[ql06] CRIMINAL:S.E.C. Pursues Time Warner Investigation
- From: Sheldon Erentzen <sheldon.erentzen@xxxxxxxxxxxx>
- To: QL'06 newslist <ql06@xxxxxxxxxxxxx>
- Date: Wed, 22 Oct 2003 08:18:30 -0400
Last week, Professor Harry Glasbeek, retired Osgoode law Professor gave
a talk on the wave of corporate crime, which is slowly starting to form
a considerable part of our headline news. One of his main point was the
fraudelent accounting policies of major corporations. I want to
highlight the word policy because it was Glasbeeks argument that these
fraudelent practices were deliberate and calculated decisions to break
the law based on bean-counter determinations of profit/loss. One of
Glasbeek's main points was the very real effect fraudelent accounting
practices, called euphemistically "creative acounting", had on the
economy was the need to make layoffs in economic sectors where the
exagerrated profit margins lead to discrepancies between productive
capital earnings and financial capital earnings--not to mention the lost
revenue to governments. This point is important in a Canadian sense
because when you hear people speak about the bankrupt medicare system
(or any tax based social net policy), the question of how much available
money is being lost through fraudelent corporate practices becomes
extremely relevant. I wonder why this connection is never made by our
major media outlets.
October 22, 2003
S.E.C. Pursues Time Warner Investigation
By DAVID D. KIRKPATRICK
The Securities and Exchange Commission has subpoenaed Stephen M. Case,
the former chairman of AOL Time Warner
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=AOL>;
Richard D. Parsons, the chairman and chief executive; and several other
top executives for questioning as part of its investigation into the
company's accounting for an advertising deal with Bertelsmann, two
people involved in the investigation said yesterday.
The subpoenas demonstrate that the S.E.C. is still pursuing its
investigation into the deal with Bertelsmann more than a year after the
S.E.C. began a broader investigation into Time Warner's accounting.
It has been six months since the company disclosed that the S.E.C. was
questioning its accounting for $400 million in revenue recorded under
the deal. Since then, Time Warner, which officially changed its name
last week from AOL Time Warner, has disclosed that the S.E.C. is
pressing the company to restate its past earnings to deduct a portion of
the payment, but the company is defending its accounting and resisting a
restatement.
Legal experts said that the questioning might indicate that the
investigation into the deal was entering its final stages. The
investigators stopped interviewing Bertelsmann executives, including its
former chairman, Thomas Middelhoff, about the matter more than six
months ago, people involved in those interviews said.
The subpoenas alone do not indicate that the S.E.C. is contemplating
action against any of the people who received them, and lawyers
sympathetic to Time Warner said the interviews were an inevitable part
of such an investigation.
But the S.E.C.'s persistence may be troublesome for Time Warner because
satisfying the commission's request to restate its past results could
increase the company's vulnerability to lawsuits from shareholders angry
over the company's failure to live up to its promises after America
Online acquired Time Warner in January 2001. Time Warner has already
reduced its reported advertising revenue by $190 million for the 21
months ended last spring, with the reduction mainly related to its AOL unit.
Issuing the subpoenas also suggests that the inquiry into this deal
extends to the highest levels of the company, and that the S.E.C. has
specific questions for its top executives, securities lawyers said.
"You don't seek to depose the chief executives of very big firms like
Time Warner unless you have very specific questions that require their
personal corroboration," said John C. Coffee Jr., a securities law
professor at Columbia Law School. "You don't depose that sort of person
on a general fishing expedition. It doesn't mean they will bring a case,
but it means they have to resolve a very specific question about what
kinds of agreements or relationships existed between the companies."
The S.E.C. may also use the questioning to put pressure on the company
and its executives by looking for inconsistencies or contradictions in
statements, securities lawyers said. People involved in the inquiry said
the S.E.C. had subpoenaed a large group, including several top current
and former executives, interviewing some as early as this week.
Spokesmen for the S.E.C. and for Time Warner declined to comment. A
spokeswoman for Bertelsmann said, "Bertelsmann is not under
investigation, and this is a Time Warner issue."
The payments in question evolved out of the unusually close relationship
between Bertelsmann and America Online before it acquired Time Warner.
In 1994, Mr. Middelhoff, then a strategic planning executive at
Bertelsmann, met Mr. Case, the chairman of America Online, who persuaded
Bertelsmann to invest in a joint venture in Europe. Over the next few
years, the value of Internet companies like AOL soared. Mr. Case and Mr.
Middelhoff became friends, communicating often by e-mail and instant
messages.
The S.E.C.'s inquiry relates to a larger payment that AOL agreed to make
to Bertelsmann soon before America Online completed its acquisition of
Time Warner. America Online agreed to pay about $7 billion to
Bertelsmann for its interest in AOL Europe. As part of revisions to that
deal, which were made in 2001, Bertelsmann agreed to pay AOL Time Warner
about $400 million for advertisements, mainly on the AOL Internet
service. The $400 million payment was AOL's largest single advertising
deal at the time, accounting for 20 percent of the Internet service's
advertising and commerce revenue last year.
Executives at Bertelsmann divisions like the BMG music group or music
clubs have said that they sometimes complained internally that the
agreement forced them to buy online advertising from AOL at values above
the market rate.
Now the S.E.C. is contending that part of the $400 million in
advertising payments should have been considered a form of rebate or
payback on the much larger payment for Bertelsmann's stake in AOL
Europe, according to Time Warner's filings earlier this year.
Through a spokeswoman, Mr. Case, who was chairman in 2001, has said he
was not involved in negotiating the revisions of the agreement. A
Bertelsmann executive involved in the same negotiations said Mr.
Middelhoff was not directly involved either. At the time, Mr. Parsons
was co-chief operating officer in charge of divisions outside the AOL unit.
The S.E.C. and the Justice Department are also investigating other
reciprocal deals involving the AOL unit. Investigators are looking into
the possibility that AOL made inflated payments to business partners to
get the same money back again in return, improperly increasing its
reported revenue and profits in a practice known as round tripping.
Other related posts:
