Conglom pays $300 mil to end AOL probe
NEW YORK — You’ve got settlement.
Finalizing its massive deal with Washington, Time Warner said Monday it will pay $300 million to resolve Securities and Exchange Commission fraud charges stemming from allegedly inflated online ad revs and customer rolls at troubled AOL.
Media titan recently paid $210 million in fines to settle a parallel criminal investigation by the U.S. Dept. of Justice into accounting abuses at the once high-flying AOL, which became engaged to Time Warner in 2000 and married in 2001.
Long-running inquiries had kept Time Warner at a virtual standstill in terms of making acquisitions such as the conglom’s current joint bid to buy up bankrupt cabler Adelphia or issuing new stock, like the much-rumored spinoff of Time Warner Cable.
Time Warner chair-CEO Richard Parsons, who has earned high marks for successfully guiding the company through postmerger waters, said he was pleased the SEC accepted the proposed $300 million settlement.
Time Warner neither admitted nor denied the charges. Execs directly tied to the accounting abuses have long since left.
Parsons said conglom would abide by all the obligations mandated by the SEC, including hiring an independent examiner to look at additional transactions and determine whether further financials need to be restated.
“At the same time, we look forward to continuing to operate our businesses best in class and delivering sustained, superior growth to our stockholders,” Parsons said.
Conglom, however, still faces multiple shareholder lawsuits regarding the failed merger.
SEC said it is requesting the $300 million fine be distributed to affected investors, but it made clear that Time Warner can’t use the hefty fine to offset any judgment or settlement in any related shareholder suit.
Wall Streeters said the SEC settlement was in line with their expectations. Time Warner disclosed in early December it was setting aside $500 million as a settlement reserve.
“The good news is that Time Warner can finally move ahead, e.g., issue stock. While shareholder lawsuits will take years to resolve, which will be an ongoing overhang, the final resolution of both the DOJ and SEC investigations is a major relief,” Merrill Lynch analyst Jessica Reif Cohen wrote in a note to investors.
Time Warner shares didn’t reap a boost in trading as a result of the announcement Monday. Shares were down 28¢ to close at $18.42.
According to the settlement, SEC said Time Warner would restate financial results by shaving off roughly $500 million in online advertising revenues beginning in the fourth quarter of 2000 and through 2002. That includes certain transactions with Bertelsmann that were improperly recognized.
SEC division of enforcement director Stephen Cutler said the complaint detailed “a wide array of wrongdoing.”
And in a strong slap on the corporate wrist, the SEC charged Time Warner chief financial officer Wayne Pace, controller James Barge and deputy controller Pascal Desroches with causing the violation of reporting provisions of federal securities laws for their role in the accounting irregularities. Charges were included in a separate administrative action that was likewise settled by Time Warner.
SEC, however, did not fine the three execs or require that they be suspended or barred. The execs neither admitted nor denied the charges.
“Accountants are gatekeepers to the capital markets. The actions against Pace, Barge and Desroches demonstrate that the commission will hold responsible executives and accountants who fail to take meaningful action when faced with significant evidence that the accounting is wrong,” said SEC division of enforcement assistant director James Coffman.
Throwing his support behind Pace and the other execs, Parsons said the conglom has “confidence in our top financial officers, and we’re pleased that they will continue to serve our company in their current position.”
Coffman said the SEC’s investigative attention will now turn to those “primarily responsible for the company’s fraud and improper reporting.”
In its complaint, SEC said as the high-tech industry began to crash in 2000, AOL began to mask a business slowdown through fraudulent “round-trip” transactions that boosted ad revenue when AOL was giving outside parties the means to pay for the advertising.
Time Warner fraudulently overstated the number of AOL subscribers by counting members from bulk subscription sales, even though those accounts hadn’t been activated.
The SEC also said Time Warner overstated financial results for AOL Europe for a period by not treating it as a consolidated business, as required.
Particularly vexing to SEC investigators was violation of a May 2000 cease-and-desist order against AOL.
“Some of the misconduct occurred while the ink … was barely dry. Such an institutional failure calls for strong sanctions,” Cutler said.