Time Warner Inc. settled a two-year dispute with the U.S. Department of Justice and the Securities and Exchange Commission regarding accounting practices at its America Online Inc. unit, agreeing to pay about $500 million in fines and to assist with the government’s investigations into possible inflated earnings at other Internet companies.
Time Warner agreed to pay $210 million to the DOJ -- a $60 million penalty and $150 million that will go into a fund to settle any shareholder or securities litigation.
The DOJ will file a criminal complaint against AOL for the conduct of certain employees in connection with securities fraud committed by defunct Las Vegas software developer Purchasepro.com, but the DOJ will defer the prosecution of AOL.
After two years, provided that it fulfills its obligations under the agreement, the DOJ will dismiss the criminal complaint filed against AOL.
Four Purchasepro executives have pleaded guilty to conspiracy to commit securities fraud and perjury related to dealings with AOL. In March 2000, Purchasepro paid AOL about $70 million as part of a joint venture, but when that partnership did not generate the revenue expected, AOL began buying Purchasepro products directly and helped the software company to mislead auditors about the source of that revenue.
In addition, an independent monitor will be chosen to oversee AOL’s compliance with the agreement, and Time Warner must also agree to a number of changes to its internal practices.
“If AOL fails to comply, the deal is off, and they are in a world of trouble,” Deputy U.S. Attorney General James Comey -- who heads the agency’s Corporate Fraud Task Force -- said at a press conference Wednesday.
Time Warner also reached a proposed settlement with the SEC whereby it agreed to pay a $300 million penalty and to:
• Adjust its accounting for $400 million in advertising revenues recognized 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;
• Adjust its accounting for its investment in and consolidation of AOL Europe; and
• Agree to the appointment of an independent examiner who will review accounting practices for a limited number of transactions entered into between 1999-2002 and dealing primarily with online advertising revenue.
That deal still has to be approved by SEC commissioners.
In November, Time Warner said it had set aside a $500 million reserve to cover anticipated costs of the investigations. At the time, analysts believed that was a signal that a deal was imminent.
The deal removes one of the remaining overhangs on Time Warner stock, and it could free the company to make acquisitions more easily. Time Warner had been prohibited from issuing new stock while the SEC and DOJ investigations continued, which somewhat limited its ability to do deals.
Time Warner is considering making a joint bid for Adelphia Communications Corp. assets with Comcast Corp.
The settlement news helped to drive Time Warner stock to a new two-year high Wednesday to $19.90 per share. The stock was priced at $19.44 (up 6 cents) in afternoon trading Wednesday.