Time Warner Settles With SEC Over Ad Revenue Overstatement

by Glen Shapiro, LawAndTax-News.com, New York

23 March 2005

It emerged earlier this week that Time Warner has reached a $300 million civil settlement agreement with the US Securities and Exchange Commission over charges that the company "materially" overstated online ad revenue and the number of its internet subscribers.

The firm was also charged with counts of aiding and abetting securities fraud, but is neither admitting nor denying the charges as part of the settlement.

The SEC alleged that Time Warner's AOL unit had effectively paid some of its customers' advertising bills in order to boost revenue, and that it had artificially inflated the number of its subscribers by factoring in bulk subscriptions to corporate customers, even though it knew that many of them would not be renewed at the end of the free trial period.

The Commission also accused AOL of failing to consolidate its financial results with those of its European arm, and of violating an earlier cease-and-desist order.

"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," Stephen Cutler, director of the SEC's enforcement division, announced in a statement, continuing:

"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."

The SEC revealed this week that its investigation into Time Warner's financial affairs is ongoing.

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