Prosecutors Eye 50 at 15 Largest Media Agencies in Volume Discount Probe

Last Updated Jan 20, 2010 6:38 AM EST

Prosecutors in Europe are investigating 50 people at the 15 largest media buying agencies over the industry's alleged practice of keeping volume discounts, according to Absatzwirtschaft, a German ad trade publication.

So-called "volume discounts" occur when agencies buy media airtime or other services (such as print and TV production) from vendors who then offer the agency a rebate or discount on their bulk buys. Client contracts generally require that such discounts be returned to the client -- but because the vendors offer them to the agency, the agency is tempted is to keep them as revenue, hoping the client never finds out. As years go by, agencies can skim millions in revenue from their clients via volume discount fraud.

The German probe covers agency-client relationships from 2003 to 2007. The investigation arose out of the Aegis Media (AGS.L) case, in which the agency's president, Aleksander Ruzicka, and five others were found siphoning credits for free media airtime to a private company and then selling them for his own profit. Aegis may have to give back up to $22 million to its clients in that case, including Danone (BN.PA).

That fact points out another key weakness in Aegis' reporting of its own financials. Potential liabilities in the German probe and the Danone volume discount case have been hanging over Aegis' head for years -- the scandal dates back to 2006. And yet Aegis' recent financial statements have made no mention of these potential liabilities. Its Q3 2009 report was a joke, it's Q2 2009 report said only that all its potential risks were listed in its 2008 annual report, and that report contains no mention of the case.