Peter Tafeen, a former Homestore executive, pleaded guilty Thursday to one count of securities fraud for his participation in a scheme to artificially inflate company revenues, the U.S. Attorney’s Office for the Central District of California has announced.
As a part of his plea agreement, Tafeen, 36, agreed to testify against Stuart Wolff, 42, a former Homestore CEO who is also facing federal charges for allegedly participating in fraudulent transactions to boost the company’s stock performance.
As a result of his guilty plea, Tafeen faces a maximum sentence of 10 years in federal prison. A total of 10 former Homestore employees have pleaded guilty to criminal charges related to the fraudulent “round-trip” transactions.
Two of the defendants who have pleaded guilty admitted in court documents that Homestore shareholders suffered losses of at least $100 million when the company’s stock price dropped in 2002 upon news of an investigation into accounting irregularities. All 10 defendants, including Tafeen, are cooperating with the government in its ongoing investigation, according to the announcement.
The trial against Wolff is scheduled to begin March 28. Wolff, of Westlake Village, Calif., served as Homestore’s CEO and chairman of the board from 1997 to January 2002, when he resigned during an internal investigation. Tafeen served at Homestore from 1997 to November 2001.
Homestore, which will soon change its name to Move Inc., was almost ruined by the financial scandal that led to the federal lawsuit and criminal charges. The company’s stock price had plummeted to pennies after the scandal was publicized in 2002, but the company has since rebounded. Homestore announced Thursday that it had a profitable fiscal year in 2005 despite reaching settlement agreements to pay out millions of dollars to support the legal defense of the two former executives.
The U.S. Securities and Exchange Commission and U.S. Justice Department in April 2005 announced criminal and civil cases against Wolff and Tafeen. The duo was charged with participating in fraudulent “round-trip” transactions that generated a circular flow of money that the company reported as cash revenue in order to exceed Wall Street analysts’ expectations.
The civil and criminal cases have also alleged that Wolff misled investors and analysts about Homestore’s true financial condition and used the Sept. 11, 2001, terrorist attacks as a pretense for Homestore’s financial decline. Wolff and Tafeen both exercised stock options during the course of the fraudulent scheme, obtaining millions of dollars in proceeds.
Tafeen left Homestore in the fall of 2001, when accounting irregularities were reported along with other alleged improprieties. In October 2003 he filed a lawsuit against Homestore, claiming the online real estate company owes him $2 million for expenses already incurred, plus unstated sums of future expenses in connection with the federal investigations and lawsuits.
In February, Homestore officials announced that they had reached a settlement to pay up to $11.9 million to support legal costs for Tafeen, and officials earlier announced a separate agreement to pay up to about $15.2 million in fees and expenses related to Wolff’s legal expenses.
Wolff and Tafeen were both charged in a grand jury indictment with conspiracy to violate securities laws, insider trading, creating false books and records and lying to Homestore’s accountants.
The federal criminal lawsuit, filed April 27 in U.S. District Court in Los Angeles, charged Tafeen with conspiracy, filing of false statements with the Securities and Exchange Commission, circumvention of internal auditing controls, and fraudulent insider trading. Wolff is facing similar charges, along with falsification of corporate books and records.
Both men faced 19 counts, representing a maximum possible sentence of 185 years in federal prison.
“Every corporation has a responsibility to completely and accurately report its financial condition to its shareholders,” said United States Attorney Debra Wong Yang in a statement. “Every corporation and every executive – no matter how high up the chain of command – that violates this responsibility by cooking the books will be subject to aggressive action by the Justice Department.”
J. Stephen Tidwell, assistant director in charge of the FBI in Los Angeles, said in a statement Thursday, “Today’s guilty plea is gratifying in that an individual in a position of authority, with influence over his subordinates, has taken responsibility for his role in orchestrating and implementing a serious fraud scheme.”
In his plea agreement, Tafeen admitted to helping execute fraudulent “round-trip” transactions and “admitted knowing that Wolff misled investors and analysts about Homestore’s true financial condition and used the September 11, 2001 terrorist attacks as a pretense for Homestore’s financial decline,” according to the announcement.
Bloomberg News reported that Brian Hennigan, Tafeen’s lawyer, said, “(Tafeen is) ready to close this chapter of his life and move on.”
Hennigan told Inman News that sentencing for Tafeen is scheduled for Aug. 28. The federal government will likely call Tafeen to testify as a witness during Wolff’s trial, though Tafeen will have no other participation in that trial, he said.
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