The New York Times reports the SEC wants to talk with Stephen M. Case, the company's former chairman, and Richard D. Parsons, the current chairman and CEO of Time Warner, which changes its name from AOL Time Warner last week.
The subpoenas do not mean the executives are suspected of wrongdoing. But securities lawyers tell the newspaper the SEC would only subpoena top executives if investigators had specific questions for top managers. The move also likely signals the probe has entered its final phase.
The probe concerns $400 million in advertising the media company Bertelsmann bought from AOL in 2001. According to The Times, the deal grew out of a close personal relationship between Case and one-time Bertelsmann chief executive Thomas Middelhoff. The two companies became partners in ventures into the European marketplace.
Shortly before the AOL-Time Warner merger in January 2001, AOL agreed to buy out Bertelsmann's share of AOL Europe for $7 billion, according to The Times. The deal was revised in 2001 with Bertelsmann paying $400 million to AOL to buy advertising on AOL — a payment to compensate Time Warner for offering buy Bertelsmann's AOL Europe shares with cash.
The $400 million ad buy was reported as AOL's single biggest advertising deal — a fifth of its 2002 ad revenue. And Time Warner contends that the ads were indeed run. But the SEC thinks the money was actually a rebate on AOL's purchase of Bertelsmann's shares, and the SEC is pressuring Time Warner to restate the way it reported the earnings.
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.
Case claims he wasn't involved in the Bertelsmann deal, and Parsons was in charge of a non-AOL until of Time Warner until he succeeded Case as CEO earlier this year.
But even if no top executives are blamed for wrongdoing, the probe could still spell trouble for Time Warner, The Times reports: Any downward restatement of earnings will spur more lawsuits by shareholders angry over the poor performance to date of Time Warner since the celebrated marriage to AOL.
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.
But since the $112 billion AOL-Time Warner merger, AOL has been damaged by what proved to be grossly overvalued stock and a huge debt.
The pioneering Internet company AOL 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. AOL is still profitable, on track to make nearly $1 billion this year, but it's facing a host of problems, including a regulatory inquiry into its accounting and an eroding subscriber base as users drop AOL for faster connections to the Internet.
With hopes for a media revolution now a distant memory, the company will focus on simplifying its tangled corporate structure, cleaning up its balance sheet, and selling off businesses in order to pay down debt and allow more attention to be paid to its core businesses.
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.
"We believe that our new name better reflects the portfolio of our valuable businesses and ends any confusion between our corporate name and the America Online brand name for our investors, partners and the public," Parsons said in a statement at the time.