Time Warner Settles Fraud Charges for $500 Million

Times Staff Writer

Time Warner today agreed to pay more than $500 million to settle two government fraud investigations into its America Online operation in a move that resolves a major legal and financial uncertainty which has loomed over the media giant.

A resolution to investigations by the Justice Department and the Securities and Exchange Commission had been expected since Time Warner announced last month that it would take a $500-million charge against third-quarter profits to resolve government probes into AOL’s accounting and financial practices.

In its settlement with the Justice Department, Time Warner, without admitting guilt, agreed to pay a $60-million fine and to set aside $150 million to cover the costs of resolving civil lawsuits and other government investigations. The company also agreed to cooperate with Justice Department investigators, adopt corporate reforms and appoint an independent monitor to review its progress.

The Justice Department agreed to defer prosecution of felony fraud charges filed today against Time Warner for two years to see if the company complies with all elements of the agreement.

The deferred charges “give the company a chance to turn itself around and avoid the consequences of a criminal conviction” and “minimize the collateral consequences of an indictment, which would have been borne by innocent employees and investors,” said Deputy Atty. Gen. James Comey during a press conference today.

The government charged that employees of Time Warner’s AOL Internet unit and a small Internet software company called PurchasePro cooked up a scheme to fraudulently inflate Purchase Pro’s revenues in 2000 and 2001 by more than $40 million. AOL was motivated to engage in such fraud in order to protect the value of $100 million in securities it had received from PurchasePro as part of a partnership agreement.

Government investigators claimed that AOL purchased products and services from PurchasePro it did not need in order to inflate the small company’s revenue and prop up the value of the PurchasePro securities it owned. AOL also made false statements to PurchasePro auditors, the government said.

Government investigators are examining similar relationships between AOL and other Internet companies.

Four former executives of PurchasePro, which has filed for bankruptcy protection, have pleaded guilty to felony charges related to the scheme, the Justice Department said.

The New York-based company also announced today a tentative agreement to settle a separate SEC fraud investigation by paying a $300 million penalty. That settlement has been approved by agency staff but must still receive final approval by SEC commissioners.

The proposed agreement also requires that Time Warner’s chief financial officer, controller and deputy controller “cease and desist from any violations” involving certain securities laws.

Analysts believe that settling the probes is crucial to rebuilding the media company in the wake of its ill-fated AOL merger in 2001.

The SEC probe has hindered Time Warner’s acquisition plans, such as its unsuccessful effort to buy Metro-Goldwyn-Mayer, because it cannot issue stock as currency. Time Warner is considering other deals, such as joining Comcast Corp. in a joint bid for bankrupt cable TV operator Adelphia Communications.

Times staff writer Richard Verrier contributed to this story.