The U.S. Securities and Exchange Commission (SEC) filed charges against three former executives of Homestore Inc. for arranging fraudulent "round-trip" barter transactions involving online advertising.
The SEC's complaint explains that online advertisements were a major source of revenue for Homestore, and that the company engaged in sham transactions related to advertising to meet Wall Street estimates. Management covered up by lying to the company's auditors PricewaterhouseCoopers.
In effect, the sham transactions allowed Homestore to recognize its own cash as revenue. This circular flow of funds began when the company paid inflated sums to certain vendors. The vendors used the proceeds to buy advertising from two media companies, who in turn bought advertising from Homestore. When it received the funds back from the media companies, Homestore recorded them as revenue.
In related proceedings, one of the former executives agreed to plead guilty to one count of conspiracy to commit securities fraud and one of wire fraud. Another agreed to one count of conspiracy, and the third agreed to one count of insider trading. They face prison terms of between 5 and 10 years, depending on the charges. As part of their plea agreements, all three have agreed to cooperate with the SEC and the criminal authorities.
The press reported that Homestore had entered into an agreement with AOL Time Warner's America Online unit, and there is speculation that the case could have implications for the government's continuing investigation of accounting practices by that unit.