Time Warner Inks $510M Settlement With Gov't

Time Warner Inc. on Dec. 15 settled criminal securities fraud charges the government leveled on its America Online unit, agreeing to pay $210 million to end the Justice Department's probe. The company

(The Hollywood Reporter) -- Time Warner Inc. on Dec. 15 settled criminal securities fraud charges the government leveled on its America Online unit, agreeing to pay $210 million to end the Justice Department's probe. The company also is ready to settle separate charges with the Securities and Exchange Commission for $300 million.

Under the deal the company cut with the Justice Department prosecution, charges of aiding and abetting securities fraud will be deferred for two years, provided AOL and Time Warner cooperate in an ongoing investigation into whether AOL improperly helped smaller Internet companies artificially inflate their earnings. The company will pay $150 million into a compensation fund and a $60 million fine.

It also agreed to allow an independent monitor to oversee AOL's compliance, and the company must agree to a number of changes in its internal practices, said Deputy Attorney General James Comey, who runs the corporate fraud task force.

"Today's agreement gives AOL a chance to make amends for its conduct and clean up its act in return for a stiff penalty and far-reaching reforms," Comey said. "In this major corporate investigation, the government has achieved a result that minimizes the collateral damage to shareholders and employees while imposing appropriate punishment and protecting the rights of victims."

While Comey said Time Warner and AOL "accepted responsibility of the criminal conduct of its employees," none of them are going to jail -- yet. Four executives with the now-defunct Purchasepro.com, a Las Vegas software company that had a partnership with AOL, have agreed to plead guilty.

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

"Watch this space," he quipped.

According to Justice Department lawyers, the scam worked like this: Purchasepro paid AOL $70 million in March 2000 in a partnership that Purchasepro expected would bring it customers and revenue through AOL's Netbusiness section. When the deal failed to generate the cash, AOL began buying Purchasepro products directly and then helped the company mislead auditors about how the revenue was actually earned.

The arrangement allowed AOL to report about $45 million in additional revenue in late 2000 and early '01, while Purchasepro reported about $30 million in false revenue during that time frame, Comey said.

The SEC also is 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 German media company Bertelsmann AG and whether that was used to inflate AOL profits. On Wednesday, the company proposed a $300 million settlement with the SEC to settle that case.

Comey defended the Justice Department's decision to defer charging AOL employees or officers. Having the criminal complaint ready to drop at any moment will ensure the company's good behavior.

"If AOL fails to comply with the agreement, the deal is off, and they are in a world of trouble," he said, but declined comment on which employees or officers faced the charges.

"Our goal in these cases is to secure cooperation," FBI assistant director Chris Swecker said. "We're going to use that to continue the prosecution."

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

The terms of the two settlements are in line with the $500 million that the company set aside last month to cover the expected cost of settling the government agencies' long-running investigations. Some recent media reports had suggested the settlement could cost the conglomerate closer to $750 million.

In a statement last month, the company had said the amount represents its "best estimate of the amounts that would be involved ultimately to resolve" the government investigations. However, the $500 million reserves don't include money that the company might have to spend on shareholder and other possible lawsuits.

Time Warner chairman and CEO Richard Parsons has long focused on resolving the accounting probes to rid his firm of the last vestiges of investor doubts stemming from the much-maligned AOL-TW merger and to win the company more financial flexibility.

People familiar with the situation said Parsons was intricately involved in the resolution of the probes. While Parsons on Dec. 15 wasn't available for comment on the settlements, he told an investor conference the previous week that it was "a key focus" for him to reach a resolution of the probes.

Comey said he was convinced "Parsons is committed" to instituting controls that would prevent a recurrence and the "company has agreed to cooperate" with the ongoing probe.

Wall Street analysts have in recent weeks suggested that Time Warner shares could be in for a growth spurt once the long-running overhang of the investigations is behind the company. In fact, the stock has done well in recent weeks and has hit a new 52-week high.

"Time Warner should trade up on this news as it indicates pending resolution of this over-two-year overhang," Merrill Lynch analyst Jessica Reif Cohen said Dec. 15 in a report about the settlements. "Time Warner shares are up 22% quarter to date and are enjoying continued momentum following three brokerage upgrades within the past two weeks."

Brooks Boliek reported from Washington, D.C.; Georg Szalai reported from New York.


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