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Insight – Time to face music

In a separate proceeding, the SEC also charged Time Warner chief financial officer Wayne Pace, controller James Barge and deputy controller Pascal Descroches with violating reporting provisions of securities law, alleging they broke an SEC cease-and-desist order concerning money paid to the company by Bertelsmann AG.

It is claimed that in 2001 and 2002 Bertelsmann paid Time Warner $400m as consideration for amendments made to the purchase agreement governing Time Warner’s purchase of Bertelsmann’s interests in AOL Europe. Rather than accept cash for the amendments, the company requested Bertelsmann purchased $400m-worth of advertising, by which Time Warner inflated its advertising revenues.

Stephen Cutler, director of the SEC’s Division of Enforcement, said: “Our complaint against AOL Time Warner details a wide array of wrongdoings, 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. Some of the misconduct occurred while the ink on a prior Commission cease-and-desist order was barely dry. Such an institutional failure calls for strong sanctions.”

Without admitting or denying the allegations, Time Warner consented to pay $300m in civil penalties to injured investors at time of going to press.

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