Time Warner Settles With Feds for $510M


Time Warner Inc. settled a two-year dispute with the Justice Department and the Securities and Exchange Commission regarding accounting practices at America Online, agreeing to pay about $510 million in fines and assist with the government’s investigations into possible inflated earnings at other Internet companies.

Time Warner agreed to pay $210 million to Justice — a $60 million penalty and $150 million that will go into a fund to settle any shareholder or securities litigation.

The DOJ said it 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 will defer the prosecution of AOL.

After two years, provided it fulfills its obligations under the agreement, Justice 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, reportedly over the Internet-service providers’s buying Purchasepro products in an effort to inflate the value of warrants it held in the company.

An independent monitor will be chosen to oversee AOL’s compliance to the agreement and Time Warner also must 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 up the agency’s Corporate Fraud Task Force, said at a press conference last Wednesday.

Time Warner also reached a proposed settlement with the SEC, agreeing to pay a $300 million penalty and:

  • Adjust accounting for $400 million in advertising revenue recognized primarily in 2001 and 2002 in transactions with Bertelsmann A.G. and for transactions with two other AOL customers that resulted in approximately $30 million of advertising revenue recognized in 2001;
  • Adjust accounting for the investment in and consolidation of AOL Europe;
  • And appoint an independent examiner to review accounting practices for a limited number of transactions dealing primarily with online advertising revenue.

SEC commissioners must still approve the deal.

In November, Time Warner said it set aside a $500 million reserve to cover anticipated costs of the investigations. Analysts believed that was a signal a deal was imminent.

The deal removes one of the remaining overhangs on Time Warner stock and could make it easier to complete acquisitions. Time Warner had been prohibited from issuing new stock for deals while the SEC and DOJ investigations continued.

Time Warner is considering making a joint bid for Adelphia Communications Corp. assets with Comcast Corp.

The company also had set the wheels in motion for a Time Warner Cable initial public offering in 2002, but scrapped those plans last year in part because of the SEC investigation.

The settlement news helped drive Time Warner to a new two-year stock-price high on Dec. 15, of $19.90. It closed that day unchanged at $19.38.