SEC 'close to tabling $400m case' against Time Warner

After two years of investigation into questionable accounting practices at Time Warner, the US Securities and Exchange Commission was reported yesterday to be preparing a formal accusation against the company.

After two years of investigation into questionable accounting practices at Time Warner, the US Securities and Exchange Commission was reported yesterday to be preparing a formal accusation against the company.

The Washington Post reported that the SEC is preparing a formal notification of allegations, known as a Wells notice, that would require Time Warner to address the issues both in writing and in face-to-face interviews with SEC investigators.

The Wells notice procedure usually results in either a settlement or the imposition of punitive sanctions against the company under investigation.

The key issue in the SEC's investigation now appears to be $400m (£220m) that the company, then known as AOL Time Warner, attributed to advertising revenue the wake of the January 2001 mega-merger of the media conglomerate Time Warner and the online service provider AOL.

AOL Time Warner bought a 49 per cent stake in AOL's European operations from the German media giant Bertelsmann in 2002 for $6.95bn. The company has maintained that Bertelsmann promised to provide the $400m in advertising revenue as part of the buyout deal, and therefore booked it as such in its accounts.

Bertelsmann, however, did not book a $400m advertising expense in its accounts, but in effect treated the $400m as a discount on the price of AOL assets. The German group said the discount was offered to Time Warner in exchange for a promise that the US company would pay for the stake in cash rather than in stock.

The SEC said last year that "at least some portion of the revenue" should have been treated as a reduction in the price paid to Bertelsmann, although Time Warner has told the regulator that its accounting was correct.

Time Warner had no comment on the press reports yesterday, other than to say it was complying with the requirements of SEC investigators.

The SEC is understood to be looking into a number of allegations that Time Warner misled investors by overstating advertising revenue at the online unit. It has subpoenaed a number of executives, including the former chairman Steve Case and the current chairman and chief executive Richard Parsons.

In 2002, soon after the SEC began investigating, the company restated $190m in advertising revenue and warned other adjustments may be needed if new information emerged.

The company is also facing a number of lawsuits, which could soar if it was forced to make hefty revisions to its accounts.

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