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CNN Live Today

AOL Stock Down After Justice Opens Investigation

Aired July 31, 2002 - 13:15   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

KYRA PHILLIPS, CNN ANCHOR: Now, the inquiry into the accounting practices of AOL Time Warner, the parent company of CNN, is widening. The Justice Department has launched an investigation into the media giant's business practices, already under review by the SEC. CNN Financial News Reporter Bruce Francis joins us now from New York with the details -- Bruce.
BRUCE FRANCIS, CNN FINANCIAL CORRESPONDENT: Thank you very much, Kyra. Indeed, CNN has confirmed that the Department of Justice is conducting a preliminary investigation into accounting practices at AOL Time Warner's America Online unit. These practices apparently took place in the months leading up to the merger -- actually, the acquisition of Time Warner by America Online. They were first disclosed in a series of articles in the "Washington Post" just a couple of weeks ago.

What did AOL do here? Well, they got real aggressive, according to the "Post" on booking a number of deals, like selling advertising on behalf of eBay and not counting the proceeds from that on just a commission basis, but grossing up the whole amount.

They also made some profits on warrants, which are a financial instrument that allow you to purchase the price of stock at a given price. They booked those profits as advertising revenues. What did this do? This made the financial performance of the online unit look better than it might have otherwise. Now, remember, this all was occurring in the fall of 2001 at a time when Online advertisers were pulling back sharply, and the concern is, on the part of a number of experts, as quoted in the "Washington Post," is that while things were probably deteriorating quite rapidly for advertising for America Online, these deals helped obscure that. And, perhaps helped the deal sail through and get more positive reception on Wall Street than it might have otherwise.

Earlier on CNNfn, we spoke to Ted Leonsis. He is the vice chairman of America Online, and he had this to say about his company's accounting practices.

(BEGIN VIDEO CLIP)

TED LEONSIS, AOL VICE CHAIRMAN: We think our accounting was correct. After the "Washington Post" story broke, we gave a head's up -- excuse me -- to the SEC and have been cooperating with them fully. We've reviewed the accounting on numerous occasions and we think it's correct. The Department of Justice today, it's not an unusual case where they would join in with the SEC, and we're, you know, very anxious to get all this behind us and we stand behind our accounting. (END VIDEO CLIP)

FRANCIS: The involvement of the Department of Justice means that now AOL can be subpoenaed and potentially criminal charges can be brought against executives who are found, if they are found, indeed, to have broken any laws.

Now, Kyra, we understand at this point, though, that AOL has not received any subpoenas -- back to you.

PHILLIPS: So Bruce, what are you hearing? Of course, you can imagine there is a lot of talk going on around here. Investors, 401(K)s, job stability, it's a big concern to many of us and of course other people that are involved with the company.

FRANCIS: Now in the event that this results in a restatement, and no one is saying at this point that it would, this -- all these practices involve a very small percentage -- just a few percentage points of the overall company's revenue. So, it is not expected to have a huge financial impact. Nevertheless, as you mentioned, the context that it comes on -- comes in, when there are all these investigations at all these different companies, it is troubling to investors, and the stock, is again, down today -- Kyra.

PHILLIPS: Bruce Francis, live from New York. Thanks, Bruce.

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