Government prosecutors have moved to drop four charges that former Homestore.com Chairman and Chief Executive Officer Stuart Wolff misled the company’s accounting firm about "round-trip" advertising deals that later forced the company to restate millions of dollars in earnings.

The move follows accusations by Wolff’s attorneys that employees of the accounting firm, PricewaterhouseCoopers, modified or destroyed evidence in the case, which the company denies (see story).

Government prosecutors have moved to drop four charges that former Homestore.com Chairman and Chief Executive Officer Stuart Wolff misled the company’s accounting firm about "round-trip" advertising deals that later forced the company to restate millions of dollars in earnings.

The move follows accusations by Wolff’s attorneys that employees of the accounting firm, PricewaterhouseCoopers, modified or destroyed evidence in the case, which the company denies (see story).

In a motion to dismiss four counts of a 23-count criminal indictment of Wolff, prosecutors said issues raised by his defense team have "some merit," but do not "exculpate Wolff for his involvement" in an alleged "fraud scheme" to deceive Homestore investors.

Prosecutors say they don’t need to call witnesses from the accounting firm to the stand in order to prove Wolff’s criminal intent, because three former Homestore executives who pled guilty and served prison sentences are expected to testify against him.

Realtor.com operator Homestore, which has since rebranded as Move Inc., allegedly inflated its revenue by overpaying vendors for services, recouping some of the money by selling advertising to third-party intermediaries in the circular deals.

When the nature of the deals was revealed, Homestore announced in December 2001 that it would restate seven quarters of earnings. According to a civil suit filed by Homestore investors, the company ultimately erased $192.6 million in revenue from its books.

To date, 13 former Homestore employees have been convicted of violating securities law or settled charges with the U.S. Securities and Exchange Commission (SEC). Homestore paid $13 million in cash and forfeited 20 million shares of company stock to settle a civil suit by investors, who claimed $853 million in losses, and PricewaterhouseCoopers paid $17.5 million.

But Wolff’s 2006 fraud conviction and 15-year prison sentence for his alleged involvement in the scheme was vacated last year, after an appeals court found that the judge presiding over the case should have disqualified himself because he owned stock in America Online, which allegedly served as a third-party intermediary in some of the circular deals (see story).

Wolff’s retrial, now scheduled for Jan. 26, could be pushed back if the court grants his request for an evidentiary hearing to investigate allegations that evidence in the case has been modified or destroyed by PricewaterhouseCoopers employees.

Wolff’s lawyers claim he went into his first trial without a number of key records, and that a review of recently obtained documents showed some of the evidence used against him was altered by PricewaterhouseCoopers.

Internal work papers maintained by PricewaterhouseCoopers to document the services the company performed for Homestore were altered "after the fact to make it look as though Homestore executives provided false information and directly lied" to PricewaterhouseCoopers, Wolff’s attorneys said in an Oct. 23 motion for an evidentiary hearing.

In their Nov. 13 response, prosecutors said that after further investigation, "the government agrees that there are some inconsistencies in the (PricewaterhouseCoopers) records and in recent witness statements, particularly when (witnesses) have been asked to recall non-essential details of the Homestore debacle eight years after the fact." …CONTINUED

Although there appear to be "benign explanations" for the inconsistencies, Wolff "would undoubtedly be able to impeach the credibility of (PricewaterhouseCoopers) witnesses at trial with their inconsistent statements, even as he falls short of establishing his sensational allegations of cover-up and misconduct," prosecutors said.

Prosecutors now say they are prepared to go to trial without calling any PricewaterhouseCoopers employees as witnesses, or submitting any of the accounting firm’s records as evidence.

Instead, they intend to call on former Homestore employees to demonstrate that company executives "intended to lie to (PricewaterhouseCoopers), and created numerous false contracts and records that were deliberately sent to the auditors," prosecutors said. "This is crucial evidence of the criminal intent and knowledge of Wolff and his co-conspirators during the fraud scheme."

Wolff and a core group of three other executives — former Executive Vice President Peter Tafeen, former Chief Financial Officer Joseph Shew, and former Chief Operating Officer John Giesecke — "closely controlled Homestore," prosecutors said.

Prosecutors said Tafeen, Shew and Giesecke — who all pled guilty and have served prison sentences — will testify that the four agreed to conceal the round-trip nature of the advertising deals from PricewaterhouseCoopers.

During Wolff’s first trial, Tafeen recalled a May 2001 meeting between the four executives, where Shew allegedly asked: "Is everybody in agreement and understand that we are going to hide this from Pricewaterhouse?"

"So there wasn’t just a silent nodding. Everybody actually voiced their agreement with it?" Tafeen was asked at Wolff’s trial.

"It was like playing ‘Ring Around the Rosie,’ " Tafeen said. " ‘Yes.’ ‘Yes.’ ‘Yes.’ ‘Yes,’ " was the response of each, he testified.

Wolff monitored Homestore’s receipt of revenue and payments to vendors in the fraudulent round-trip deals, prosecutors said, and personally approved virtually all of the payments made to vendors.

He allegedly intervened in dealings with America Online at least 20 times during a two-week period, prosecutors said, in one e-mail demanding that "we (Homestore) need to get our cash now just as you have gotten yours."

PricewaterhouseCoopers employees were aware of the first and third legs of the transactions, prosecutors said, because they generated cost and revenue. Homestore’s accounting firm was not aware that the transactions were related, they said, because its employees were kept in the dark about the second leg of the circular deals.

But Wolff’s lawyers claim PricewaterhouseCoopers employees altered work papers documenting the services they performed for Homestore, adding details about six transactions between Homestore and outside vendors. …CONTINUED

The work papers were allegedly altered after the fact to state that Homestore managers told PricewaterhouseCoopers employees that there was no revenue associated with the transactions — in other words, that they were not circular.

Wolff’s defense team has also questioned why it has not been able to obtain a complete set of PricewaterhouseCoopers e-mails and faxes from 2000 and 2001.

Wolff’s defense team spelled out those and other allegations in a July 22 memo, which eventually led U.S. District Judge Gary Feess to postpone Wolff’s October trial date to January "to allow the government to meaningfully investigate the newly discovered evidence put forward by the defense."

The FBI interviewed three PricewaterhouseCoopers employees about the allegations in October.

Prosecutors say they disagree with "Wolff’s characterizations of PricewaterhouseCoopers’ actions" as an attempt to conceal the true nature of the accounting firm’s role in the scandal.

"To the contrary, there is compelling evidence from numerous independent sources corroborating (PricewaterhouseCoopers’) fundamental assertion that Wolff’s co-conspirators at Homestore deceived the accounting firm," prosecutors said.

By dropping charges that Wolff deceived PricewaterhouseCoopers and not calling the accounting firm’s witnesses to the stand, "the government has considerably streamlined its anticipated presentation at trial," prosecutors said.

Having previously dropped one count of the indictment related to allegations that Wolff deceived PricewaterhouseCoopers, the motion by prosecutors to drop four similar counts would leave Wolff facing 19 counts of conspiracy to commit securities fraud, filing false reports with the Securities and Exchange Commission, and violating corporate recordkeeping provisions.

Five counts of the indictment relate to Wolff’s sale of Homestore stock between April and August 2001, which netted him more than $8 million.

With the government moving to drop charges relating to Wolff’s dealings with PricewaterhouseCoopers, there is no need for an evidentiary hearing into the alleged destruction or modification of evidence, prosecutors said.

A hearing on the government’s request to drop some of the charges against Wolff and Wolff’s request for an evidentiary hearing is set for Dec. 7.

The lead attorney representing Wolff did not respond to requests for comment.

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