Time Warner Inc. has agreed to pay $300 million in civil penalties to settle Securities and Exchange Commission charges that it overstated Internet subscribers and Internet advertising revenue.
Last November, the company set aside $500 million in litigation reserves in connection with a government probe; a month later, Time Warner agreed to pay $210 million to settle similar charges with the Department of Justice.
The media giant also consented to restate its results to reduce its online advertising revenues by roughly $500 million — in addition to the $190 million already restated — for the fourth quarter of 2000 through 2002 and to properly reflect the consolidation of AOL Europe in the company’s 2000 and 2001 financial statements. In addition, Time Warner has agreed to hire an independent examiner to determine whether the company’s historical accounting for certain transactions conformed with generally accepted accounting principles.
In a separate administrative proceeding, three Time Warner finance executives — chief financial officer Wayne H. Pace, controller James W. Barge, and deputy controller Pascal Desroches — consented to a cease-and-desist order that found them responsible for violations of the reporting provisions of the federal securities laws.
The SEC said that when approving Time Warner’s accounting for $400 million — paid to the company by Bertelsmann AG in two sets of transactions — as advertising revenue, the three finance executives “failed to pursue facts and circumstances that evidenced the true economic substance of the transactions.” Even though others were responsible for negotiating the transactions, Pace, Barge, and Desroches “each were a cause” of Time Warner’s improper accounting for the $400 million.
Time Warner, Pace, Barge, and Desroches agreed to settle without admitting or denying the allegations.
The commission stated that it will request that Time Warner distribute the $300 million in penalties to harmed investors, and it stressed that the penalties cannot be used to offset any judgment or settlement in a related shareholder suit.
The judgment further orders that Time Warner comply with the commission’s May 15, 2000, cease-and-desist order against AOL; enjoins the company from violating antifraud, reporting, books-and-records, and internal control provisions of the federal securities laws; and enjoins the company from aiding and abetting securities fraud.
“Our complaint against AOL Time Warner details a wide array of wrongdoing, including fraudulent round-trip transactions to inflate online advertising revenues, fraudulent inflation of AOL subscriber numbers, misapplication of accounting principles relating to AOL Europe, and participation in frauds against the shareholders of three other companies,” said Stephen Cutler, director of the SEC’s Division of Enforcement, in a statement. “Some of the misconduct occurred while the ink on a prior commission cease-and-desist order was barely dry. Such an institutional failure calls for strong sanctions.”
In commenting on the charges against the finance executives, assistant director James Coffman added that “Accountants are gatekeepers to the capital markets. The actions against Pace, Barge, and Desroches demonstrate that the commission will hold responsible executives and accountants who fail to take meaningful action when faced with significant evidence that the accounting is wrong.
Coffman then issued this warning: “As our investigation continues, we will be turning our attention to those primarily responsible for the company’s fraud and improper reporting.”