The US Securities and Exchange Commission (SEC) has filed a lawsuit against four former AOL Time Warner executives, charging them with falsely boosting the company's advertising revenue by $1 billion (£500 million).
In addition, four other former AOL executives settled with the SEC on related fraud charges, agreeing to pay hundreds of thousands of dollars each in penalties.
The SEC filed the charge on Monday in the US District Court for the Southern District of New York against John Michael Kelly, former chief financial officer of AOL Time Warner; Steven E. Rindner, former senior executive in the company's Business Affairs unit; Joseph A. Ripp, former chief financial officer of the company's AOL division; and Mark Wovsaniker, former head of accounting policy.
The executives, according to the SEC, essentially funded AOL's own advertising revenue by giving companies money to buy online advertising.
AOL conducted the "round-trip" funding in several ways, the SEC says. For example, in some cases it would pay inflated prices for goods or services in exchange for the vendor purchasing advertising in the amount that AOL overpaid. AOL also paid more for businesses it purchased so that the seller would then buy advertising, the SEC alleges.
The scheme boosted the company's advertising revenue by more than $1 billion, the SEC says. The SEC is asking that the executives return ill-gotten gains, pay civil penalties and be barred from serving as company officers or directors. The SEC is also charging Kelly and Wovsaniker with misleading the company's external auditor about the transactions.
The AOL executives engineered the fraudulent practices in order to boost the company's advertising performance in a struggling market, the SEC said. "In mid-2000 ... AOL faced a growing crisis with regard to its advertising revenue as the market for online advertising began shrinking," the suit reads. "Kelly insisted that AOL achieve the revenue targets that he and others in AOL's executive offices had set in 2000."
In addition to that complaint, the SEC has settled a suit against former AOL Time Warner executives for their involvement in the same scheme.
The executives who settled include David M. Colburn, former head of the Business Affairs unit; Eric L. Keller, former senior manager in the Business Affairs unit; James F. MacGuidwin, former controller; and Jay B. Rappaport, former senior manager in the Business Affairs unit. Colburn agreed to pay disgorgement and prejudgment interest of about $3.2 million and a penalty of $750,000; MacGuidwin will pay disgorgement and prejudgment interest of $2.1 million and a penalty of $300,000; Rappaport agreed to pay disgorgement and prejudgment interest of $493,629 and a penalty of $250,000; and Keller will pay disgorgement and prejudgment interest of $699,868 and a penalty of $250,000.
In addition, Colburn and MacGuidwin agreed not to serve as officers or directors of a public company for 10 years and seven years, respectively.
The fraudulent filings occurred between 2000 and at least 2003, and the company has since restated its earnings for those periods, the SEC said.
AOL has been struggling as it shifts its business from one that was primarily built on monthly dial-up subscription charges to one based on advertising-supported online content.
AOL did not reply immediately to a request for comment on the suits.
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