Former AOL execs sued for fraud

May 21, 2008 // 12:30 p.m.

Tags: #fraud #merger #revenue #sec

Companies: #aol

Former executives of popular ISP AOL are being sued by the Securities and Exchange Commission in the US for fraud after the SEC uncovered evidence that advertising revenue had been overstated by more than $1 billion.

The accusations, according to the New York Times are that the executives deliberately overstated earnings from advertising during the company's merger with Time Warner in order to gain the upper hand in negotiations. Although AOL itself settled the charges three years ago after agreeing to pay $300 million, the SEC now believes it has enough evidence to bring the executives behind the scam to justice rather than take further punitive action against the company itself.

The lawsuits, filed at the start of the week in the United States District Court in Lower Manhattan, accuse eight AOL executives of cooking the books in order to convey an image of AOL as a “healthier, stronger company than it really was” at a time when “the Internet bubble was deflating” according to the SEC's Scott W. Friestad.

Four of the accused – James F. MacGuidwin, the former controller of the company; David M. Colburn, ex-head of the Business Affairs Unit; Eric L. Keller, former business affairs executive; and Jay B. Rappaport, another ex-business affairs executive – have already coughed to their part in the offences, and settled with the SEC. MacGuidwin has agreed to pay $2.4 million and Colburn $4 million in order to make the charges go away, and both are barred from serving on the board of directors for any publicly traded company for ten and seven years each. Rappaport will pay $750,000 for his part, and Keller will pay approximately $1 million with no other penalties.

The other four executives named in the suit – John M. Kelly, former CEO of post-merger AOL Time Warner; Joseph A. Ripp, former CFO of post-merger AOL; Steven E. Rindner, ex-business affairs executive; and Mark Wavsaniker, another former business affairs executive – have vowed to fight all the way. Lawyers for the accused have described them variously as “a straight shooter who uncovered fraud and did not commit it,” “a decent and honourable young man who conducted himself appropriately during his three years at AOL,” and each has announced their clients intentions to “vigorously defend [themselves] in the courts.”

Even though the crimes themselves are in the past, and each of the accused are no longer employed by the corporation, the bad press comes at a time when AOL Time Warner's telecommunications division is struggling. Already the company has offloaded its ISP business in the UK to The Carphone Warehouse, and if it keeps getting bad press with lawsuits such as this I'm not entirely certain if it will be able to keep itself afloat.

Do any of you have fond memories of getting hooked up with a “500 free hours!” CD, or do friends not let friends do AOL? Share your thoughts over in the forums.
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