Media-entertainment giant Time Warner agreed on Monday to pay US$300 million to settle charges that its America Online (AOL) division fraudulently overstated ad revenues and Internet subscribers from 2000 to 2002.
The Securities and Exchange Commission (SEC) said the settlement was reached on the charges of inflating its subscriber numbers and financial results and noted that the company would restate its results from the period affected.
The penalty of US$300 million will be distributed to "harmed investors" of the company, the SEC said.
The SEC says that beginning in mid-2000, AOL "effectively funded its own online advertising revenue" by indirectly giving customers the funds to pay for ads they wouldn't have purchased otherwise.
This was done through a series of "fraudulent" transactions, the commission said. Three companies -- Homestore, PurchasePro.com and an unnamed California-based software firm -- are alleged to have improperly recognized revenue stemming from AOL's fraudulent transactions, and then misstated financial results to their own investors, the SEC said.
"As a consequence, [AOL] aided and abetted the frauds" perpetrated at those companies, the commission said.
The investigation put the spotlight on the accounting practices used for online advertising and the counting of subscribers at AOL, which saw its value soar enough to become the acquirer of traditional media giant Time Warner in 2000.
SEC officials said that following the merger, AOL Time Warner continued to use dodgy accounting, ignoring an order from regulators.
"Our complaint against AOL Time Warner details a wide array of wrongdoing, including fraudulent roundtrip transactions to inflate online advertising revenues, fraudulent inflation of AOL subscriber numbers, misapplication of accounting principles relating to AOL Europe and participation in frauds against the shareholders of three other companies," SEC enforcement chief Stephen Cutler said.
"Some of the misconduct occurred while the ink on a prior commission cease-and-desist order was barely dry. Such an institutional failure calls for strong sanctions."
As part of the settlement, Time Warner agreed to restate financial results to reduce online advertising revenues by some US$500 million in addition to the US$190 million already restated for the fourth quarter of 2000 through 2002.
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