SEC subpoenas Case, Parsons in AOL probe
By David A. Vise
Washington Post
A continuing federal probe into AOL's accounting practices has reached top management, as the Securities and Exchange Commission issued subpoenas to Time Warner Chairman Richard Parsons, AOL founder Steve Case and other senior officials, sources familiar with the probe said yesterday.
The SEC wants to question them about the company's booking of $400 million in revenue from transactions with German media conglomerate Bertelsmann AG following the 2001 merger of America Online and Time Warner.
Amid the new revelations about the probe, the company also revealed yesterday in its quarterly filing that America Online lost 2 million subscribers during the past year, including 688,000 users who left the online service during the third quarter.
The SEC contends that AOL overstated advertising revenue from the deals, rather than booking a portion of the $400 million as a rebate related to other transactions. The subpoenas, initially reported in today's New York Times, do not indicate any wrongdoing by those who received them, but show the SEC wants to delve further into the Bertelsmann matter, which appears to be the biggest advertising deal under scrutiny. In its filing yesterday, the company acknowledged that the matter is still under government scrutiny.
"In July 2003, the Office of the Chief Accountant of the SEC informed the Company that it has concluded that the accounting for these transactions is incorrect," Time Warner disclosed in its filing. "In addition, the Division of Enforcement of the SEC continues to investigate the facts and circumstances of the negotiation and performance of these agreements with Bertelsmann, including the value of advertising."
"The SEC staff also continues to investigate a range of other transactions principally involving the Company's America Online unit, including all advertising arrangements and the methods used by the America Online unit to report its subscriber numbers. The Department of Justice also continues to investigate matters related to these transactions."
The probe, which is preventing the company from moving forward with the sale of stock in its Time Warner cable unit, is expected to continue for months, sources said.
As of Sept. 30, AOL had 24.7 million U.S. subscribers versus 26.7 million a year earlier. AOL remains the nation's biggest Internet access service, but the firm is continuing to lose subscribers to competitors offering faster or cheaper Internet access.
During the third quarter, the company added about 340,000 subscribers who get their high-speed Internet service from another firm but subscribe to AOL for its content, bringing to 2.6 million the total number of BYOA, or bring-your-own-access subscribers, AOL has signed up.
In addition to struggling with the continued decline of subscriptions, AOL's advertising revenue dropped to $178 million in the third quarter, a decline of 33 percent from a year ago.
In the third quarter, Time Warner reported an increase in revenue to $10.33 billion from $9.96 billion, because of strong performance in its cable and entertainment divisions. Time Warner reported net income of $541 million (12 cents a share), versus $57 million (1 cent) in the same period last year.
Both Case and Parsons have Hawai'i ties. Case is a Punahou graduate who holds a 43 percent interest in Maui Land & Pineapple. Parsons attended the University of Hawai'i in the 1960s.
Advertiser staff contributed to the Hawai'i information in this report.
