SEC Looks at AOL, PurchasePro Deals

The Securities and Exchange Commission is reportedly widening its probe of AOL Time Warner’s accounting practices to include the media company’s past dealings with PurchasePro, a B2B software firm.

Las Vegas-based PurchasePro confirmed to the The Washington Post that federal regulators have contacted the company about its former business relationship with AOL Time Warner.

“As far as we know, the SEC is looking into our transaction with AOL
that occurred under prior management,” PurchasePro spokesman Steve
Stern told the newspaper. “Our accounting for this was conservative and appropriate, and we expect to hear further from the SEC shortly.” When contacted by this publication, he declined further comment other to confirm the SEC probe.

The report said PurchasePro began to withdraw from its AOL partnership last
summer and terminated it in the fall of 2001.

Spokesmen for AOL and the SEC were not reachable by presstime.

AOL Time Warner CEO Richard Parsons confirmed last week that the SEC had opened a fact-finding inquiry in the wake of two Post articles raising questions about how America Online booked advertising revenue as the dot-com bubble was bursting.

The company also confirmed this week that The Justice Department is taking part in the SEC probe, although analysts and experts note that the DoJ’s participation in the SEC investigation is routine.

The news comes amid a tumultuous few weeks amid a difficult year for the media giant, including senior management shakeups, a slumping AOL division in search of a new CEO and federal investigations into its accounting practices. In a related story, The New York Times reported that AOL may name a new chief as early as today to replace Robert Pittman, the former interim CEO at AOL and COO of the corporate parent who resigned July 18th.

The Washington Post story quoted sources familiar with the SEC probe that the talks with PurchasePro attorneys about the company’s dealings with AOL were preliminary. The report said it was unclear which dealings were under scrutiny.

The Post reported that in one arrangement between the two companies, AOL gave $9.5 million in cash to PurchasePro for $30 million in stock warrants in the firm, and AOL booked the difference — $20.5 million — as ad and commerce revenue.

The newspaper said (as a result of its examination of numerous internal business documents of AOL) that AOL earned its warrants under a marketing deal that included distributing PurchasePro software. “The warrants, similar to stock options, gave AOL the right to buy shares in PurchasePro for 1 cent each, according to internal company documents. AOL calculated the value of the warrants and booked it as $20.5 million in advertising and commerce revenue in the quarter ended December 2000 and another $7 million in the quarter ended March 2001.”

The report said the PurchasePro deal was one of several unconventional transactions carried out by AOL at a critical time before and after its takeover of Time Warner Inc. in January 2001.

AOL Time Warner has repeatedly defended the deals, noting that its auditor Ernst & Young looked into the accounting procedures and signed off on them.

Quoting unnamed sources, the Post report said at least two AOL executives have already retained attorneys in connection with the company’s partnership with PurchasePro, including Myer Berlow, a former AOL advertising executive who now is a company consultant, and David M. Colburn, executive vice president and president of business affairs and development for AOL Time Warner’s subscription services and advertising and commerce businesses. Colburn recently relinquished some of his daily responsibilities related to that business unit. Both men were not available for comment.

PurchasePro has its own troubles to contend with as a struggling dot-com with a stock price in the 33-cent range. Its auditor Arthur Andersen resigned from the company in November of 2001 after it objected to some of the company’s internal controls.

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