Class Action History: AOL and Time Warner Accounting Scandal

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Back in the early 2000s, a major scandal rocked Time Warner, Inc. The company paid fines connected to a complicated scheme with online advertising deals. The strategy reportedly artificially inflated their revenue, defrauding investors and resulting in a stiff series of penalties from the SEC.

The investigation into Time Warner stemmed from allegedly fraudulent action by its subsidiary, America Online, both before and after its 2001 acquisition. When Time Warner settled with the SEC, it neither agreed to admit any wrongdoing nor deny its role in the alleged misconduct.

The Scheme

The Securities and Exchange Commission accused AOL and Time Warner of engaging in a complex string of online advertising schemes. In short, the company allegedly took part in a practice called “round-trip” transactions. These transactions involved AOL buying extra online ads for its internal clients, like Hewlett-Packard, to make their revenue look artificially higher.

The SEC’s suit against Time Warner alleged that the company “knowingly or recklessly engineered, oversaw and executed a scheme to artificially and materially inflate the company’s reported online advertising revenue.”

Criminal Charges

Four former executives paid fines to settle their criminal charges with the SEC. In 2008, Eric Keller and Jay Rappaport, two business affairs executives, each paid $1 million to the regulatory board, respectively. AOL’s former business unit head, David Colburn, agreed to shell out $2 million in fines and was barred from serving as any company’s leader for seven years.

The harshest penalties fell on James MacGuiwin, AOL’s former controller. MacGuiwin paid an eye-watering $4 million and received a ban from serving as the head of any company for ten years. In all four cases, however, the executives admitted to no wrongdoing, preserving their reputations at the expense of their wallets.

Historical Significance

While the eight executives faced criminal charges, AOL Time Warner suffered the steepest penalties for the scandal. In 2005, Time Warner agreed to pay $300 million to settle the civil fraud charges. Later, the company also paid $210 million to the US Justice Department from a separate criminal securities fraud investigation.

The scandal also led to one of the largest class-action settlements in history: in 2006, a New York federal court ordered Time Warner to pay out $2.5 billion to a group of 625,000 investors. The Minnesota State Board of Investment led the class and named the auditing firm Ernst & Young as a defendant alongside AOL Time Warner.