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Time Warner, SEC Settle AOL Fraud Charges

Time 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
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 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.
AOL 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.
AOL Time Warner Inc. Case 07/18/2002
According 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.
SEC 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.
Media giant inflated stock prices with tricks, contrivances and bogus transactions
while top executives hastily cashed in their shares for personal profits
AOL-Time Warner financial results inflated by more than $1 billion
Los 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.
AOL 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 Sales
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 -- 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
Range of Complaints
Time 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 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.