Time Warner pays $300 million to settle SEC charges

Time Warner has agreed to pay $300 million in penalties to settle with the U.S. Securities and Exchange Commission (SEC) over charges of securities fraud related to its accounting for online advertising revenue, the SEC and Time Warner said Monday. Time Warner consented to the settlement without admitting or denying allegations in the SEC’s complaint against the company.

“Some of (Time Warner’s) misconduct occurred while the ink on a prior Commission case-and-desist order was barely dry,” SEC enforcement division director Stephen Cutler said in a written statement. “Such an institutional failure calls for strong sanctions.”

The fine is among the largest ever levied by the SEC, topping the fines Qwest Communications ($250 million) and Computer Associates ($225 million) paid last year to settle fraud charges. WorldCom paid about $750 million in cash and stock in 2003 to settle charges related to the accounting fraud that led the company into bankruptcy.

The SEC settlement echoes an agreement Time Warner reached with the U.S. Department of Justice in December to avoid criminal prosecution on related charges. In that deal, Time Warner agreed to pay $150 million to a fund to compensate affected investors, along with a $60 million penalty fine.

As part of the SEC settlement, Time Warner will restate its financial results to decrease by $500 million its reported online advertising revenue from the fourth quarter of 2000 through all of 2002. It will also amend its 2000 and 2001 annual reports to consolidate AOL Europe’s financial results into its company-wide results. Time Warner agreed to bring in an independent examiner to evaluate whether the company’s historical accounting for certain transactions conforms to legal requirements; depending on the examiner’s findings, it may again restate its results, the company said.

The SEC complaint rolls together several different schemes it alleges Time Warner carried out in violation of accounting laws. To boost its online advertising revenue in mid-2000, as sales began declining, America Online Inc. (AOL), which Time Warner bought in 2001, began using “round-trip transactions” where it effectively gave outside parties the means to pay for advertising they otherwise would not have bought, according to the SEC. These transactions boosted both AOL’s reported revenue and that of the involved outside companies, which include PurchasePro.com Inc. Several former PurchasePro.com executives previously pleaded guilty to criminal charges related to the AOL transactions.

The SEC also accused Time Warner of improperly failing to include in its financial reports the results of AOL Europe, and with using bulk sales to incorrectly inflate its AOL subscriber count throughout 2001.

Time Warner’s $300 million penalty will be paid into a fund for compensation of affected investors, in accordance with the “Fair Fund” provisions of the Sarbanes-Oxley Act.

The SEC also issued, with Time Warner’s consent, cease-and-desist orders against three company executives it says should have more closely scrutinized the disputed transactions: Chief Financial Officer Wayne Pace, Controller James Barge and Deputy Controller Pascal Desroches. All three remain with Time Warner.

Time Warner Chairman and Chief Executive Officer Dick Parsons said the company is pleased to have resolved the SEC investigation. Time Warner first disclosed the long-running investigation in mid-2002. Parsons also expressed confidence in Pace, Barge and Desroches, and said he is pleased they will remain in their positions.

Leaving itself room to bring further charges against individuals for their roles in the alleged fraud, the SEC said it will continue its investigation into the transactions.