Homestore: The Advertising Revenue It Paid to Receive

In the Homestore round-trip advertising case, three former executives agreed to return approximately $4.6 million in stock-option proceeds after the SEC alleged they booked the company’s own money as advertising revenue. If you handled the vendor purchase, the advertising agreement or the incoming payment, you might recognize the connection: the company paid out money on the understanding that it would come back dressed as a sale.

This page follows Homestore’s vendor purchases, advertising intermediaries and the records allegedly hidden from its auditors. Our page on fictitious sales and round-trip transactions explains the broader pattern across different businesses.

The Revenue Shortfall Behind the Round Trip

Homestore operated an Internet portal for real estate and related services from Westlake Village, California. It offered real estate listings to consumers on Realtor.com and sold subscriptions, products and services to real estate agents. According to the SEC’s complaint, online advertising supplied approximately 40% of its revenue during 2000 and 2001, and the company reported that revenue separately in its financial statements.

That separate number mattered to the story Homestore told investors. The SEC alleged that the former chief operating officer, chief financial officer and vice president of transactions caused an advertising-revenue overstatement of $46 million, or 64%, for the first three quarters of 2001. Its case concerned the transactions behind that apparent growth and the information executives kept from auditors and securities analysts.

The complaint describes earlier barter deals in which Homestore bought advertising, services or rights from a vendor, and the vendor promptly bought advertising from Homestore for roughly the same amount. Faced with a significant revenue shortfall in the first quarter of 2001, executives allegedly inserted a media company into the exchange. The SEC alleged that the extra participant made linked purchases appear independent.

How Homestore’s Advertising Money Came Back

The alleged round trip began with Homestore buying products or services from vendors on the condition that they spend the proceeds on advertising elsewhere. The SEC’s announcement traced $49.8 million in Homestore payments to vendors during the first two quarters of 2001. Those vendors then paid $45.1 million to a major media company for online advertising.

The media company bought advertising from Homestore as a media buyer for other advertisers. The announcement said Homestore recorded $36.7 million in revenue from those related purchases. With a second media company, the SEC alleged that the same general arrangement generated an additional $9.7 million in improperly recognized revenue in the second and third quarters.

The complaint makes the vendor’s obligation explicit. In the SEC’s telling, Homestore’s purchase and the vendor’s advertising commitment belonged to the same bargain:

The outgoing purchase had an accounting benefit of its own. According to the complaint, Homestore generally had no business need for the deals, paid the entire price up front and agreed to receive the goods or services over two to five years. It recorded those payments as prepaid assets and spread the expense over the agreements’ terms, reducing current expenses and increasing reported earnings.

In the SEC’s account, we see Homestore financing its own apparent growth. The purchase expense could wait. The returned cash got to be revenue now.

The Records an Advertising Accountant Could Connect

The useful securities fraud evidence connects the purchase approval to the advertising commitment, the bank movements and the revenue entry. The SEC alleged that the executives understood from the outset that advertising referred through vendors would produce advertising purchases from Homestore. An accountant who knew that condition would have a different view of the receipt from someone who saw only the final invoice.

For a similar arrangement, we would examine the records in connected groups:

• The purchase and its purpose. Vendor agreements, purchase approvals and payment instructions can show what the company bought, why it bought it and whether the advertising commitment was a condition of the deal.
• The counterparty and the cash. Advertising contracts and bank movements can connect the vendor to the intermediary and the intermediary to the apparent customer payment. Separate company names can hide a connection that the agreements or payment instructions reveal.
• The entry and the explanation. The revenue entry, prepaid-asset accounting and information given to the auditor can show how the business arrangement became a reported number, and which connections disappeared from the explanation.

You may know the purchasing condition even if you never booked the revenue. We connect that knowledge to the agreements and cash movements that explain the other side of the transaction.

The SEC complaint identifies decisions behind those records. It alleged that the chief operating officer authorized the inflated vendor wire transfers, while the chief financial officer signed the quarterly reports and directed employees to use privately held vendors in hopes of attracting less scrutiny. The vice president of transactions allegedly helped structure the deals so Homestore could record the revenue while hiding the circular arrangement.

The Audit File Hid the Middle of the Deal

The SEC alleged that executives concealed the vendors’ purchases from the media company, the middle leg that connected Homestore’s outgoing cash to its incoming revenue. Its complaint says the chief financial officer directed employees to have vendors use separate entities to buy the advertising. It also alleges that executives withheld documents and falsely told the auditor there were no side agreements or revenue arrangements tied to the vendor purchases.

The complaint also alleges that the media company agreed to pay Homestore a 5% referral fee for sending vendors its way. Homestore allegedly left approximately $1.4 million in those fees unrecorded in the second quarter of 2001 to hide the connection from its auditor.

The alleged concealment reached beyond the accounting file. The complaint says the vice president of transactions instructed a subordinate to alter websites to hide the relationship between a vendor and its intermediary, and helped backdate documents used to recognize barter revenue. The SEC’s follow-up enforcement announcement also described altered vendor press releases and false addresses for connected businesses.

That announcement extended the civil charges to sales and financial-planning employees and to executives of NameProtect, a vendor providing trademark research and brand-protection services. It alleged that participants helped set up the round trips and mislead the outside auditors, and that some salespeople profited from vendor kickbacks. If you worked on the vendor side, your view of the deal could explain a connection missing from Homestore’s accounts.

The 2019 paper Accounting Fraud: A Literature Review, published in Risk Governance and Control: Financial Markets & Institutions, identifies corporate governance and senior personnel as central to accounting fraud. That finding gives a reason to follow the approval and the auditor response together. In Homestore’s case, the SEC alleged that people responsible for the numbers also directed how the transactions would be concealed.

Executive Settlements and Homestore’s Cooperation

The SEC brought its civil case against the former executives in federal court in Los Angeles and announced their settlements on September 25, 2002. Alongside the agreed return of stock-option proceeds, the former chief operating officer agreed to a $360,000 civil penalty. The agency said the returned proceeds would benefit Homestore shareholders and asked the court to direct that penalty to shareholders too.

Homestore itself received a different response. The SEC said it would bring no enforcement action against the company because of its cooperation: prompt reporting after the audit committee learned of possible misconduct, an independent internal investigation, sharing the results, dismissing responsible employees and taking corrective action. The agency credited what the company did after discovery while pursuing the people it alleged had arranged and concealed the transactions.

Why an Insider’s View of the Deal Matters

Research connects the possibility of whistleblowing to the way companies report their numbers. A March 2019 working paper from the University of Chicago Booth School of Business and Baruch College, Do Corporate Whistleblower Laws Deter Accounting Fraud?, studied companies exposed to state False Claims Acts through state pension-fund ownership. It reported a 5% to 9% reduction in fraud probability after exposure.

In an arrangement like the one the SEC alleged at Homestore, an insider can supply the missing commercial condition: the vendor got the purchase because it agreed to buy advertising. We focus on what you know about that condition and how the company’s records reflect it.

Our work on reporting securities fraud to the SEC begins with those connections between the deal and the reported number. An SEC whistleblower can receive 10% to 30% of qualifying sanctions collected when an action exceeds $1 million in monetary sanctions. Where a different matter involves fraud against government money, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know the Condition Behind the Purchase

If you know why a vendor payment came back through an advertising buyer, speak to one of our Whistleblower Experts about what tied the transactions together. We develop your securities fraud case around that knowledge, bring in securities fraud whistleblower lawyers experienced in revenue-recognition cases, and stand beside you as the case moves forward.