The investigation from the DOJ related to an AOL deal with B2B firm PurchasePro.com that allegedly allowed it to exaggerate its profits. The SEC investigation focused on AOL's accounting of certain transactions, including a $400 million payment from Bertelsmann of Germany.
Under the terms of the DOJ settlement, a criminal complaint will be filed against AOL for the conduct of certain employees in connection with securities fraud committed by PurchasePro.com; but the Justice Department will defer the prosecution of AOL. After two years, provided the AOL fulfils its obligations under the agreement, the DOJ will dismiss the criminal complaint filed against AOL.
AOL will pay a penalty of $60 million and establish a $150 million fund, which the company may use to settle any related shareholder or securities litigation. It must also retain and cooperate with an independent monitor, who will review the effectiveness of AOL's internal controls, including those related to the accounting for advertising and related transactions.
Under the settlement proposed to SEC staff, Time Warner will agree, without admitting or denying any wrongdoing, to be enjoined from future violations of certain provisions of the securities laws and to comply with a prior SEC cease-and-desist order issued to AOL in May 2000.
The proposed settlement would also require the company to pay a $300 million penalty, which the SEC staff will request be used for a Fair Fund, as authorised under the Sarbanes-Oxley Act, and adjust its accounting for the $400 million in advertising revenues recognised primarily in 2001 and 2002 in transactions with Bertelsmann, AG and for transactions with two other AOL customers that resulted in approximately $30 million of advertising revenue recognized in 2001. Time Warner must also adjust its accounting for its investment in and consolidation of AOL Europe.
Time Warner must also agree to the appointment of an independent examiner, who will review the company's historical accounting for a limited number of transactions entered into between 1999 and 2002, principally involving on-line advertising revenue. Depending on the examiner's conclusions, a further restatement might be necessary.
Final settlement is subject to both agreement on final documentation and approval by the SEC Commissioners.