Time Warner, SEC Settle AOL Fraud ChargesTime Warner Inc. agreed to pay securities regulators $300 million to settle long-running civil fraud charges related to online advertising deals that helped the company artificially inflate revenue.The settlement closes another chapter on more than two years of federal investigation into the accounting practices and deal making activities at Dulles-based America Online Inc. before and after its January 2001 merger with Time Warner.Time Warner said it had restated financial results for 2000 to 2002 by about $500 million to correct its accounting for deals under scrutiny by the Securities and Exchange Commission. The company did not admit or deny wrongdoing as part of the settlement.The SEC also settled with the company's finance chief, controller and deputy controller, who stood accused of causing false financial reports to be filed in connection with $400 million worth of transactions that Time Warner negotiated with German media company Bertelsmann AG. The men, who were responsible for approving corporate accounting practices, received false information from unnamed insiders and "failed to pursue facts and circumstances" that would have thrown into question the payments in 2000 and 2001, according to court papers.Chief financial officer Wayne H. Pace, controller James W. Barge and deputy controller Pascal Desroches are not required to pay fines or face other sanctions as part of yesterday's settlement. The three men, who did not admit or deny wrongdoing, remain employed at Time Warner, company officials said. Their defense lawyers declined to comment.SEC enforcement chief Stephen M. Cutler said the charges in the complaint detail "a wide array of wrongdoing" at the world's biggest media company, including schemes to inflate advertising revenue and subscriber numbers. Time Warner also helped PurchasePro.com Inc., Home store Inc. and an unnamed California software company commit securities fraud by engaging in ad deals that allowed the firms to artificially boost revenue, the SEC said.Cutler noted that Time Warner's AOL unit had been operating under a May 2000 order to cease and desist from fraudulent activity at the time some of the improper conduct took place. In that 2000 order, AOL agreed to pay $3.5 million to settle charges that it had improperly tamped down expenses for acquiring new subscribers by capitalizing them over time.In a prepared statement, Time Warner chairman and chief executive Richard D. Parsons yesterday said he is pleased to have resolved the SEC case.In an e-mail sent to employees, Parsons said yesterday's settlement opens a new chapter for the company and its operations."Now that this chapter is closed, we can look forward to putting all of our energies behind delivering sustained, superior growth to our stockholders," Parsons wrote.As part of the SEC settlement, Time Warner agreed to open its books to an independent examiner, who will review the company's accounting practices for deals it brokered with 17 other companies from June 2000 to December 2001. Further restatements may be needed after the examiner's review, Time Warner said in a recent securities filing.The company said it would not be able to deduct the $300 million civil fine for tax purposes or to cover settlements of related shareholder lawsuits. Time Warner faces 30 ongoing class-action lawsuits, according to an annual report it filed last week with the SEC.Time Warner had outlined the terms of the SEC settlement in December, when it resolved a related criminal case filed by the Justice Department by agreeing to pay $60 million in penalties and $150 million to create a fund for shareholders. Time Warner could be subject to criminal prosecution if it violates the terms of the Justice Department deal in the future.Securities regulators and federal prosecutors in Northern Virginia said they continue to probe individuals who may have taken part in the fraud.James T. Coffman, an assistant SEC enforcement director, said in a written statement that investigators will turn their attention "to those primarily responsible for the company's fraud and improper reporting."In January, the U.S. attorney for the Eastern District of Virginia, Paul J. McNulty, indicted two former AOL officials and four executives at PurchasePro, a Las Vegas software company. Several other former AOL employees remain under scrutiny. Time Warner stock closed at $18.42 yesterday, down 28 cents, or 1.5 percent.http://www.washingtonpost.com/wp-dyn/articles/A53801-2005Mar21_2.htmlAOL Time Warner faces fraud inquiry.AOL Time Warner is under investigation by America's top criminal prosecutors for alleged accounting fraud as the bad news piles up at the media giant.The US Justice Department inquiry will focus on how the company booked online advertising deals between 2000 and 2001, but is expected to go much wider than that.Chunks of corporate America face similar probes as the gloss comes off accounts that looked fabulous before the bear market raised its head.As the public and politicians clamour for top executives to be jailed, the slightest whiff of scandal is enough to spark an investigation.The company said: "When anyone raises a question about accounting, it's not surprising that the relevant government agencies will want to look into the facts. As we said last week, we are co-operating 100pc with the SEC, and we will co-operate with the Department of Justice as well."A note to clients from Merrill Lynch yesterday warned: "We are not 100pc sure the investigation is contained purely at the AOL division."The Securities & Exchange Commission was already delving into whether AOL boosted its bottom line by $270m, exaggerating revenues in order to meet profit forecasts.Ernst & Young, the auditors, stand by the accounting methods. Shares in AOL Time Warner, down 80pc since the merger, wobbled another 70 cents to $11.70. A share now costs less than a month's internet connection from AOL.A management shake-up has left Time Warner executives firmly in control. Chief operating officer Bob Pittman quit last week. The media group, formed from the biggest merger of all time two years ago, includes Time magazine, Sex in the City and Bugs Bunny among its money-spinners. The internet arm is less successful and there are some calls for the AOL name to be ditched as a relic of an earlier age.Earlier this year AOL wrote off $54 billion - an admission that Time Warner had dramatically overvalued the assets it acquired. Former top executives from telecom disaster WorldCom are expected to be charged with fraud today for their role in the biggest bankruptcy ever. Nasdaq delisted WorldCom this week.http://www.telegraph.co.uk/finance/2769469/AOL-Time-Warner-faces-fraud-inquiry.htmlAOL Time Warner Inc. Case 07/18/2002According to a press June 8, 2007, an appeal is holding up, at least temporarily, initial distribution of a $2.65 billion class-action settlement involving the 2001 combination of America Online Inc. and Time Warner Inc. A notice of appeal was filed in U.S. District Court in New York on June 1 by a group called BizProLink LLC. The brief docket entry for the notice did not specify a basis for the appeal. An active telephone listing for Biz- ProLink could not be found and the court docket did not list an attorney for the entity. Last month, U.S. District Judge Shirley Wohl Kram signed an order directing payment of an initial distribution of the settlement, in an amount equal to 91 percent of the net settlement and accrued interest.According to a press release dated July 17, 2006, the Commission today announced that the Honorable Gladys Kessler, United States District Court Judge for the District of Columbia, has approved the Commission's plan to distribute to injured investors $300 million paid by Time Warner Inc. (formerly known as AOL Time Warner) in connection with its settlement of the Commission's accounting fraud suit against it (the "SEC Fair Fund"). In that suit, the Commission charged Time Warner with materially overstating online advertising revenue and the number of its Internet subscribers, with aiding and abetting three other securities frauds and with violating a Commission cease-and-desist order. See Litigation Release No. 19147 dated March 21, 2005. The Commission's distribution plan substantially adopts and uses the court-approved plan of allocation in the class action settlement of a similar case in In re AOL Time Warner, Inc. Securities and "ERISA" Litigation, Case No. 02 Civ. 5575 (SKW) (S.D.N.Y.). The claims administrator is Gilardi and Co. LLC.In a press release dated April 9, 2006, a judge has approved a $2.65 billion class-action settlement of claims that advertising revenue was counted in a fraudulent manner prior to the merger of America Online Inc. and Time Warner Inc. U.S. District Judge Shirley Wohl Kram signed a ruling approving the deal Thursday. She had given the settlement tentative approval in September 2005. The settlement resulted from lawsuits brought by shareholders who complained that AOL improperly accounted for dozens of advertising transactions, inflating revenue for 15 quarters between 1998 and 2002. AOL and Time Warner announced they were merging in early 2000. AOL's steadily declining dial-up subscriber base became a drain on Time Warner, though the Internet provider has risen in stature with the recent boom in online advertising. According to the deal approved by Kram, Time Warner will pay the bulk of the settlement while its auditor, Ernst & Young LLP, will pay $100 million. The judge noted in her ruling that the settlement resulted from seven months of intense negotiations overseen by a court-appointed special master. She said it was clear that class members will not recover their entire loss, but added that the settlement was "all the more impressive" when the parties continue to dispute the very existence of damages.In a press release dated February 7, 2006, securities lawyer William Lerach said yesterday that he will pursue individual lawsuits against Time Warner Inc. on behalf of more than 100 institutional investors who opted out of a tentative $2.4 billion class-action settlement with the media company. Lerach said his clients are seeking more than $3.3 billion in damages over stock-market losses suffered after the ill-fated merger between Time Warner and America Online Inc. and after revelations about improper accounting at AOL.In a press release dated August 3, 2005, the Company has reached an agreement in principle for the settlement of the primary securities class action pending against it. The tentative settlement is reflected in a Memorandum of Understanding, dated as of July 29, 2005, between the lead plaintiff and the Company. Under the proposed settlement, $2.4 billion will be paid by Time Warner into a settlement fund for the members of the class represented in the action. In addition, the $150 million previously paid by Time Warner into a fund in connection with the settlement of the investigation by the Department of Justice will be made available to the class, and Time Warner will use its best efforts to have the $300 million, which it previously paid in connection with the settlement of its Securities and Exchange Commission investigation, transferred to the settlement fund for the class. The proposed settlement is subject to completion of final documentation and preliminary and final court approval, as well as other conditions. At this time, there can be no assurance that these conditions will be met and that the settlement of the securities class action litigation will receive preliminary or final court approval. Ernst & Young also has agreed to a settlement in this litigation matter and will pay $100 million.On September 9, 2002, the Honorable Shirley Wohl Kram issued an Order consolidating the related cases into one class action lawsuit entitled In re AOL Time Warner, Inc. Securities Litigation, 02 Civ. 5575 (SWK). Competing motions for the appointment of Lead Plaintiff and Lead Counsel were filed with Court on September 16, 2002. The Court issued an Order appointing Lead Plaintiff and Lead Counsel on January 8, 2003 and Plaintiffs filed a Consolidated and Amended Class Action Complaint (the Amended Complaint) on April 14, 2003, which extended the class period to include all persons and entities who purchased, exchanged or otherwise acquired publicly traded securities of American Online, Inc. during the period January 27, 1999 through January 11, 2001 and persons or entities who purchased, exchanged or otherwise acquired publicly traded securities of AOL Time Warner, Inc. during the period January 12, 2001 through and including July 24, 2002. Defendants filed their Motion to Dismiss the Amended Complaint on July 14, 2003. Defendants then filed their Reply to Plaintiffs Opposition to the Motion to Dismiss on November 14, 2003 and the Court issued an Order granting in part and denying in part Defendants Motions to Dismiss on May 5, 2004. All claims based on the bond offerings were dismissed as well as all claims against Morgan Stanley & Co. The Court also granted the Plaintiffs permission to submit a proposed Second Amended Complaint to address the remaining dismissed claims, which Plaintiffs filed on June 8, 2004.Thereafter, Defendants filed a Motion for Summary Judgment on July 30, 2004. On August 11, 2004, the Court issued an Order granting Lead Plaintiffs leave to file a Second Amended Complaint. Plaintiffs then filed a Second Amended Complaint (2nd Amended Complaint) on August 23, 2004. On February 14, 2005 Defendants filed their answers to the 2nd Amended Complaint. The docket reflects no further significant activity at this time.The original Complaint alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market between April 18, 2001 and April 24, 2002, thereby artificially inflating the price of AOL Time Warner securities. As alleged in the complaint, defendants issued numerous materially false and misleading statements concerning the Company, the synergies derived from the merger of America Online Inc. and Time Warner, Inc. (the "Merger") and the Company's prospects and earnings projections. The complaint alleges that these statements were materiallyfalse and misleading because they failed to disclose: (i) that the Merger was not generating the synergies as represented by defendants; (ii) that the Company was experiencing declining advertising revenues; and (iii) that the Company had failed to properly write down the value of more than $50 billion of goodwill, thereby artificially inflating its reported financial results and rendering its published financial statements materially false and misleading and in violation of Generally Accepted Accounting Principles.On April 24, 2002, the last day of the Class Period, AOL Time Warner issued a press release announcing its financial results for the first quarter of 2002, and revealed that it would be taking a "one-time, non-cash charge that reduced the carrying value of the Company's goodwill by approximately $54 billion (Emphasis added.)." Following this announcement, AOL Time Warner stock closed at $19.30 per share, a decline of more than 66% from a Class Period high of $56.60 per share. During the Class Period, prior to the disclosure of the true facts about the Company, AOL Time Warner insiders sold their personal holdings of AOL Time Warner common stock to the unsuspecting public for proceeds in excess of $250 million.http://shareholdersfoundation.com/case/aol-time-warner-inc-case-07182002SEC charges eight ex-AOL Time Warner execs with fraud:WASHINGTON The U.S. Securities and Exchange Commission Monday charged eight former executives of AOL Time Warner, now known as Time Warner (TWX), in a fraudulent scheme that overstated company advertising revenue by more than $1 billion.Four of the defendants settled with the SEC and the other four are facing fraud-related charges in federal court in New York. The former executives participated in a scheme from mid-2000 to mid-2002 to artificially inflate the company's reported online advertising revenue, the SEC said in a statement. Online advertising revenue was a key measure analysts and investors used to evaluate the company.The scheme involved fraudulent transactions in which AOL Time Warner effectively funded its own advertising revenue by giving purchasers the money to buy online advertising that they did not want or need, the SEC said.The SEC settled charges with David Colburn, former head of the company's business affairs unit; Eric Keller, former senior manager in the business affairs unit; James MacGuidwin, former controller; and Jay Rappaport, former senior manager in the business affairs unit. The four neither admitted nor denied they were guilty of the charges.As part of their settlements, Colburn agreed to pay almost $4 million, Keller almost $1 million, MacGuidwin $2.4 million, and Rappaport almost $750,000, the SEC said.Colburn and MacGuidwin were also barred from serving as officers or directors of a public company for 10 years and seven years, respectively.John Michael Kelly, former chief financial officer of AOL Time Warner; Steven Rindner, former senior executive in the business affairs unit; Joseph Ripp, former chief financial officer of the company's AOL division; and Mark Wovsaniker, former head of accounting policy, are facing fraud-related charges, the SEC said.The SEC said it is seeking disgorgement of ill-gotten gains and civil monetary penalties from each of them. "It was a very significant fraud and another instance that shows the commission ... is going to be diligent protecting investors," said David Frohlich, an assistant director in the SEC's enforcement division.In 2005, Time Warner agreed to pay $300 million to settle a related SEC case.Mark Hulkower, an attorney for Rindner, said his client is disappointed the SEC is pursuing a case against him but looks forward to the opportunity to clear his name.Rappaport's attorney, W. Neil Eggleston, said his client is pleased the matter has been resolved without any restraint on his ability to act as an officer or director of a public company.David Geneson, an attorney for Ripp, said "we are appalled and dismayed" at the charges. He said Ripp investigated and uncovered the accounting fraud at the AOL division and was not involved in any fraudulent conduct. An attorney for Kelly did not immediately have a comment about the charges. Attorneys for the other defendants did not immediately return messages seeking comment.http://usatoday30.usatoday.com/money/industries/technology/2008-05-19-aol-time-warner-fraud-charges_N.htmAOL AND TIME WARNER EXECUTIVES ACCUSED OF POCKETING NEARLY $1 BILLION IN INSIDER TRADINGMedia giant inflated stock prices with tricks, contrivances and bogus transactionswhile top executives hastily cashed in their shares for personal profitsAOL-Time Warner financial results inflated by more than $1 billionLos Angeles Immediately before and after AOLs merger with Time Warner in January 2001, top executives at the Internet company used tricks, contrivances and bogus transactions to inflate the value of AOL stock while liquidating their shares in a selling frenzy to enrich themselves to the tune of $936 million, according to a lawsuit filed today (Apr. 14) in California state court.The lawsuit, filed by the University of California and Amalgamated Banks LongView Collective Investment Fund, alleges that former AOL Chairman Stephen Case and other top executives were primary beneficiaries of illegal insider trading. The complaint also names as defendants a number of other past and present officers and directors at AOL Time Warner Inc., along with the company itself and its auditor, Ernst & Young LLP.The lawsuit details a more deliberate and widespread scheme on the part of AOL executives than has previously been reported. Case and two of his AOL colleagues, Vice Chairman Kenneth Novack and President/COO Robert Pittman, are accused of carrying out a scheme to overstate the number of the companys Internet subscribers and inflate its e-commerce advertising revenues, profits and backlog of future business to help secure a merger with Time Warner.While the stock was still at an artificially high level, AOL and Time Warner executives used the closing of the merger in January 2001 to take advantage of a change of control proviso to cash in millions of stock options on an accelerated basis. The merger triggered early vesting of 35 million shares valued at $1.7 billion for the five top AOL executives alone.In the subsequent five months, company executives sold off 10.7 million shares from personal portfolios. During the same period, however, they spent $1.3 billion of the companys cash reserves to repurchase 30.2 million shares on the open market in effect, using corporate money to prop up the stocks value so they could benefit personally and shield themselves from a stock collapse, according to the suit.The lawsuit reports that repurchasing began on Feb. 1, 2001, and the personal stock sales began the very next day.AOL executives Case and Pittman received the highest gain from vesting their shares, selling off $157 million and $94 million, respectively, between July 2000 and November 2002.AOL Time Warners stock price ultimately plummeted from a high of $58.51 per share to a low of $8.60 per share, resulting in a combined loss of more than $500 million for the two plaintiffs.

Under the law, a company issuing new stock, as the merged AOL Time Warner did, is liable to the purchasers of that stock for material misstatements that inflate the stocks value, said James E. Holst, UC general counsel. We believe that AOL Time Warner and its investment advisers must be held responsible for the admitted misstatement of AOLs financial condition.The scheme began in the period leading up to the merger when AOL executives engaged in falsifications to create a grossly distorted e-commerce advertising business that pumped up AOL stock prices, according to the complaint. The advertising deals included swaps with other Internet companies that AOL misleadingly counted as revenues or transactions involving AOLs own funds that were provided to purported customers. Many of the deals were also made with companies that lacked the financial wherewithal to honor them.Even as other Internet competitors were reporting a slowdown in advertising, AOL continued to insist it was bucking the trend. Six months after the merger, former AOL chief executive officer Gerald Levin, who is also named a defendant, claimed advertizing revenues were stabilizing and that we have several high growth areas. Levin left the company a few months later with a $625-million retirement package.The lawsuit alleges that AOL revenues from 2000-01 were overstated by almost $1 billion. AOL Time Warner has admitted that AOL may have overstated revenues by as much as $600 million, but the lawsuit argues that even this number is too conservative.The public may becoming numb to the stream of reports about accounting scandals and corporate fraud, but this case should fuel renewed concern about how Americas big corporations do business and earn the trust of investors, said William S. Lerach, senior partner at Milberg Weiss Bershad Hynes & Lerach LLP, the plaintiffs counsel. In this instance, had AOL truthfully reported its actual ad revenue at the time, the merger could never have taken place.The merger has been called a terrible deal by Dow Jones, the worst deal of the century by Time and one of the great train wrecks in corporate history by Fortune. The New York Times has said that Case pulled off one of the sweetest deals in business historyby managing to acquire Time Warner with AOLs inflated stock. Richard Parsons, AOLTWs current CEO, has called the merger silly and a mistake based on overly ambitious forecasts that were not real. Due to overvalued assets, the merged company took a $100 billion loss in 2002, the largest in history.Ernst & Young, the accounting firm that oversaw the auditing throughout the merger, has retained the account and is paid $52 million in annual fees.The merger itself turns out to have been a contrivance intended to benefit an unscrupulous few at the top of the corporate hierarchy, said Bruce Raynor, Amalgamated Bank vice chairman.The University of California made a sound investment in a solid company when it invested heavily in Time Warner prior to its merger with AOL, said David H. Russ, UC treasurer. The value of that investment was significantly impaired as a result of the merger. In addition to the lawsuit against AOL Time Warner, the company is facing a class action securities suit and investigations by the Securities and Exchange Commission and U.S. Department of Justice.http://www.ucop.edu/news/archives/2003/apr14art1.htmAOL Accounting Fraud Charges Settled for $300 million:The investigation focused largely on so-called "round-trip" transactions, in which AOL paid sites that bought advertising space on its network, essentially paying itself for that space. Time Warner will also restate more than two years' worth of results, reducing advertising revenue at AOL by $500 million over that stretch.Time Warner has reached a deal with the Securities and Exchange Commission (SEC) to pay US$300 million in fines to settle a long-simmering investigation into America Online's accounting practices during the height of the dot-com boom.The company said the SEC has formally approved a settlement that calls for Time Warner to pay the cash penalty and to hire an independent examiner to look into various online advertising transactions with some 17 other parties identified during the investigation.'Round Trip' Ad SalesThe investigation focused largely on so-called "round-trip" transactions, in which AOL paid sites that bought advertising space on its network, essentially paying itself for that space.Time Warner will also restate more than two years' worth of results -- from the fourth quarter of 2000 through 2002 -- reducing advertising revenue at AOL by $500 million over that stretch. However, the deal does not call for it to admit any wrongdoing.Three Time Warner executives -- Chief Financial Officer Wayne Pace, Controller James Barge and Deputy Controller Pascal Desroches -- also reached settlements and agreed to cease-and-desist orders barring a return to the earlier practices.Time Warner has been working to resolve the accounting questions for the better part of four years. The SEC issued a cease and desist order against some of AOL's accounting practices in 2000.Range of ComplaintsTime Warner floated the proposed settlement to the agency late last year. The media giant, which merged with AOL in 2000, had previously settled a Justice Department inquiry by paying a $210 million penalty."We look forward to continuing to operate our businesses [as] best in class and [to] delivering sustained, superior growth to our stockholders," AOL CEO Dick Parsons said in a statement."Our complaint against AOL Time Warner details a wide array of wrongdoing," SEC Chief of Enforcement Stephen Cutler said. Cutler said AOL is also accused of inflating its numbers in other areas, including how it handled revenue from AOL Europe.

The settlement involves transactions with Homestore, which has had its own lengthy dealings with investigators, business-to-business buying hub PurchasePro.com and a third, unnamed software firm.Ironically, some analysts say the looming investigations might have been one reason that Time Warner never followed through on widely reported discussions at the board level to sell off the Internet unit. Those discussions came as AOL was struggling to keep customers from departing amid the rise of broadband Internet connections.http://www.ecommercetimes.com/story/41604.html