" such as AOL. The intermediary would return much of the revenue to Homestore in the form of advertising, prosecutors claim.
Homestore, which has cooperated with investigators and brought in new management, was not named as a defendant in the indictment Thursday. It said its operations would be unaffected by the charges.
AOL also wasn't named as a defendant. AOL's parent, Time Warner Inc., has settled separate charges by the Justice Department and the SEC that AOL had falsely inflated its own revenue in recent years.