On May 19, 2008, the Securities and Exchange Commission filed civil fraud charges against eight former executives of AOL Time Warner Inc. for their roles in a fraudulent scheme that caused the company to overstate its advertising revenue by more than $1 billion.
The SEC filed charges in District Court that 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 violated SEC regulations during the time period between 2000 and 2002.
The SEC alleges that from at least mid-2000 to mid-2002, the executives engineered, oversaw, and executed fraudulent round-trip transactions in which AOL Time Warner effectively funded its own advertising revenue by giving purchasers the money to buy online advertising that they did not want or need. Online advertising revenue was a key measure by which analysts and investors evaluated the company. The defendants made or substantially contributed to statements to investors that included the company’s fraudulent financial results. Kelly and Wovsaniker, both certified public accountants, also are charged with misleading the company’s external auditor about the fraudulent transactions.
The complaint seeks injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, civil monetary penalties, and officer and director bars against each of them.
The Commission also filed a complaint against four former AOL Time Warner executives, David M. Colburn, Eric L. Keller, James F. MacGuidwin, and Jay B. Rappaport, in District Court against alleging that the executives participated in a scheme to artificially inflate the company’s reported online advertising revenue. The four defendants have agreed to settle that action, without admitting or denying the allegations in the complaint. All of them have agreed to pay disgorgement and prejudgment interest and civil penalties.
Colburn will pay disgorgement and prejudgment interest of $3,222,107 and a penalty of $750,000; MacGuidwin will pay disgorgement and prejudgment interest of $2,100,000 and a penalty of $300,000; Rappaport will 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. Colburn and MacGuidwin have agreed to be barred from serving as officers or directors of a public company for ten years and seven years, respectively. The settlements are subject to court approval.
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