United States of America
In the Matter of
|ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AS TO BRIAN WIEGAND|
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Brian Wiegand ("Wiegand" or "Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 as to Brian Wiegand ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
1. Brian Wiegand, age 34, is a resident of Waunakee, Wisconsin. He is the founder of NameProtect and Business Filings. During 2001, Wiegand was the Chief Executive Officer and a director of NameProtect. Additionally, he was the Chief Executive Officer and Chairman of the Board of Business Filings. Wiegand resigned as an officer of NameProtect in July 2003.
2. Homestore, Inc., previously known as Homestore.com, Inc., is a Delaware corporation headquartered in Westlake Village, California. Homestore was one of the top portals for on-line real estate and related services in 2001. Homestore provides Internet real estate listings to consumers on Realtor.com and also markets services and products to real estate brokers. The Company's stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and trades on the Nasdaq SmallCap Market.
3. NameProtect, Inc. is a closely held Delaware corporation based in Madison, Wisconsin. The company provides trademark research services, brand protection, and brand monitoring services.
4. Business Filings, Inc. was a closely held Wisoconsin corporation based in Madison, Wisconsin. In 2001, Business Filings was in the business of providing incorporation services. In 2002, another company acquired the assets of Business Filings in an arm's length transaction. The corporate entity is now liquidated.
5. David Slayton, age 34, is a resident of Waunakee, Wisconsin. During 2001, he was a director and the Chief Financial Officer of NameProtect, Inc. He is also a part owner of both NameProtect and Business Filings, Inc. Slayton resigned as an officer of NameProtect in July 2003.
6. Similar to other Internet companies, Homestore's business model was based on revenue growth as a key indicator of its standing in the market. Advertising revenues were particularly significant and were separately disclosed in Homestore's financial statements. Securities analysts covering Homestore consistently focused on such advertising revenues and rendered favorable recommendations for the stock based on the company's revenue growth.
7. In an effort to surpass analysts' expectations, Homestore entered into several unconventional revenue transactions in 2000 and early 2001 that generated heightened scrutiny from Homestore's auditors, PricewaterhouseCoopers, LLP ("PwC"). In 2001, as a result of this, Homestore devised a complex structure for its advertising transactions to improperly inflate revenue and avoid detection by PwC. In the first three quarters of 2001, Homestore engaged in a series of round-trip transactions that caused the company to overstate its advertising revenue by over $46 million, or 46-80%, for the first three quarters of 2001, and to overstate the company's total revenue by up to 21% during these periods. The essence of these transactions was a circular flow of money by which Homestore recognized its own cash as revenue. Essentially, these transactions improperly inflated Homestore's revenue by allowing Homestore to funnel money through various outside parties and recognize its own cash as advertising revenue. Homestore filed Forms 10-Q for the first three quarters of 2001 despite knowing that the financial statements contained in these filings materially overstated the company's revenues for those periods. In addition, Homestore filed a Securities Act registration statement in October 2001 on Form S-8 that incorporated the financial statements included in Homestore's Forms 10-Q for the first three quarters of 2001.
8. In late March 2001, Homestore entered into a formal agreement with a Media Company ("Media Company") to engage in complicated round-trip transactions in order to generate advertising revenue at Homestore. To begin the flow of money, Homestore purchased products or services from various vendors for which it generally had no business need. As an unwritten condition to these transactions, Homestore required the vendors to buy on-line advertising at the Media Company with most or all of the money received from Homestore. In return and after retaining a fee of several million dollars the Media Company purchased on-line advertising from Homestore in the name of several companies for which the Media Company acted as a media buyer. The amount of such advertising purchases from Homestore was dependent on and directly correlated to the amount of advertising purchased through Homestore's referrals.
9. Homestore engaged in a significant four-party round-trip transaction in the second quarter of 2001 involving NameProtect and Business Filings. As part of the deal, Homestore paid an artificially inflated price of $5.2 million to NameProtect for various services such as establishing Internet domain names, incorporation assistance, and email forwarding. As a condition to the transaction, Homestore required that another conduit company, Business Filings, purchase $4.45 million worth of advertising from Homestore and the Media Company. The use of Business Filings for purchase of the advertising concealed the true nature of the transaction and made it appear that the two legs of the round-trip transaction were independent and distinct. To facilitate this, NameProtect transferred funds that it received from Homestore to Business Filings under the guise of a services agreement. Eventually, the Media Company transferred the bulk of these funds back to Homestore through the purchase of on-line advertising as a media buyer. Homestore recorded these funds as revenue without informing PwC of the overall round-trip nature of the deal, and reported the revenue in its Form 10Q for the quarter ended June 30, 2001.
10. Wiegand and Slayton primarily negotiated, structured and implemented the above round-trip transaction with Homestore.
11. Wiegand and Slayton assisted Homestore staff in implementing the round-trip transaction with the Media Company in the second quarter of 2001. Both Wiegand and Slayton understood that the circular nature of the transaction was intended simply to generate revenue for Homestore. Nevertheless, they agreed to comply with the conditions demanded by Homestore management to conceal the true nature of the transaction from PwC.
12. Wiegand facilitated the scheme as follows: (a) he agreed to accept inflated prices for their services from Homestore and to use those funds to purchase advertising either from Homestore or the Media Company; (b) he agreed to use Business Filings simply to add another entity to obscure the paper trail; (c) he allowed the use of an incorrect business address for Business Filings and backdating of certain documents to falsely portray that the two parts of the circular transaction were separate and distinct; (d) he eliminated links between the websites of Business Filings and NameProtect to make it appear that the two entities were unrelated; (e) he ensured that different officers signed the contracts of the two sides of the transaction so as to more thoroughly conceal the transaction from PwC; (f) he assisted Homestore management in improperly justifying to PwC the inflated price Homestore paid for NameProtect's services during PwC's examination of Homestore's financial statements in the second quarter of 2001.
13. As a result of the conduct described above, Wiegand caused violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer or sale, or in connection with the purchase or sale of securities, respectively.
14. Also as a result of the conduct described above, Wiegand caused Homestore's violations of Section 13(a) and the Exchange Act and Rules 12b-20 and 13a-13, thereunder.
15. Moreover, as a result of the conduct described above, Wiegand caused Homestore's violation of Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets.
16. Further, as a result of the conduct described above, Wiegand caused Jessica McLellan's2 violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1, which prohibit persons from knowingly circumventing a system of internal accounting controls and knowingly falsifying any book, record or account, and directly or indirectly falsifying or causing to be falsified any book, record, or account.
17. Lastly, as a result of the conduct described above, Wiegand caused Homestore's senior managers to violate Rule 13b2-2, which prohibits any director or officer of an issuer from directly or indirectly making or causing to be made a materially false or misleading statement to an accountant in connection with any audit or examination of the financial statements of the issuer.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Wiegand's Offer.3
Accordingly, it is hereby ORDERED that Respondent Wiegand cease and desist from committing or causing violations of or any future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 and causing violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 Homestore's former Business Development Manager.
3 Wiegand has agreed to pay $1 in disgorgement and a $35,000 civil penalty in connection with a parallel civil action.
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