A two-year-old SEC probe into Time Warner's AOL unit has turned into a standoff, with stark legal risks for the company no matter what it does.
In 2001, Time Warner agreed to pay $6.75 billion for media giant Bertelsmann's stake in joint venture AOL Europe. At the same time, Bertelsmann bought $400 million in ads, primarily on AOL.
The SEC contends the ad deal was an offset against the price of the AOL Europe stake and that booking the $400 million as ad revenue inflated AOL's profits. Time Warner says independent experts agree with its treatment of the two deals as separate.
IF TIME WARNER FIGHTS
The SEC is likely to bring securities fraud charges this summer. A trial would provide a road map for shareholders suing Time Warner over charges that it hid AOL's true financial condition.
IF TIME WARNER SETTLES
The company probably won't be forced to admit wrongdoing, but the SEC charges will boost the shareholder suit. The SEC penalties could be stiff because the agency views Time Warner as uncooperative.