SEC Eyeing AOL Books

The Securities and Exchange Commission is getting ready to charge Time Warner with misreporting $400 million in AOL advertising revenue, a newspaper reports, and might even fine the media giant for failing to cooperate with the SEC probe.

The Washington Post said the SEC is preparing a notice to Time Warner outlining the allegations, which could be delivered early this summer. The firm could then respond to the charges and negotiate with the SEC towards a settlement. If those talks fail, it might face enforcement action.

The SEC probe began in 2002, after Time Warner — in the midst of a national controversy over corporate accounting practices — restated $190 million in earnings. But The Post reports federal regulators think that more of Time Warner's revenue needs restatement, particularly a deal involving the German media giant Bertelsmann.

And while Time Warner characterizes the problems as inherited from AOL, the deal in question took place after the companies' 2001 merger, with the knowledge of top Time Warner executives like chairman and chief executive officer Richard Parsons.

Before the merger, AOL agreed to pay $7 billion to buy Bertelsmann's stake in AOL's European business. In 2001, Time Warner reduced the purchase price by $400 million so Bertelsmann could buy advertising on AOL. Time Warner reported the $400 million as advertising revenue.

But Bertelsmann executives have told the SEC they did not think of the $400 million as an actual ad buy, The Post reports. They say they reduced the sale price of their stake because Time Warner agreed to pay in cash rather than stock, and that the AOL advertising was seen as free. Bertelsmann did not record an advertising expense on the deal.

The New York Times reported last year that the SEC had subpoenaed current and former top Time Warner executives in the probe, including Parsons and Stephen M. Case, the company's former chairman. The subpoenas do not mean the executives are suspected of wrongdoing.

According to The Times, the SEC and Justice Department are also looking into whether AOL set up reciprocal deals in which it overpaid vendors with the arrangement that the vendors would then make purchases from AOL — a method for inflating sales.

Time Warner noted the ongoing probes in its most recent annual report, saying, "the company and its auditors continue to believe its accounting for these transactions is appropriate.

"It is possible, however, that the company may learn information as a result of its ongoing review, discussions with the SEC, and/or the SEC's ongoing investigation that would lead the company to reconsider its views of the accounting for these transactions.

"It is also possible that restatement of the Company's financial statements with respect to these transactions may be necessary," the report continued.

The report notes that the SEC is looking at other aspects of AOL's books, like its advertising and how it reports subscriber numbers.

"It is not yet possible to predict the outcome of these investigations, but it is possible that further restatement of the company's financial statements may be necessary," the annual report read.

Time Warner comprises dozens of companies: Warner Brothers, New Line Cinemas, Turner Broadcasting (including CNN and TNT), HBO, Warner Music, Time Warner Cable, several local cable companies, AOL, and dozens of magazines, including Time, People, Sports Illustrated and Entertainment Weekly.

Since the $112 billion AOL-Time Warner merger, Time Warner has been damaged by what proved to be grossly overvalued stock and a huge debt. AOL, the pioneering Internet company, was once seen as a catalyst to breathe new life into the various media properties of Time Warner. Now, AOL is the company's biggest embarrassment, facing a host of problems.

Acknowledging the failures of the largest merger in U.S. history, the board of AOL Time Warner Inc. voted in September to remove "AOL" from the company's name.