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Time Warner Settles Fraud Charges for $210M

By Reuters
Published | Updated

WASHINGTON – Media company Time Warner Inc. (TWX) on Wednesday confirmed it has reached a $210 million settlement with the U.S. government over charges of inflated revenue at its America Online (AOL) unit and a proposed $300 million settlement with securities regulators.

The $210 million payment is part of a deal to settle criminal charges of aiding and abetting securities fraud. Also in the agreement filed a federal court in Virginia, AOL accepted responsibility for conduct of its employees that led to the criminal violations and agreed to cooperate fully with the Justice Department in its investigation of those people.

Time Warner said the Department of Justice (search) would defer prosecution of Internet provider AOL (search) for 24 months, after which the government would dismiss a criminal complaint against the company provided the terms of the agreement are fulfilled

Separately, Time Warner is expected to pay about $300 million to settle civil charges with the Securities and Exchange Commission (search) related to its buyout of a stake held by Germany's Bertelsmann AG (search) in AOL Europe. The company has already set up a reserve to cover anticipated costs of the settlements.

The complaint accuses AOL and PurchasePro.com (search), a once-thriving software company that has since shut down, of engaging in a scheme to inflate its revenue.

As a result of the scheme, PurchasePro reported at least $30 million in false revenue in the fourth quarter of 2000 and the first quarter of 2001, the complaint said.

"As a result of aiding and abetting PurchasePro's officer's fraud, AOL was able to report approximately $20 million of additional revenue from PurchasePro in the fourth quarter of 2000 and approximately $15 million of additional revenue in the first quarter of 2001," the complaint said.

Under terms of the deal with the Justice Department, AOL will pay out a total of $210 million. The company will deposit $150 million into a compensation and settlement fund to pay for any civil litigation to resolve criminal charges. AOL will also pay a criminal fine of $60 million.

Time Warner, the world's largest media company, is also required under a separate agreement to cooperate fully with the investigation, a Justice Department official said.

"It removes one of the clouds from a story that's finally turning around," said Richard Steinberg of Steinberg Global Assets which owns 42,000 shares of Time Warner. "The momentum is finally going in the right way. Maybe they'll get some wind in their back from advertising spending and they can finally concentrate on the business again."

A Time Warner representative declined to comment. Time Warner stock was up 24 cents, or about 1.2 percent, at $19.62, in afternoon trading on the New York Stock Exchange.

Analysts have said that Time Warner could be shielded from shareholder lawsuits if the company doesn't have to admit to wrongdoing.

In the third quarter, Time Warner took a reserve of $500 million to cover expected legal costs related to government probes into AOL's accounting practices.