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Time Warner Settles AOL Fraud Charges

March 22, 2005

NEW YORK (AP) – After more than two years of scrutiny by federal regulators, Time Warner Inc. is getting ready to move on.

Under an agreement with the Securities and Exchange Commission announced Monday, Time Warner will pay a $300 million penalty to close the book on an investigation into its accounting of online revenue and subscriber tallies at its AOL unit.

The deal, together with an earlier settlement of criminal-fraud allegations from the Department of Justice, clears the way for Time Warner to look ahead toward acquisitions and to pursue other ways to expand.

First up: Time Warner’s joint bid with Comcast Corp. for the assets of Adelphia Communications Corp., a bankrupt cable-TV provider. That deal is still in the works, but speculation has been building on Wall Street that final word could come soon.

Time Warner has also been considering floating shares of its cable-TV subsidiary, which would allow investors to separately value its cable businesses and give the company a separate “currency” to use in making other possible cable deals.

What’s more, a cable-TV company in Time Warner’s home area of New York City, Cablevision Systems Corp., is ensnared in a bitter family feud that some think could lead the company to be put up for sale. Time Warner has long been known to desire Cablevision’s 3 million cable subscribers.

All that and more could become more feasible now that Time Warner has put the regulatory investigations from the SEC and Justice behind it. Time Warner has spent the last several years selling off assets and shoring up its balance sheet, and investors have been wondering how the company will use its newly restored financial muscle.

The company has been working to right itself in the years following its disastrous merger with AOL. Time Warner’s stock is still about 75 percent below the level it reached in early 2000, when it agreed to be acquired by the Dulles, Va.-based Internet company.

Time Warner did not admit or deny any wrongdoing under the settlement. However, it restated three years of financial results and agreed to appoint an independent examiner who will review the company’s accounting of several previous transactions. That report, which is expected to be done within six months, could result in more restatements.

Time Warner CEO Dick Parsons said the company was “pleased” to have resolved the investigation and was committed to cooperating with the examiner and fulfilling its other obligations under the settlement with the SEC.

The settlement was filed with the U.S. District Court for the District of Columbia, which will also manage the distribution of the $300 million penalty to affected investors. Those payouts, which are akin to class-action distributions, will be made under the “Fair Fund” provision of the Sarbanes-Oxley Act.

The SEC accused Time Warner of several fraudulent acts, including inflating its own online advertising revenue with a number of “round-trip” transactions in which it essentially provided other companies with the means to buy online advertising.

The SEC also said Time Warner overstated the number of AOL subscribers by counting members from bulk subscription sales to companies even though the company knew that they had not been activated.

Because the company did not treat AOL Europe as a consolidated business from March 2000 to January 2002, as it should have, Time Warner also overstated its financial results for those time periods, the SEC said. Time Warner has since revised its results to reflect that change.

With the federal investigations now behind it, Time Warner has a freer hand to pursue acquisitions. Its primary focus now is a bid it has made together with Comcast for the Adelphia assets, which would also allow it to unwind a complicated partnership it has with Comcast.

Time Warner shares fell 28 cents, or 1.5 percent, to close at $18.42 on the New York Stock Exchange in line with an overall decline in the market. Its shares have traded in a 52-week range of $15.41 to $19.90.

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On the Net:

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