Time Warner and its AOL subsidiary have reached a settlement with
the Department of Justice that ends an investigation of the
company's accounting and disclosure practices. A settlement deal
with the SEC is also expected.
Time Warner and its AOL subsidiary have reached a settlement with
the US Department of Justice (DOJ) that ends an investigation of
the company over accounting and disclosure practices. A separate
deal with the Securities and Exchange Commission (SEC) is also
expected to conclude.
The investigation from the DOJ related to an AOL deal with B2B
firm PurchasePro.com that allegedly allowed it to exaggerate its
profits. The SEC investigation focused on AOL's accounting of
certain transactions, including a $400 million payment from
Bertelsmann of Germany.
Under the terms of the DOJ settlement, a criminal complaint will
be filed against AOL for the conduct of certain employees in
connection with securities fraud committed by PurchasePro.com; but
the Justice Department will defer the prosecution of AOL. After two
years, provided the AOL fulfils its obligations under the
agreement, the DOJ will dismiss the criminal complaint filed
against AOL.
AOL will pay a penalty of $60 million and establish a $150
million fund, which the company may use to settle any related
shareholder or securities litigation. It must also retain and
cooperate with an independent monitor, who will review the
effectiveness of AOL's internal controls, including those related
to the accounting for advertising and related transactions.
Under the settlement proposed to SEC staff, Time Warner will
agree, without admitting or denying any wrongdoing, to be enjoined
from future violations of certain provisions of the securities laws
and to comply with a prior SEC cease-and-desist order issued to AOL
in May 2000.
The proposed settlement would also require the company to pay a
$300 million penalty, which the SEC staff will request be used for
a Fair Fund, as authorised under the Sarbanes-Oxley Act, and adjust
its accounting for the $400 million in advertising revenues
recognised primarily in 2001 and 2002 in transactions with
Bertelsmann, AG and for transactions with two other AOL customers
that resulted in approximately $30 million of advertising revenue
recognized in 2001. Time Warner must also adjust its accounting for
its investment in and consolidation of AOL Europe.
Time Warner must also agree to the appointment of an independent
examiner, who will review the company's historical accounting for a
limited number of transactions entered into between 1999 and 2002,
principally involving on-line advertising revenue. Depending on the
examiner's conclusions, a further restatement might be
necessary.
Final settlement is subject to both agreement on final
documentation and approval by the SEC Commissioners.
