A panel of judges has tossed out the conviction and sentencing of former Homestore Inc. CEO Stuart Wolff, ruling that the judge presiding over the case should have been removed because of a financial conflict of interest.

The panel of three judges from the U.S. 9th Circuit Court of Appeals found that U.S. District Court Judge Percy Anderson’s financial interest in America Online — a company participating in transactions with Homestore that were a focus in the Wolff trial — should have disqualified him from presiding over the case, according to a Monday court filing.

Wolff had served as CEO and chairman for Move Inc. predecessor Homestore from 1997 until his resignation amid an internal investigation in 2002. A jury convicted Wolff on all 18 counts in June 2006, including conspiracy to commit securities fraud, file false reports with the U.S. Securities and Exchange Commission, falsify Homestore’s books and records, make false statements to the company’s auditor, and filing false quarterly reports with the SEC, falsifying corporate books and records, lying to accountants, and engaging in illegal insider trading.

He was sentenced to 15 years in prison, three years of supervised release, and ordered to pay a $5 million fine and an additional $8.64 million in restitution to shareholder victims.

E. Lawrence Barcella Jr., a lawyer for Wolff, said today, “We felt that the judge had a conflict from the very beginning. We’re certainly glad that the 9th Circuit agreed with us. He never disclosed how much stock he held, when he purchased, or what the stock ownership was.”

Meanwhile, Michael Wilner, an assistant U.S. attorney who has represented the government in the case against Wolff, said, “We’re evaluating our options. We do intend to proceed with the case.” Among the government’s options are to request reconsideration of the matter by a separate panel of judges or to proceed with preparation for a new trial.

Eleven other former Homestore officials have been convicted for their participation in illegal schemes such as fraudulent transactions and inflated earnings reports that led Homestore to restate its earnings and nearly sunk the company. The company’s former executive vice president of business development, Peter Tafeen, was among other Homestore officials who testified against Wolff during the trial.

So-called “triangular” deals, in which money changed hands from Homestore to other companies and back again to Homestore as reported revenue, were at the center of the lawsuit against Wolff. The government charged that Homestore participated in about 23 “triangular” or “round-trip” deals involving about $67 million in revenue, and that AOL participated in about 17 of those deals.

In the first quarter of 2001, Homestore “was alleged to have engaged in ‘at least seven fraudulent roundtrip transactions with AOL as intermediary, as a result of which Homestore fraudulently recorded approximately $15 million in advertising revenue,’ ” followed by 10 deals that led to $21.75 million in revenue during second-quarter 2001.

The government charged that Homestore should not have recognized the returning money as revenue in any of the transactions.

Wolff remains on home detention and Barcella said that a new judge assigned to the case will consider bail in light of the panel’s ruling.

The 9th Circuit Court of Appeals judges noted in their ruling that Anderson acknowledged he “owns stock in AOL” but “did not specify the date(s) of purchase, the amount held, or whether he had engaged in any subsequent transactions involving the stock.”

Anderson did excuse himself from consideration of an August 2005 motion related to subpoenaed documents from AOL, citing a “financial interest in AOL,” according to the panel’s ruling, and in November 2005 Wolff’s lawyers sought to disqualify Anderson from the case. Another judge, U.S. District Court Judge John F. Walter, considered whether Anderson should be disqualified from the case but found insufficient evidence to demonstrate that Anderson had a “financial interest in the subject matter in controversy.”

The panel found that, “In this case, the judge’s rulings could potentially have had a financial impact on AOL,” and “we conclude that the judge did have a financial interest in the subject matter in controversy.” And AOL employees may be unindicted co-conspirators, the judges found, as several witnesses in the Wolff case “testified in detail regarding direct dealings with AOL” and that company has faced separate criminal and civil litigation.

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Send tips or a Letter to the Editor to glenn@inman.com, or call (510) 658-9252, ext. 137.

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