Updated from 4:37 p.m.
agreed Wednesday to pay $510 million to settle government accounting and securities fraud charges.
The New York media conglomerate said the settlements, with the Justice Department and the
Securities and Exchange Commission
, stem from bubble-era accounting and business practices at the America Online operation Time Warner acquired in January 2001. The company will pay $360 million in penalties and create a $150 million settlement fund.
Time Warner also said three top financial officers, including finance chief Wayne Pace, will agree to the entry of an administrative order that they cease and desist from any violations of certain reporting provisions of the securities laws. That settlement, which won't result in penalties against the executives, has been agreed to by the SEC staff and will be proposed to the agency's commissioners.
News of the settlements caps off long-running investigations of onetime accounting and disclosure practices at America Online. In early November, Time Warner said it was taking a $500 million reserve related to ongoing government investigations. Time Warner shares rose early on talk the company would settle the probes, but the stock slid later to end Wednesday's trading flat.
Under the Justice Department settlement, AOL will avoid criminal prosecution by cooperating with an ongoing investigation into whether AOL improperly helped other Internet companies artificially inflate their earnings. Justice will charge AOL for the conduct of certain employees in connection with securities fraud committed by PurchasePro, a now-bankrupt company that once did business with AOL, but the government will defer the prosecution of AOL, Time Warner said.
Last fall, two former PurchasePro executives pleaded guilty to fraud charges in connection with a scheme to inflate PurchasePro's revenue. According to a statement of facts included in the Justice Department settlement, at least 6 AOL officers "aided and abetted" PurchasePro officer's revenue-inflation scheme in 2000 and 2001 in return for increased AOL revenue.
The AOL/PurchasePro relationship has spawned ongoing class-action litigation, naming Time Warner as a defendant, by PurchasePro shareholders.
Time Warner said that under the Justice settlement, it must also accept responsibility for the conduct of certain AOL employees with respect to the PurchasePro transactions; establish a $150 million fund for use in settling any related shareholder or securities litigation; cooperate fully with federal criminal law enforcement regarding the transactions covered by the settlement; and retain and cooperate with an independent monitor.
The Justice Settlement agreement includes a lengthy description of various internal controls in place at Time Wanrer and AOL designed to promote ethical conduct and both deter and detect violations of the companies' policies and procedures.
In the SEC deal, Time Warner will adjust its accounting for ad deals with Bertelsmann, and for transactions with two other AOL customers;adjust its accounting for the investment in and consolidation of AOL Europe; and agree to the appointment of an independent examiner who will review the historical accounting for a limited number of transactions entered into between 1999 and 2002. AOL said the review could result in further restatements.
In July 2003, the SEC's Office of the Chief Accountant told Time Warner that it believed that certain 2001 and 2002 deals with Bertelsmann, recorded as $400 million in ad revenue for AOL, should have been at least partly recorded as a reduction in the purchase price for Bertelsmann's interest in AOL Europe. After disclosing the accountant's opinion, Time Warner continued to insist that its accounting for the $400 million had been correct.
While the settlement with the Justice Department is definitive, Time Warner says, the company's settlement with the SEC staff is subject to agreement on appropriate documentation and must be approved by the SEC's commissioners.
Settling charges with regulators could erase a major uncertainty hanging over the company: its ultimate liability for aggressive revenue recognition and other practices at AOL, dating back to before the completion of the AOL-Time Warner merger. Time Warner has indicated that the company would be unlikely to carry out, for example, an initial public offering of stock in its cable TV subsidiary in the absence of an SEC settlement.
Wednesday's settlement could clear the way for big-ticket dealmaking, though the fate of such an IPO has been clouded by Time Warner's interest in purchasing assets of bankrupt cable operator Adelphia, and by Time Warner's cooperation with
in an Adelphia bid.
Time Warner's ultimate liability for clearing up the AOL matter could also be affected by the phrasing of its settlement agreements, and the size of the door they leave open for shareholder suits.
Time Warner, then known as AOL Time Warner, originally disclosed the SEC and DOJ investigations in the summer of 2002, saying that the feds were looking at issues including AOL's advertising arrangements and methods AOL used to report subscriber numbers.
Following its own internal investigation, Time Warner in early 2003 restated earlier financial statements for 2001 and 2002, reflecting a decision to reduce previously reported AOL advertising and commerce revenue by $190 million.
On Wednesday, Time Warner's shares set a 52-week high of $19.90, then fell back to $19.38, unchanged for the day. Like other media stocks such as
, shares in Time Warner have recovered steadily from August lows.