The U.S. Securities and Exchange Commission's (SEC) investigation into AOL Time Warner's (AOLTW) business dealings has reportedly focused on swapping transactions akin to those that have come under heavy scrutiny in the energy and telecom industries.
SEC lawyers and federal prosecutors are reviewing instances where the company's America Online Inc. (AOL) Internet unit performed practices known as "round-tripping" and "back-to-back" transactions, according to Monday's online edition of the Wall Street Journal.
Round tripping has traditionally been used to describe instances where telecom and energy companies sell unused assets of their business to another company while simultaneously agreeing to buy back those or similar assets at roughly the same price. Back-to-back transactions are essentially the same as round-tripping, except that there can be a delay between transactions. Both practices can be used to artificially prop up both the buyer's and seller's revenues. No one from AOLTW was immediately available to comment Monday morning. The SEC declined to comment on the report.
News that the government probe has narrowed in on AOL's possible exchange transactions could spell even more trouble for the beleaguered company given that downfall of Global Crossing Holdings Ltd. and Enron Corp. were in part pinned on similar sorts of deals.
Telecom giant Global Crossing was accused of improperly inflating its revenues through "capacity swaps," for instance, buying fiber-optic capacity from one customer while selling nearly the same capacity.
However, it is too early to say whether the AOLTW transactions in question were illegal. Federal prosecutors will have to prove that AOLTW was intentionally trying to deceive or defraud investors with the deals to have a case, according to the Journal.
AOLTW not only faces a SEC probe, but is also under a parallel investigation by the U.S. Department of Justice for possible criminal offenses. The investigations were sparked by articles in the Washington Post last month, alleging that the company performed a series of unusual transactions in an effort to prop up its AOL Internet unit.
AOLTW acknowledged last week that it had discovered three transactions in which it may have misbooked revenue for its Dulles, Virginia, Internet unit totalling US$49 million. The company said that the revelation came as it was reviewing its financial records in preparation for a SEC deadline requiring company officials to sign off on their financial results. The company squeaked in just under last Wednesday's deadline, and an SEC spokeswoman said Monday that the agency is still reviewing the company's certification.
Meanwhile, the government investigations are reportedly centering on the former head of AOL's business unit, David Colburn. Colburn, who helped forge many of the transactions that are now in question, left the company earlier this month, under unclear circumstances.
Stock in the company (AOL) slumped .8 percent to US$12.46 a share in trading Monday morning, following the latest news in the investigation.