TELECOM Digest OnLine - Sorted: AOL Settlement Includes Tight Controls

AOL Settlement Includes Tight Controls

Lisa Minter (
Fri, 17 Dec 2004 10:59:04 EST

By David A. Vise, Washington Post Staff Writer

America Online Inc.'s settlement with the Justice Department imposes a
strict new set of controls on the company, including requirements that
the Internet giant hire a corporate monitor and disclose serious
wrongdoing discovered internally to the government.

The deal -- announced Wednesday and signed by federal prosecutors and
America Online chief executive Jonathan F. Miller -- comes as
authorities seek to strengthen corporate checks and balances following
scandals at Enron Corp., WorldCom Inc. and other firms.

The AOL settlement requires the Dulles-based company to give the
Justice Department every letter it receives threatening private
litigation against AOL. The agreement also makes the Justice
Department a party to normally private communications between AOL and
its parent company, media giant Time Warner Inc.

"AOL will adopt a new internal standard of conduct under which it will
inform the Department of Justice of any new matter reported to Time
Warner's Audit and Finance Committee that involves substantial and
credible evidence of any Federal Crimes," the cooperation agreement

AOL also agreed to hire and pay for an independent monitor for at
least two years. The selection must be approved by Justice, and the
monitor will report to prosecutors regularly on the firm's business
conduct. The monitor has the power to hire accounting firms to assist
in the work and must be given access to all details of AOL's online
advertising deals.

The company could be subject to criminal prosecution if it fails to
live up to the terms of the agreement. Justice officials filed a
criminal complaint against America Online but agreed to defer
prosecution for two years and to dismiss the complaint at the end of
that period if the company cooperates fully with authorities.

However, AOL could be prosecuted as a corporate entity if it commits
various crimes in the future. As part of the settlement, the firm
waived its right to assert that the statute of limitations had

On Wednesday, Time Warner and AOL agreed to pay the federal government
$510 million to settle criminal and civil charges following a
long-running probe of questionable accounting and dealmaking that
inflated AOL's revenue and profit before and after the company merged
with Time Warner. The agreements have been approved by Justice and the
enforcement division of the Securities and Exchange Commission , but
the proposed SEC agreement still must be reviewed by the commissioners
of the agency, who have the right to alter, amend or reject the
proposed settlement.

AOL also agreed to assist Justice fully in the criminal prosecution of
"six or more" current and former AOL employees involved in alleged
accounting fraud committed between AOL and Inc., a
defunct Las Vegas software firm. The agreement states that AOL and
PurchasePro engaged in a multiyear scheme of accounting fraud and
deceptive dealmaking that enabled both companies to exaggerate the
real revenue they were taking in by millions of dollars.

The agreement does not list the names of the six individuals at AOL
but states that they worked in AOL's business affairs unit, which took
the lead on advertising deals; in the interactive marketing unit; and
elsewhere. Former AOL employees David M. Colburn and Eric Keller, who
worked in business affairs, are among the former AOL employees under
scrutiny, said people familiar with the probe who spoke on condition
of anonymity because of the ongoing investigation. Attorneys for both
men have said they engaged in no wrongdoing.

Four former PurchasePro executives agreed on Wednesday to plead guilty
to criminal charges in the probe and to cooperate in the government's
investigation. They are Robert Geoffrey Layne, former executive vice
president and a co-founder; Shawn P. McGhee, the company's former
chief operating officer; Dale L. Boeth, a former senior vice
president; and James S. Sholeff, a former vice president.

Under the cooperation agreement signed by Miller, AOL agreed not to
challenge Justice's conclusions about the alleged criminal nature of
the scheme between the companies or the criminal culpability of some
AOL officials. Miller also agreed that AOL will actively assist
Justice in the prosecution.

Among other things, Miller agreed that AOL officials with knowledge of
the wrongdoing will testify before a federal grand jury about current
and former America Online officials who participated in the fraudulent
deals and, if necessary, testify at trial.

The Department of Justice's "decision to defer and ultimately not seek
criminal sanctions against AOL is contingent on AOL's adherence to a
number of conditions," Miller wrote in an e-mail to employees. "We
take this matter very seriously and expect you to do the same. As a
company, living up to the conditions imposed by the DOJ must and will
be a clear priority."

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