SEC Steps Up Probe of Time Warner

Subpoenas of top management suggest ''very specific questions that require their personal corroboration.'' Also: Sent packing, at least Tyco treasurer had somewhere to go; COOs optimistic, but where does shareholder return fit in?; and more.

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The Securities and Exchange Commission is apparently turning the screws on a few high-profile executives as part of its investigation into Time Warner’s accounting practices and an advertising deal with Bertelsmann AG.

The regulator has subpoenaed Stephen M. Case, the former chairman of AOL Time Warner; Richard D. Parsons, the chairman and chief executive; and several other top executives for questioning, according to Wednesday’s New York Times, which cited two people involved in the investigation.

In a March filing, the company — then called AOL Time Warner — disclosed that the SEC recommended it adjust its accounting for two advertising deals with Bertelsmann back in 2001, worth $400 million. At the time, the company indicated that further restatements might be necessary.

Last year, management said the company would restate revenues downward by $190 million for the eight quarters ended June 30, 2002. The restatement stemmed from advertising and commerce transactions at America Online. Two months earlier, management admitted that company may have overstated $49 million in advertising and E-commerce revenues at the AOL unit.

The recent subpoenas could be an indication that the SEC’s investigation into the deal is entering its final, crucial stages, and that top management could have some knowledge of what the commission is looking for, the Times theorized.

“You don’t seek to depose the chief executives of very big firms like Time Warner unless you have very specific questions that require their personal corroboration,” John C. Coffee Jr., a securities law professor at Columbia Law School, told the paper. “You don’t depose that sort of person on a general fishing expedition. It doesn’t mean they will bring a case, but it means they have to resolve a very specific question about what kinds of agreements or relationships existed between the companies.”

The SEC’s inquiry relates to $6.75 billion in cash that AOL shelled out for Bertelsmann’s 49.5 percent stake. The SEC has indicated that it believes at least some portion of the revenue recognized by the company for advertising should have been treated as a reduction in the purchase price paid by the company to Bertelsmann rather than as advertising revenue.

In the filing earlier this year, the company reported that it subsequently provided the SEC with a written explanation of the basis for its accounting for the transactions. “To date, both the company and its auditors continue to believe that these transactions have been accounted for correctly,” it added.

The SEC and the Justice Department are also investigating other “round-trip” deals involving the AOL unit.

(For more, see “Time Warner: Branded Again,” part of our special report on corporate cleanups.)

Sent Packing, at Least Tyco Treasurer Had Somewhere to Go

When former Tyco International treasurer Barbara Miller was fired in 1998 because former CEO Dennis Kozlowski was disappointed with a stock-option program she had helped design, she didn’t exactly need to race to the unemployment office and file for benefits.

Testifying in the jury trial of Kozlowski and former CFO Mark Swartz, Miller testified that her severance package paid her $325,000 salary for three years, added a $500,000 bonus, and paid for an $860,000 apartment in New York City, according to The Wall Street Journal. The company also forgave a $400,000 Tyco loan on her vacation home in Montana, said reports.

Why was Kozlowski so generous with an individual who apparently failed to live up to his expectations? Perhaps because he was also happy with the job Miller did as “the point person” who handled and prepared financial information related to a relocation loan program. She also served as a liaison to board members.

In her testimony for the prosecution, Miller said that the relocation program, which she oversaw, was enhanced to allow top executives to buy vacation homes with company loans and to use Tyco money to pay for private school for their children, according to The Wall Street Journal. She said this program, designed to cover expenses for employees moving to New York City, was ordered changed by Kozlowski and Swartz after the compensation committee approved a more modest program, the paper added.

During a courtroom recess on Tuesday, Kozlowski defended Miller’s severance, telling Reuters that “she worked very hard for Tyco.” Outside the courtroom, he told The Washington Post that his parting from Miller was “reasonably amicable” and that “I hadn’t know her very long.”

Kozlowski also told Reuters that after Miller testified for the prosecution, one of his lawyers, Austin Campriello, slipped him a note at the defense table remarking that it pays to get fired from Tyco. Replied Kozlowski, “You still work for me and I can fire you.”

(For more, see “Tyco: The Long Haul,” part of our special report on corporate cleanups.)

COOs Optimistic, but Where Does Shareholder Return Fit In?

As the economy continues to move further and further away from the worst economic downturn in three decades, chief operating officers are signaling they are very optimistic about the upcoming year.

In a recent Deloitte & Touche study of more than 600 COOs in 16 countries, nearly two-thirds expect that their companies will record improved results in 2004. U.S.-based COOs are even more upbeat; 79 percent anticipate a better economy over the next year.

Another sign that times are getting better: Chief operating officers are once again talking about growing their companies. They reported that they believe generating revenues is as critical to success now as trimming costs has been for the past four years, Deloitte pointed out.

“The survey certainly suggests that most COOs are confident about the future,” said Jim Quigley, chief executive officer of Deloitte. “It looks as if the days of persistent layoffs may be ebbing as revenue expansion again becomes a top priority in Corporate America.”

Indeed, less than 10 percent of respondents expect their companies’ results to worsen next year, and 30 percent foresee little change in performance.

One of the most interesting pieces of information from the survey is that among their “key objectives,” COOs ranked shareholder return at the bottom of the list. Customer loyalty ranked highest. And among the “best means of increasing revenues,” mergers and acquisitions ranked lowest.

Two-thirds of COOs will continue to outsource, and more than half reported that outsourcing has played a major role in helping their organizations achieve their goals. Nearly half said that a significant portion of their firm’s outsourcing represents market-facing activities in addition to the more traditional back-office activities.

Other key findings:

  • 46 percent of U.S. respondents saw “entry into new geographic markets” as a great source of revenue growth in the next two years.
  • Only 23 percent of COOs believe their companies will raise prices on products and services, although 31 percent expect their suppliers will do so.
  • Two-thirds of COOs think corporate governance has changed for the better in the past year. Even so, 26 percent think it has been more difficult to manage their business since the Enron scandal broke.
  • Just 49 percent of COOs reported no conflicts with other members of senior management. 45 percent said the CEO was their most supportive senior colleague.
  • Telecom-industry COOs are the most optimistic about the future, perhaps because their sector can’t get much worse. Financial-services COOs worry most about the economy.

Short Takes

  • Merrill Lynch & Co. has hired Brad Olson to become the chief financial officer of its huge brokerage unit, according to a memo obtained by Reuters. Olson had been senior vice president of strategy and finance at Citigroup’s Smith Barney unit. His hiring announcement came in a note to staff from Merrill’s global private client chief, James Gorman, the wire service reported.

Olson will report to Gorman and Laurence Tosi, who had been acting CFO of the unit. Olson will be responsible for all financial management, reporting, and controls at Merrill’s private client group.

  • Bear Stearns Co. Inc. issued $750 million in 7-year global notes in a self-led deal. They were priced to yield 4.549 percent, or 75 basis points above comparable Treasurys. The notes were rated A2 by Moody’s and Single-A by Standard & Poor’s.
  • Despite overall signs pointing to a recovering economy and job market, drugmaker Merck & Co. Inc. said it will cut about 4,400 jobs as part of a larger restructuring after reporting flat third-quarter earnings.
  • Convergys Corp., a billing software and services company, named Earl Shanks as chief financial officer, replacing Steve Rolls, who was both CFO and executive vice president. Rolls will continue as executive vice president. Shanks comes over to the company from NCR Corp., where he also served as CFO.
  • Hibernia Corp. raised its quarterly cash dividend 20 percent, to 18 cents per share.

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