NEW YORK — It’s been a long and heavy slog, but Time Warner said Wednesday it’s about to close the book on a record 2½-year probe by federal authorities with two settlements worth a total of $510 million.
The Justice Dept. and the Securities and Exchange Commission have been conducting investigations into suspect accounting and financial disclosure at America Online both before and after the Netco and the media conglom merged in 2001.
Under chairman-CEO Richard Parsons, Time Warner has since stricken AOL from the company’s name, boosted morale and fortified Time Warner’s balance sheet by slashing debt and divesting non-core assets. Ripples from the AOL debacle nevertheless continued to distract investors and weigh down the stock as the twin inquiries continued.
“We’re pleased to have made progress toward resolving the government investigations of the company,” said Time Warner spokesman Ed Adler. “We continue to work with the SEC staff to finalize our proposed agreement and we’re committed to fulfilling our obligations to the government.”
Time Warner shares rose early in the day, dipped slightly in late trading and closed flat at $19.38. Investors called the ho-hum reaction a typical “buy the rumors, sell on news” market response — noting the shares have jumped nearly 20% since early November. Time Warner added “$4 billion in market cap last week — that’s pretty good for a settlement everyone knew was coming,” said Harry DeMott of Gothic Capital Management.
The agreements announced Wednesday do have strings attached.
The DOJ, in fact, said it will file a criminal complaint against AOL for the conduct of certain employees in connection with securities fraud committed by a former AOL marketing partner, PurchasePro. But Justice will defer prosecution for two years and drop the case entirely at that time if Time Warner has fulfilled certain obligations.
Those include accepting responsibility for the conduct of certain AOL employees with respect to the PurchasePro transactions. No individuals were named, but for TW, what’s important is that in case of prosecution, the individuals would be liable — not the company.
Time Warner must pay a $60 million penalty and establish a $150 million fund that can be used to settle related shareholder or securities litigation. It must cooperate fully with the DOJ and any other federal law enforcement agencies regarding the transactions covered by the settlement, and hire an independent monitor to review AOL’s internal controls.
“Today’s deferred-prosecution agreement gives AOL a chance to make amends for its conduct and clean up its act,” said Deputy Atty. Gen. James Comey at a Justice Dept. press conference.
In a separate settlement proposed with the SEC that was recommended by SEC staff but still needs a greenlight from commissioners, Time Warner would pay a $300 million penalty without admitting or denying wrongdoing. That provision could help shield the company somewhat in numerous shareholder lawsuits filed after the merger and collapse of the stock, erasing billions of dollars of value.
Attorney Tod Collins of Philadelphia-based Berger & Montague, who is representing several large institutional shareholders in non-class state court action, said he’s moving forward.
“We’ve got very, very big lawsuits here,” he said, calling the $150 million set-aside “a drop in the bucket compared with what shareholders lost.”
A class action, which has folded in most of the shareholder suits, is pending in federal court for the Southern District of New York.
Time Warner also made a promise to the SEC to adjust its accounting for $400 million in advertising revenues booked in 2001 and 2002 from transactions with German media group Bertelsmann, as well as $30 million in revenue from two other AOL advertisers. That means revenues will be restated downward for those periods for a total of $430 million.
Time Warner had already agreed to adjust its accounting for its purchase of AOL Europe — another SEC request.
The commission also insisted its own outside examiner have 180 days to review the company’s books, focusing on a limited number of transactions between 1999 and 2002. Depending on the examiner’s conclusions, a further restatement could be necessary.
Finally, the company’s chief financial officer, controller and deputy controller — Wayne Pace, Jimmy Barge and Pascal Desroches, respectively — would, without admitting or denying wrongdoing, agree not to violate certain reporting provisions of securities law. The three won’t be fined or suspended.