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Crimimal probe { August 1 2002 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A28756-2002Jul31.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A28756-2002Jul31.html
U.S. Opens Criminal AOL Probe
Justice Dept. to Focus On Unusual Accounting
By Alec Klein and Dan Eggen
Washington Post Staff Writers
Thursday, August 1, 2002; Page A01
The U.S. Justice Department has opened a criminal investigation into the accounting practices of AOL Time Warner Inc., focusing on the business deals of its Dulles-based online division, officials familiar with the matter said.
The investigation coincides with a civil probe of the world's largest media company by the Securities and Exchange Commission disclosed last week by the company's chief executive, Richard D. Parsons.
The Bush administration, seeking to restore investor confidence after a string of business scandals, recently formed a corporate fraud task force to pursue criminal and civil cases against several high-profile companies and their executives.
"In the current environment, when anyone raises a question about accounting, it's not surprising that the relevant government agencies will want to look into the facts," AOL Time Warner said yesterday in a prepared statement. "As we said last week, we are cooperating 100 percent with the SEC, and we will cooperate with the Department of Justice as well."
New York-based AOL Time Warner said its accounting conforms to generally accepted accounting principles, which it confirmed with its outside auditor, Ernst & Young LLP.
The company declined to comment beyond its written statement. The Justice Department and SEC also declined comment.
It was not known which AOL executives might be subjects of the Justice Department's investigation. Prosecutors have "not ruled out anybody," including top AOL executives, a source said.
Sources familiar with the investigation said the Justice Department is focusing on transactions cited in a recent Washington Post report that examined how America Online recorded revenue through a series of unconventional transactions from 2000 to 2002.
The Justice Department investigation was first reported by USA Today.
The U.S. attorney's office for the Eastern District of Virginia in Alexandria is handling the case, the sources said. The main Justice Department office in Washington also is involved, and people in its New York division may assist in gathering evidence, the sources said.
The U.S. attorney's office for the Southern District of New York issued a subpoena to AOL initially but withdrew it when the case was transferred to Virginia, where AOL is based, sources said. There is no current subpoena of AOL.
U.S. Attorney Paul J. McNulty in Virginia did not return calls.
Paul T. Cappuccio, AOL Time Warner's general counsel, is spearheading AOL's legal response to the Justice Department and SEC, sources said. Myer Berlow, a former AOL advertising executive who now is a company consultant, has retained counsel in connection with SEC investigations of companies that did business with AOL, sources said. So has David M. Colburn, executive vice president and president of business affairs and development for AOL Time Warner's subscription services and advertising and commerce businesses, the sources said. The company declined to make Berlow or Colburn available for comment.
The deals examined by The Post included a transaction in which AOL inherited an arbitration award from a British entertainment company and settled the case by accepting an advertising deal instead.
In another deal, AOL served as an advertising agent for eBay Inc., the giant online auctioneer. AOL sold ads for eBay, but AOL booked the revenue from the sale of eBay's ad space as AOL's own revenue. AOL has said it accounted for these transactions properly.
Sources said the Justice Department has notified AOL of its investigation and requested documents, but it has not yet interviewed company officials. The SEC also has requested information from AOL, including some the company provided in response to questions related to articles published by The Post, the sources said.
The two federal agencies have worked concurrently in the past, in part because their investigatory powers are different. The SEC brings civil cases only, a process that can be quicker in bringing enforcement actions and punishments than a criminal case. The Justice Department can bring both civil and criminal cases, but the department's ability to prosecute criminally -- and use grand-jury subpoenas to compel testimony -- augments what the SEC does, lawyers say.
The Justice Department also has access to vast investigative resources, including those of the FBI. The SEC also has subpoena power, but it requires the specific authorization of its commissioners.
The Justice Department and SEC have cooperated on several inquiries recently. The Justice Department is reviewing WorldCom Inc., and it has brought criminal charges against former cable-television executives at Adelphia Communications Corp., and the co-founder of biotech company ImClone Inc. The SEC has filed civil cases against WorldCom and Adelphia.
The two agencies also cooperated in the investigation of Enron Corp.'s collapse. The corporate-fraud task force recently created by the president also is an illustration of interagency cooperation. It is headed by Deputy Attorney General Larry D. Thompson, and SEC Chairman Harvey L. Pitt also can be brought in to assist the task force. It is not clear what role if any the task force might play in the AOL investigation.
The SEC staff complains that personnel shortages have hurt the agency's ability to police securities markets.
Congress has authorized -- but not yet funded -- a $776 million SEC budget for fiscal 2003, a 77 percent increase from the current year. Congress also passed a supplemental budget that would give the SEC $30 million in emergency funding immediately, including $5 million for technology and $25 million for as many as 150 new hires.
"We are absolutely stretched, and I'm happy at the prospect of getting new resources," said the SEC's chief of enforcement, Stephen M. Cutler.
In addition to the government investigations, AOL Time Warner must deal with class-action lawsuits alleging that company executives misled investors about America Online's financial condition.
The company's stock has been pummeled. AOL Time Warner stock fell 90 cents to $11.50 in heavy trading on the New York Stock Exchange yesterday.
AOL Time Warner has moved to bolster investor confidence. Chief Operating Officer Robert W. Pittman recently left and Colburn relinquished his day-to-day responsibility for the online division's business affairs division.
One of the leading candidates to take over the online unit is Jon Miller, a former executive of USA Interactive, according to sources.
Meanwhile, AOL Time Warner overhauled its corporate structure, making the online division part of a unit that also includes Time Inc., Time Warner Cable and the AOL Time Warner Book Group.
The reorganization is a stunning turn of events for the Internet division, which acquired Time Warner about a year and a half ago in what was then considered a triumph of new media over old media.
Staff writer Kathleen Day and staff researcher Richard Drezen contributed to this report.
© 2002 The Washington Post Company
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