Homestore Execs Plead Guilty as Reports Eye AOL

The government landed three guilty pleas in its investigation into the accounting and advertising practices of Homestore.com , as reports continue to point to AOL Time Warner’s role in the scandal.

Speaking at a press conference in Washington, D.C., U.S. Attorney General John Ashcroft announced that John Giesecke, the firm’s former chief operating officer, and Joseph Shew, its chief financial officer, had agreed to plead guilty to charges of conspiracy to commit securities fraud.

Giesecke also will plead guilty to wire fraud, while former Homestore vice president John DeSimone will plead guilty to insider trading, Ashcroft said.

Giesecke and DeSimone each face a maximum of ten years in prison, while Shew faces five years. Ashcroft added that they would now assist the Justice Department in ongoing investigations, and that the U.S. Securities and Exchange Commission has filed a civil securities fraud action against the three men.

The case stems from deals struck last year by executives at the Westlake, Calif.-based startup, which operates sites selling real estate listings. Earlier this year, Homestore said it had improperly recognized as much as $95 million as advertising revenue during the first three quarters of 2001, which prompted the Justice Department’s investigation.

That investigation is likely to culminate in a complaint by the Department alleging that Homestore defrauded investors by falsely inflating its revenues, according to reports in The New York Times and Wall Street Journal.

The papers on Wednesday both reported that some of the deals in question stemmed from advertising arrangements with AOL Time Warner, a charge that had been made before.

The Times reported that such deals entailed Homestore encouraging its vendors to buy advertising on the New York media conglomerate’s America Online service by purchasing unneeded services and products from them. In return for the business referrals, America Online agreed to buy ads on Homestore and its sister properties.

If that’s indeed the case, Homestore should not be able to recognize the ads purchased by AOL as revenue, since it effectively bought those ads itself — by paying companies to advertise on America Online in exchange.

The Times reported that an as-yet-unfiled complaint by the Justice Department will claim that Homestore paid $49.8 million to other companies over 16 transactions, and the recipients then bought $45.1 million in advertising from “a major media company.” The major media company then used the cash to buy $36.7 million in advertising from Homestore.

The complaint does not name AOL Time Warner, although it is believed to be the only major media company with which Homestore had an advertising agreement, which had been signed in 2000. AOL spokespeople did not return requests for comment by press time.

During the press conference, Ashcroft declined to provide additional information on the investigation, including whether AOL Time Warner indeed was involved.

Should AOL be revealed as a player in these arrangements, it would certainly sink the troubled media titan’s fortunes even further. Already, AOL Time Warner has said it is the subject of accounting investigations by the Justice Department and the SEC, and also has said it is investigating what could be about $49 million in improperly booked revenue from late 2000 through this spring.

Such a disclosure also would be certain to further discredit the company’s once-ballyhooed ability to generate lucrative cross-media deals. During the period in question, AOL was busily striking marketing arrangements that simultaneously involved inventory across many of its properties, including America Online.

However, if the marketing deals came as the result of illicit “round-tripping” arrangements in which ad buyers were compensated (as would be the case in the Homestore allegations), then the market for pitching Internet ad inventory as an adjunct to offline media would seem falsely inflated — potentially dealing a blow to the entire online advertising industry that looked to AOL as a bellwether.