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America Online agrees to settle fraud charges
by
Heather B. Hayes
Virginia Business
February
2005
Time
Warner headed off a potentially disruptive federal investigation
into the accounting and disclosure practices of its
Dulles-based subsidiary America Online (AOL) by agreeing
in early December to a $210 million settlement with
the U.S. Department of Justice. AOL, which has been
charged with aiding and abetting securities fraud, will
pay a $60 million fine and establish a $150 million
compensation fund for investor lawsuits while the government
agreed to defer prosecution for two years. In making
the settlement, Time Warner did not admit or deny any
wrongdoing.
The
charges arose out of a partnership between AOL and PurchasePro.com,
a now-defunct Las Vegas software firm. PurchasePro paid
$70 million and gave 1 million stock warrants to AOL
for advertising and help with selling PurchasePro products.
But when no significant revenue was generated, Justice
officials allege, AOL began buying products directly
from PurchasePro to help the smaller company meet quarterly
revenue objectives. AOL employees also allegedly helped
PurchasePro executives report false revenue and mislead
PurchasePro auditors about how the revenue was earned.
Four PurchasePro executives involved in the alleged
scheme have agreed to plead guilty to felony charges,
including securities fraud, conspiracy to commit securities
fraud and perjury. Despite the AOL settlement, current
and former AOL employees are not immune from prosecution.
Two former AOL executives and four former PurchasePro
officials were indicted on fraud and conspiracy charges
in January.
In the meantime, AOL says it will cooperate fully with
Justice officials, incorporate changes in its accounting
practices, disclose any future wrongdoing that it discovers,
provide Justice officials with access to all communication
between AOL and Time Warner, and hire an independent
monitor. After two years, if all requirements are adhered
to, the government will drop the charges.
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