Time Warner proposes deal with SEC

Thursday, December 16, 2004

WASHINGTON -- Time Warner Inc. moved Wednesday to resolve two federal investigations into its America Online unit, agreeing to pay $210 million to settle criminal securities fraud charges and disclosing it would pay $300 million to end an accounting probe.

The settlements will free the media giant to move forward on proposed acquisitions in 2005 -- possibly including Adelphia Communications Corp. -- and raise money for other deals by issuing new shares of stock. That had been prevented by the Securities and Exchange Commission while the investigations continued.

"It starts to free the company to get on with business," said Tom Wolzien, media analyst for Sanford C. Bernstein & Co. "It's been a huge distraction for management."

The $210 million agreement with the Justice Department, filed in federal court in Alexandria, Va., defers for two years prosecution of AOL or Time Warner on charges of aiding and abetting securities fraud stemming from a partnership deal with now-defunct Purchasepro.com. If the company cooperates in possible prosecutions of individual AOL executives and adheres to other parts of the deal, the charges would be dismissed.

"If AOL fails to comply with the agreement, the deal is off, and they are in a world of trouble," said Deputy Attorney General James Comey, head of President Bush's corporate fraud task force.

An independent monitor will be chosen to oversee AOL's compliance with the settlement, and the company must agree to a number of changes in its internal practices. It will pay a $60 million fine and must set aside $150 million to pay civil settlements or judgments arising from investor lawsuits.

AOL entered into a partnership with Purchasepro in 2000. When revenues from the deal failed to materialize, "instead of confronting that harsh reality, AOL and PurchasePro cooked up a scheme to inflate Purchasepro's revenues," Comey said.

Four Purchasepro executives, including the co-founder, have agreed to plead guilty to securities violations, Comey said. Two others have previously pleaded guilty.

As many as six unidentified AOL executives were involved in the Purchasepro deal, according to the court papers. Comey declined to comment on when any charges might be brought, but said: "Watch this space."

On the SEC matter, Time Warner said the SEC staff has agreed to recommend approval of its proposed settlement and $300 million payment. SEC spokesman John Nester declined to comment.

The SEC has been investigating accounting irregularities at Dulles, Va.-based AOL. The probe is focused on the manner that Time Warner accounted for a $400 million payment from the German media company Bertelsmann AG and whether that was used to inflate America Online profits, and on accounting moves related to AOL Europe.

Under the proposal, Time Warner's $300 million penalty would be used to compensate investors for losses stemming from those accounting moves. Accounting adjustments would be made for the Bertelsmann payment and for its investment in AOL Europe, and an independent examiner would be named to review several advertising deals made between 1999 and 2002.

Time Warner set aside $500 million to cover the cost of settling the SEC and Justice Department investigations. Reflecting Wall Street expectations that the two settlements were imminent, Time Warner stock closed unchanged Wednesday on the New York Stock Exchange at $19.38 a share.

New York-based Time Warner's operations include magazines, books, cable TV systems, the WB television network and the Warner Bros. film studios, as well as cable networks HBO and CNN.

Associated Press reporter Seth Sutel in New York contributed to this story.

On the Net:

Justice Department: http://www.usdoj.gov

Time Warner: http://www.timewarner.com

America Online: http://www.aol.com

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