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Time Warner cuts DOJ deal on AOL case, SEC may follow
By Laura Rohde

Time Warner Inc. has reached a settlement deal with the U.S. Department of Justice (DOJ) concerning accounting issues with its America Online Inc. (AOL) Internet division, the parties announced Wednesday.

As part of the agreement the DOJ will defer for two years prosecution on charges of aiding and abetting securities fraud in connection with transactions between AOL and PurchasePro.com Inc. The charges were filed on Wednesday in the U.S. District Court for the Eastern District of Virginia. In return, Time Warner has agreed to pay US$150 million into a compensation and settlement fund as well as a criminal penalty of $60 million, the DOJ said.

Furthermore, AOL is accepting responsibility for the conduct of its employees in the PurchasePro transactions and will adopt internal reform measures while cooperating with an ongoing criminal investigation, the DOJ said. Time Warner will also fully cooperate with the investigation as part of a separate agreement with the DOJ.

The charges will be dropped after the two-year time frame should AOL keep to the terms of the agreement, Time Warner said in a separate statement.

Time Warner, based in New York, also said it has proposed a similar settlement to the U.S. Securities and Exchange Commission (SEC) that the agency has agreed to recommend to the SEC commissioners for final approval. The SEC said it does not comment on proposed settlements until they are finalized.

AOL has been the subject of investigations by the DOJ and the SEC into its past accounting practices, including advertising arrangements with smaller Internet company partners and its methods for reporting subscriber numbers.

Time Warner, which merged with AOL in 2001, publicly acknowledged in mid-2002 that AOL was the subject of an SEC inquiry into transactions made by the Internet company after July 1, 1999. The DOJ investigation soon followed.

Four former PurchasePro executives agreed Wednesday to plead guilty to criminal charges, the DOJ said. The four individuals are Robert Geoffrey Layne, 39, of Lexington, Kentucky, a co-founder of PurchasePro and its former executive vice president; Shawn McGhee, 41, of Memphis, the company's former chief operating officer; Dale Boeth, 42, of Roanoke, Texas, a former senior vice president of strategic development and senior vice president of consulting services; and James Sholeff, 37, of Las Vegas, a former sales representative, sales manager, project manager and vice president at PurchasePro.

The DOJ charged AOL with helping PurchasePro’s officers report at least $10 million in false revenue in the fourth quarter of 2000 and announcing at least $20 million in false revenue in the first quarter of 2001. In turn, according to the charges filed by the DOJ, AOL was able to report about $20 million in additional revenue in the fourth quarter of 2000 and about $15 million of additional revenue in the first quarter of 2001.

According to the DOJ, PurchasePro, a Las Vegas-based company selling Internet procurement software and services, agreed in March 2000 to pay $70 million to AOL as part of a strategic partnership and place ads on AOL’s Netscape Netbusiness Web site, Internet advertising and other services. AOL in turn expected PurchasePro to sell its products by referring customers and generating revenue through transactions on AOL’s Netbusiness platform.

But by September 2000, AOL had not helped PurchasePro generate any revenue. When the strategic partnership did not generate the expected revenues, AOL began to help PurchasePro meet its quarterly revenue objectives by directly buying products from PurchasePro that AOL did not want or need. AOL then helped mislead PurchasePro’s auditors about how the revenue was in fact earned, the DOJ said.

As part of the DOJ agreement, an independent monitor will be appointed to review the effectiveness of AOL's internal controls.

Under the proposed SEC agreement, Time Warner would pay a penalty of $300 million and would adjust its accounting for the $400 million [M] in advertising revenue recognized primarily in 2001 and 2002 in transactions with Bertelsmann AG, as well as for transactions with two other AOL customers that resulted in about $30 million of advertising revenue recognized in 2001, Time Warner said.

The company would also restate its financial reporting for its investment in and consolidation of AOL Europe.

Time Warner said last month that it had set aside $500 million to pay for any costs resulting from the investigations, and that it faced the possibility of having to restate its financial results for 2002 due to the manner in which AOL handled accounting for AOL Europe.

Posted December 16, 2004 05:01 PM |