News of SEC inquiry torpedoes ailing stock

AOL Time Warner shares plunged 24% on Thursday as investors, already sour on the stock, fled after news of an SEC investigation.

The shares, which fell as low as $8.70 during the session, closed down 15.4% at $9.64 — the first time in five years the stock has touched single digits. Seven analysts downgraded the company, fearing the prolonged uncertainty of a probe could keep the shares — cheap as they are — from rebounding soon.

“Recommending the stock on valuation alone is inappropriate, especially when combined with the overhang created by the SEC inquiry,” said Goldman Sachs analyst Richard Greenfield, who dropped the stock from the firm’s buy list.

“Although this is not considered a ‘formal’ investigation (the company noted there is a difference), we are concerned with the uncertainty an investigation such as this creates,” agreed Merrill Lynch’s Jessica Reif Cohen.

AOL TW CEO Richard Parsons revealed the Securities & Exchange Commission investigation Wednesday during a conference call to discuss the conglom’s quarterly earnings. He said it focuses on a limited number of transactions at America Online that were checked and double checked by auditors Ernst & Young.

Little reassurance

Swearing that auditors signed off on the numbers, however, won’t reassure anyone nowadays. Adelphia’s auditors cleared its accounts for years — so did Enron’s and WorldCom’s.

The underlying fear is that an inquiry could expand beyond a few deals at AOL into other areas of the AOL TW empire. A number of Wall Streeters think that’s unlikely, saying Time Warner divisions have mostly operated under rather conservative accounting.

Some fund managers, however, see a bargain, as the individual units of AOL TW are increasingly more valuable than the stock price indicates. The shares have fallen from nearly $50 a year ago, wiping out billions of dollars in market wealth. The disparity has fueled rumors of a spinoff of the AOL unit, but that’s unlikely until the SEC issues are resolved.

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