Henning [Wayne State]: Time Warner Settlement Commentary
Henning [Wayne State]: Time Warner Settlement

Peter Henning, Wayne State University Law School:

"An article in the New York Times (Dec. 15) states that Time Warner is preparing to announce a settlement in a long-running SEC and Department of Justice investigation into accounting issues at its American Online unit (AOL), including a $400 million transaction between AOL and Bertelsmann in 2000.  The accounting issues involve (always exciting) revenue recognition in what appear to have been round-trip transactions, something that has troubled the energy and food distribution industries, among others.  According to the article:

Time Warner is expected to announce a settlement with the Justice Department in its investigation of advertising deals between America Online and smaller Internet companies that may have allowed America Online to exaggerate its growth, an official close to the case said yesterday. The announcement could come as early as today.

The company may also announce a tentative agreement with the enforcement division of the Securities and Exchange Commission, which is conducting a separate investigation into accounting irregularities at America Online, the official said. Time Warner is expected to pay $500 million to $600 million to settle all civil and criminal accusations with the two agencies.

The fine will be divided between the DOJ ($200 million) and the SEC ($300+ million). The SEC investigation has had a particularly negative effect on the company because it called into question the reliability of its financial statements, making it impossible for  Time Warner to issue debt and equity securities–a must for any company hoping to engage in acquisitions, for which Time Warner is famous. Indeed, it likely still rues the day it decided to accept the AOL offer in 1999, even having dropped that moniker from its name a couple years ago." [December 15, 2004; White Collar Crime Prof Blog has the post]

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