AOL Is Target of Criminal Probe
AOL Time Warner Inc.’s accounting woes worsened Wednesday as the Justice Department opened a preliminary criminal probe amid allegations that its Internet division fudged revenue numbers.
The New York-based media giant staunchly defended its practices and portrayed itself as a victim of the recent spate of corporate scandals, which have made regulators more aggressive in cracking down on accounting gimmicks and investor fraud.
“In the current environment, when anyone raises a question about accounting, it’s not surprising that the relevant government agencies will want to look into the facts,” the company said. The Justice Department investigation, first reported by USA Today, was confirmed by the company Wednesday.
A Justice Department spokesman declined to comment. But a Justice Department official, speaking on the condition of anonymity, characterized the investigation as a criminal matter in the early stages.
AOL Time Warner Chief Executive Richard D. Parsons and other executives declined to comment.
Ted Leonsis, vice chairman of the troubled America Online unit, defended the company’s practices during a television appearance Wednesday.
“We were approached today and we are cooperating fully,” Leonsis said. “We have looked at our accounting practices. We feel very comfortable there....We are very anxious to get all this behind us.”
The company announced last week that the Securities and Exchange Commission had launched a “fact-finding inquiry” into questions raised by a Washington Post article.
The July 18 article said AOL used “unconventional” accounting practices to increase its advertising revenue by about $270 million from July 2000 to March 2002.
AOL Time Warner said it stands by its accounting practices, which it noted have been twice blessed by its outside auditors at Ernst & Young.
The company also noted that the advertising deals represented less than 2% of the company’s overall revenue during the period in question.
The government agencies appear to be focusing on the Dulles, Va.-based AOL Internet unit, whose sluggish performance this year pushed the parent company’s stock price down 65%.
The company’s financial problems have triggered a massive management restructuring in recent months, including the departures of Chief Executive Gerald M. Levin, Co-Chief Operating Officer Robert W. Pittman and America Online unit chief Barry Schuler.
The SEC is increasingly cracking down on accounting practices--even those involving relatively small dollar amounts--if they are used to disguise problems, artificially meet Wall Street expectations or hide negative trends from investors.
The Post article suggested that AOL used the deals to disguise a slowdown in ad revenue during the crucial period in which it was awaiting government approval to buy Time Warner.
Complicating matters is AOL’s history of aggressive accounting. The SEC fined the company $3.5 million in 2000 over the way it had accounted for the cost of mailing software discs to consumers in the mid-1990s.
It’s not unusual for the SEC and the Justice Department to investigate allegations of corporate wrongdoing or accounting problems, particularly after they are disclosed in the media.
But analysts and former prosecutors warn that once a government investigation begins, it is impossible to know where it will lead. It could uncover unrelated problems in other AOL Time Warner units.
“The investigation creates a level of uncertainty,” said Merrill Lynch analyst Jessica Reif Cohen, who urged investors to hold back Wednesday, despite the low stock price.
“We don’t know yet what the focus is. We don’t know how long it will take. Is this just about the AOL unit or the whole company? There’s been no announcement.”
Shares of AOL Time Warner fell 7% on Wednesday to $11.50, down 90 cents, in New York Stock Exchange trading.
The corporate backlash in Washington, triggered by the meltdowns of Enron Corp., WorldCom Inc. and Global Crossing Ltd., also is fueling a more aggressive approach by federal prosecutors.
The recent arrest of Adelphia Communications Corp. founder John Rigas, who was taken away in handcuffs in front of television cameras, was widely viewed as an attempt by the Bush administration to show that it is getting tough on white-collar crime.
“For law enforcement, some of these calls are in a gray area,” said former Justice Department attorney David Turetsky. “In the current environment, they are looking at gray areas differently. And Congress has certainly let it be known that it wants enforcement to be as strong as possible.”
Also Wednesday, Jon Miller, a former USA Interactive Inc. executive, emerged as a candidate to take over the AOL Internet unit.
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Times staff writers Josh Meyer in Washington and Thomas S. Mulligan in New York contributed to this report.
