Report: SEC to Charge TW Over AOL Ad Deal

Facing dwindling subscriber numbers and increased competition, America
Online has enough to worry about. Now, it appears it will be entangled in a
formal Securities and Exchange Commission charge to boot.

The SEC is preparing to charge its parent Time Warner for
AOL’s decision to book more than $400 million in questionable ad revenue,
according to the Washington Post.

Formal notification could come by early summer, the paper said. Time Warner
would have several weeks to review and decide whether to settle with the
agency, or defend itself against the charges.

At issue is accounting related to Time Warner’s $6.75 billion purchase of a
stake in AOL’s European operations from German media conglomerate
Bertelsmann in 2002.

Time Warner lowered its bid by $400 million so Bertelsmann could pay for
$400 million of advertising on America Online. But Bertelsmann told SEC
investigators it agreed to the reduced price because Time Warner promised to
pay for AOL Europe shares with cash not stock, the Post reported.

So, while Time Warner recorded $400 million as ad revenue, Bertelsmann
called it a reduction in the sale price, raising red flags. The SEC wants
to be sure the company didn’t misrepresent their fiscal health to investors.

The SEC investigation, as well as a related probe by the Department of
Justice, has been ongoing for more than a year, and Time Warner has
addressed it in regulatory filings. The company previously restated revenues
by $190 million in regards to accounting for Bertelsmann transactions.

“The company intends to continue its efforts to cooperate with the SEC and
DoJ to resolve these matters,” Time Warner spokeswoman Tricia Primrose told

She declined to comment on the specifics of the Post story, which said that
additional charges could be made against Time Warner for allegedly dragging
its feet in cooperating with investigators. Bertelsmann is not facing any

In its most recent SEC quarterly filing, Time Warner reiterated that it
believes it acted properly. However, it acknowledged that it “is also
possible that restatement of the company’s financial statements with respect
to these transactions may be necessary.” The company also disclosed that
it is facing shareholder lawsuits as a result of the investigation.

Time Warner also said it’s unlikely that the SEC would allow it to move
forward with any public stock offerings until the dispute is resolved.

AOL boasts 24 million subscribers but is losing some of them to broadband providers as
well as less expensive dial-up ISPs. Last month, Time Warner dismissed a report that it was in talks to sell the America Online unit to Microsoft.

Time Warner stock dipped nearly 3 percent in late afternoon trading today.
Most industry watchers believe that the investigation and lawsuits won’t
hobble it financially.

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