SEC Charges Time Warner with Fraud

The Securities and Exchange Commission this week charged Time Warner Inc. (formerly known as AOL Time Warner) with materially overstating online advertising revenue and the number of its Internet subscribers, and with aiding and abetting three other securities frauds.

The Commission also charged that the company violated a Commission cease-and-desist order issued against America Online, Inc. on May 15, 2000. In a separate administrative proceeding, the Commission charged Time Warner CFO Wayne H. Pace, Controller James W. Barge, and Deputy Controller Pascal Desroches with causing violations of the reporting provisions of the federal securities laws.

Without admitting or denying the allegations in the complaint, Time Warner consented to the entry of a judgment that, among other things, orders it to pay $300 million in civil penalties, which the Commission will request be distributed to harmed investors.

The penalties cannot be used to offset any judgment or settlement in any related shareholder suit. The judgment further orders the company to comply with the Commission's May 15, 2000 cease-and-desist order against AOL; enjoins the company from violating antifraud, reporting, books-and-records, and internal control provisions of the federal securities laws; and enjoins the company from aiding and abetting securities fraud. As part of the settlement, Time Warner agreed to restate its historical financial results to reduce its reported online advertising revenues by approximately $500 million (in addition to the $190 million already restated) for the fourth quarter of 2000 through 2002 and to properly reflect the consolidation of AOL Europe in the company's 2000 and 2001 financial statements. The company also agreed to engage an independent examiner to determine whether the company's historical accounting for certain transactions was in conformity with generally accepted accounting principles (GAAP).

In the separate administrative action, Pace, Barge, and Desroches consented, without admitting or denying the allegations, to the entry of a Commission cease-and-desist order that finds that they caused reporting violations by the company based on their roles in accounting for $400 million paid to the company by Bertelsmann AG in two sets of transactions.

Stephen M. Cutler, Director of the Commission's Division of Enforcement, said, "Our complaint against AOL Time Warner details a wide array of wrongdoing, including fraudulent round-trip transactions to inflate online advertising revenues, fraudulent inflation of AOL subscriber numbers, misapplication of accounting principles relating to AOL Europe, and participation in frauds against the shareholders of three other companies. Some of the misconduct occurred while the ink on a prior Commission cease-and-desist order was barely dry. Such an institutional failure calls for strong sanctions."

James T. Coffman, Assistant Director of the Commission's Division of Enforcement, added, "Accountants are gatekeepers to the capital markets. The actions against Pace, Barge, and Desroches demonstrate that the Commission will hold responsible executives and accountants who fail to take meaningful action when faced with significant evidence that the accounting is wrong. As our investigation continues, we will be turning our attention to those primarily responsible for the company's fraud and improper reporting."

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