AOL to Settle Investor Suit for $35 Million

America Online Inc. said Thursday it will pay up to $35 million to settle a lawsuit over the aggressive method it used to account for the heavy cost of marketing its online services in 1995 and 1996.

AOL said it agreed to pay the money as part of a preliminary settlement with shareholders who owned the stock between Aug. 10, 1995, and Oct. 25, 1996. It said a substantial portion will be covered by insurance.

“We’re pleased to put behind us this suit regarding events in 1995 and 1996,” George Vradenburg, AOL’s general counsel, said in a statement. “We believe a lengthy and distracting litigation process is not in the best interests of AOL’s members, the company or its shareholders.”

The case focused on the Dulles, Va.-based company’s method of accounting for marketing costs.

In the mid-1990s AOL--now the world’s leading provider of online services--fueled a whirlwind period of subscriber growth by bombarding consumers with free disks containing software used to sign up for its service.

During that period, AOL chose to defer hundreds of millions of dollars in marketing costs instead of immediately expensing the costs in adherence with conservative accounting principles embraced by most major U.S. companies.

Responding to criticism of the practice, which analysts said artificially boosted the short-term profit reports of the company, AOL switched course in October 1996 and began charging marketing costs to the quarter in which they were incurred.

In making the switch, AOL announced that it would take $460 million in charges spread over several quarters to cover the new accounting system, which, in effect, wiped out years of the company’s previously reported profit.

While AOL shareholders who dumped the stock during the period in question may have suffered losses, those who held the stock continuously since August 1995 have watched the value of their shares swell 447%, adjusting for stock splits.

AOL shares fell $2.25 to close at $87 on the New York Stock Exchange.

The class-action suit, Orman vs. America Online Inc., had been filed in the U.S. District Court for the Eastern District of Virginia.