SEC goes after eight former AOL executives in fraud case

by Nancy Gohring

May 19, 2008 —

The U.S. Securities and Exchange Commission on Monday filed a lawsuit against
four former AOL Time Warner executives, charging them with falsely boosting
the company's advertising revenue by US$1 billion. 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 U.S. 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.

IDG News Service