(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Charges Settled in SEC Action Against Time Warner

The SEC settled charges that Time Warner Inc. materially overstated online advertising revenue and the number of its Internet subscribers and aided and abetted other instances of securities fraud. The Commission also settled charges that the company violated a cease-and-desist order issued against an affiliate, America Online, Inc., in May 2000. In a separate administrative proceeding, the SEC settled charges against Time Warner's Chief Financial Officer Wayne H. Pace, Controller James W. Barge and Deputy Controller Pascal Desroches for causing violations of the reporting provisions of the federal securities laws.

Without admitting or denying the allegations in the complaint, the company consented to the entry of a judgment that, among other things, ordered it to pay $300 million in civil penalties. The SEC will request that this penalty be distributed to harmed investors. The penalties also cannot be used to offset any judgment or settlement in any related shareholder suit. The judgment further ordered the company to comply with the earlier cease-and-desist order against AOL, and enjoined the company from violating the antifraud, reporting, recordkeeping and internal control provisions of the federal securities laws.

As part of the settlement, Time Warner agreed to restate its historical financial results to reduce its reported online advertising revenues by approximately $500 million in addition to the $190 million already restated for the fourth quarter of 2000 through 2002, and to properly reflect the consolidation of AOL Europe in the company's 2000 and 2001 financial statements. The company also agreed to engage an independent examiner to determine whether the company's historical accounting for certain transactions was in conformity with Generally Accepted Accounting Principles.

In a separate administrative action, the chief financial officer, the controller and the deputy controller consented to the entry of a cease-and-desist order finding that they caused reporting violations by the company based on their roles in accounting for $400 million paid to the company by Bertelsmann AG in two sets of transactions. The individuals neither admitted nor denied wrongdoing in agreeing to the entry of the orders.

Stephen M. Cutler, director of the Commission's Division of Enforcement, said, "our complaint against AOL Time Warner details a wide array of wrongdoing, including fraudulent round-trip 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. "He added that "some of the misconduct occurred while the ink on a prior Commission cease-and-desist order was barely dry and such an institutional failure calls for strong sanctions." James T. Coffman, assistant director of the division, added that "accountants are gatekeepers to the capital markets and the actions against Pace, Barge, and Desroches demonstrate that the Commission will hold responsible executives and accountants who fail to take meaningful action when faced with significant evidence that the accounting is wrong." 

Krim v. pcOrder.com, Inc. (5thCir) is reported at Fed Sec L Rep ¶93,126.