The US securities and exchange commission (SEC) is preparing to formally accuse Time Warner of improperly recording more than $400m ($218.9m) in advertising revenue, it was reported today.
According to the Washington Post, the Wall Street watchdog plans to send a formal letter of notification to Time Warner by early summer about alleged wrongdoings at the media conglomerate following its merger with America Online (AOL) in 2001.
Time Warner, which last year dropped AOL from its name when the merger soured, is accused of inflating ad revenues and AOL subscriber numbers. But it is a $400m deal with Bertelsmann, the German media company, that is the focus of the SEC investigation.
The questionable revenue is linked to Time Warner's $6.7bn purchase of a large stake in AOL's European operations from Bertelsmann in 2002.
At the time of the deal, AOL Time Warner booked a $400m payment from Bertelsmann to America Online as revenue for advertising. But Bertelsmann recorded no advertising expense. Instead, the German company saw the entire $400m as a reduction in the price it was receiving for its stake in AOL Europe in exchange for a promise by Time Warner to pay in cash rather than stock.
The SEC appears to be siding with Bertelsmann's version of events.
The Washington Post said Bertelsmann is part of a broader case that SEC officials are putting together. In the autumn of 2002, Time Warner restated $190m in revenue from a few AOL advertising deals affecting the 2000-2002 period.
The Post quoted people familiar with the case as saying that the SEC has identified numerous other transactions that require additional restatements. The SEC is also considering seeking financial sanctions against Time Warner for not cooperating sufficiently with the investigation, The Post reported.
In the course of the investigation, regulators subpoenaed Steven Case, the former chairman of AOL Time Warner, Richard Parsons, the current chairman and chief executive and other executives.
Last year, the board of AOL Time Warner decided to drop AOL from the company name, change its stock exchange listing code and revert to Time Warner. The merger between the two companies came at the height of the dotcom frenzy, but the share price of the company has plummeted since the bursting of the internet bubble.
Time Warner disclosed in recent regulatory filings that it may be forced to further adjust its financial records and that it faces numerous lawsuits as well. The cost of settling those lawsuits could rise significantly if the company is required to restate all or a significant portion of the $400m it recorded.
