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Securities and Exchange Commission

Litigation Release No. 17924 / January 9, 2003

Accounting and Auditing Enforcement Release No. 1698 / January 9, 2003

SEC v. Jeffrey Kalina, (U.S. District Court for the Central District of California, Civil Action No. CV 03-0147 WMB (RZx))

U.S. Attorney's Office and SEC Bring Criminal and Civil Fraud Actions Against Fourth Former Homestore Executive

Former Homestore mergers and acquisitions manager agrees to settle with the SEC; Defendant agrees to plead guilty to criminal securities fraud charge

The United States Securities and Exchange Commission and the United States Attorney's Office for the Central District of California today announced the filing of civil and criminal charges against another former executive of Homestore, Inc. The Commission's complaint charges Jeffrey M. Kalina, Homestore's former senior manager of mergers and acquisitions, with participating in a financial fraud scheme involving "round-trip" transactions in which Homestore used its own cash to generate revenues and thereby meet Wall Street expectations. Kalina, 31, of Woodland Hills, California, has agreed to settle the Commission's lawsuit, to plead guilty to criminal charges, and to cooperate with the government in its investigation.

The Commission's civil complaint and the Department of Justice's criminal charges, which were both filed this morning in United States District Court in Los Angeles, allege that Kalina assisted senior Homestore executives in a scheme to inflate revenues during 2001 through the round-trip transactions that had no economic substance and to conceal the improper conduct from the company's independent auditors. As a result of the fraudulent scheme, Homestore overstated advertising revenues by $46 million (64 percent) for the first three quarters of 2001 and total revenues by up to 15 percent, causing the company to report false and misleading financial information to shareholders and to the public in its Form 10-Q quarterly reports.

The Commission's complaint further alleges that Kalina knew that the round-trip transactions had no economic substance and that Homestore's reporting of revenues from these transactions violated generally accepted accounting principles (GAAP). Nevertheless, he assisted management in implementing the scheme and concealing parts of the transactions from the auditors.

The Commission charged Kalina with securities fraud, falsifying Homestore's books and records, and aiding and abetting Homestore's reporting and record-keeping violations, as well as Homestore management's lying to an accountant violations. Kalina settled the Commission's lawsuit without admitting or denying the allegations in the complaint. Kalina agreed to the entry of an order that (1) permanently enjoins him from committing future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-13, 13b2-1, and 13b2-2 thereunder; and (2) requires him to disgorge $74,348, including interest, from the exercise of his Homestore stock options during his involvement in the fraudulent scheme. These funds will be paid to the benefit of Homestore shareholders. Additionally, Kalina has agreed to the entry of a public administrative proceeding pursuant to Rule 102(e) of the Commission's Rules of Practice, suspending him from practicing or appearing before the Commission as an accountant.

In the related criminal case, Kalina has agreed to plead guilty to a one-count information charging him with securities fraud. In a plea agreement also filed this morning, Kalina admitted that he coordinated the efforts of Homestore sales staff in connection with the fraudulent transactions, thereby causing false and misleading statements to be made to the investing public about Homestore's revenues. The criminal case closely mirrors the allegations made in the Commission's complaint. The charge against Kalina carries a maximum possible penalty of five years in prison and a $250,000 fine.

The Commission and the U.S. Attorney's office previously charged three other former executives for their involvement in the round-trip scheme. John Giesecke, Jr., Homestore's former chief operating officer; Joseph J. Shew, the company's former chief financial officer; and John DeSimone, Homestore's former vice president of transactions, have all pleaded guilty to criminal charges, settled the Commission's civil charges, and agreed to collectively pay almost $5 million in disgorgement and civil penalties.

At the time of the violations, Homestore was one of the top Internet portals for real estate and related services. Homestore, Inc. (formerly Homestore.com Inc.) is based in Westlake Village, California. Homestore provides Internet real estate listings on Realtor.com and related websites.

This civil case is the product of an ongoing investigation by the Securities and Exchange Commission. The criminal case was investigated by the Federal Bureau of Investigation.

 

http://www.sec.gov/litigation/litreleases/lr17924.htm

Modified: 01/10/2003