Time Warner, Justice Department said to have reached settlement

Wednesday, Dec. 15, 2004 | 10:50 a.m.

SUN STAFF AND WIRE REPORTS

Time Warner Inc. has agreed to pay $210 million to settle securities fraud charges involving the company's America Online unit, law enforcement officials said today.

Under terms of the settlement with the Justice Department, prosecution on charges of aiding and abetting securities fraud will be deferred provided that AOL and Time Warner cooperate in an ongoing investigation into whether AOL improperly helped smaller Internet companies -- apparently including the now-defunct Las Vegas company PurchasePro.com Inc. -- artificially inflate their earnings.

An independent monitor will be chosen to oversee AOL's compliance and the company must agree to a number of changes in its internal practices, said a Justice Department official who briefed reporters on condition of anonymity.

Although no Time Warner or America Online executives have been charged with wrongdoing, the Justice Department agreement does not provide them with immunity, the official said.

Meantime, the Securities and Exchange Commission continues to investigate accounting irregularities at AOL. The SEC probe involves the manner that Time Warner accounted for a $400 million payment from the German media company Bertelsmann AG and whether that was used to inflate America Online profits.

Last month, Time Warner set aside $500 million to cover the cost of settling the SEC and Justice Department investigations.

Of the $210 million called for in the Justice Department settlement, $60 million will go to the federal government in fines and about $150 million will go into a compensation fund to pay for settlements of civil lawsuits or other government actions arising from the alleged fraud.

The criminal case has already resulted in guilty pleas from executives at two companies: PurchasePro and Homestore Inc. of Westlake Village, Calif.

In September, two former PurchasePro executives entered guilty pleas in connection with a fraud investigation into the company. In announcing the pleas, the Justice Department indicated that a broader investigation continues and that additional executives of the Las Vegas company were involved in fraud.

Jeffrey R. Anderson, former senior vice president for sales and strategic development for PurchasePro, pleaded guilty to conspiracy to commit wire fraud. The plea stems from his participation in a scheme to inflate the company's revenue, a Justice Department statement said.

Scott H. Miller, the former PurchasePro controller and senior vice president of finance, pleaded guilty to impeding and obstructing a federal criminal investigation, the statement said.

At that time, the Justice Department said PurchasePro had an agreement to give AOL $30 million in PurchasePro stock warrants in exchange for arranging for the purchase of license agreements to the Las Vegas company's e-commerce software. The transactions were used to inflate revenue figures for PurchasePro in the fourth quarter of 2000 and the first quarter of 2001, the statement said.

At its pinnacle, PurchasePro, an e-commerce software company founded in 1996 by Charles "Junior" Johnson, employed more than 1,000 people, and its stock traded as as high as $188 a share in December 1999.

By May 2001, Johnson had been ousted by the company's board of directors amid mounting accounting problems.

PurchasePro eventually declared bankruptcy, and when the sale of the company's assets to California-based Perfect Commerce was approved by a judge in January 2003, the number of employees had dwindled to about 70. The assets of the company -- which carried a stock value of $3.2 billion in 2000 -- sold for about $2.5 million.

Details of the Time Warner settlement will be discussed at a news conference in Washington this afternoon.

Greg Garman, a Las Vegas attorney handling the bankruptcy of PurchasePro, said he had not seen the settlement and that the effect of the deal on bankruptcy proceedings is unclear. The estate of PurchasePro has sued Time Warner seeking revenue due the failed company under contracts with the media giant.

In recent months, Garman has indicated that the successful collection of revenue could generate enough cash for the estate to provide some return for PurchasePro shareholders that saw the stock value evaporate.