U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20586 / May 19, 2008

Accounting and Auditing Enforcement Release No. 2829 / May 19, 2008

SEC v. John Michael Kelly, Steven E. Rindner, Joseph A. Ripp, and Mark Wovsaniker, Civil Action No. 08 CV 4612 (S.D.N.Y.)

SEC v. David M. Colburn, Eric L. Keller, James F. MacGuidwin, and Jay B. Rappaport, Civil Action No. 08 CV 4611 (S.D.N.Y.)

SEC Charges Eight Former Executives of AOL Time Warner for the Company's Accounting Fraud

On May 19, 2008, the Securities and Exchange Commission filed civil fraud charges against eight former executives of AOL Time Warner Inc. for their roles in a fraudulent scheme that caused the company to overstate its advertising revenue by more than $1 billion.

In SEC v. John Michael Kelly, Steven E. Rindner, Joseph A. Ripp, and Mark Wovsaniker, filed in the United States District Court for the Southern District of New York, the SEC alleges that from at least mid-2000 to mid-2002, John Michael Kelly, former Chief Financial Officer of AOL Time Warner; Steven E. Rindner, former senior executive in the company's Business Affairs unit; Joseph A. Ripp, former Chief Financial Officer of the company's AOL division; and Mark Wovsaniker, former head of Accounting Policy, engineered, oversaw, and executed fraudulent round-trip transactions in which AOL Time Warner effectively funded its own advertising revenue by giving purchasers the money to buy online advertising that they did not want or need. Online advertising revenue was a key measure by which analysts and investors evaluated the company. The defendants made or substantially contributed to statements to investors that included the company's fraudulent financial results. Kelly and Wovsaniker, both certified public accountants, also are charged with misleading the company's external auditor about the fraudulent transactions.

The complaint charges Kelly, Wovsaniker, Ripp, and Rindner with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), Exchange Act Rules 10b-5 and13b2-1, and with aiding and abetting AOL Time Warner's violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1 and charges Kelly and Wovsaniker with violations of Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-2. The complaint seeks injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, civil monetary penalties, and officer and director bars against each of them.

The Commission also filed a complaint today in SEC v. David M. Colburn, Eric L. Keller, James F. MacGuidwin, and Jay B. Rappaport in the United States District Court for the Southern District of New York against four former AOL Time Warner executives who participated in the scheme to artificially inflate the company's reported online advertising revenue. The four defendants have agreed to settle that action, without admitting or denying the allegations in the complaint. David M. Colburn, former the head of the Business Affairs unit; Eric L. Keller, former senior manager in the Business Affairs unit; James F. MacGuidwin, former Controller; and Jay B. Rappaport, former senior manager in the Business Affairs unit, have agreed to permanent injunctions against future violations of Section 17(a) of the Securities Act, Section 10(b) the Exchange Act and Exchange Act Rules 10b-5 and 13b2-1, and from aiding and abetting violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13. MacGuidwin also agreed to be enjoined from future violations of Exchange Act Rule 13b2-2. All of them have agreed to pay disgorgement and prejudgment interest and civil penalties. Colburn will pay disgorgement and prejudgment interest of $3,222,107 and a penalty of $750,000; MacGuidwin will pay disgorgement and prejudgment interest of $2,100,000 and a penalty of $300,000; Rappaport will pay disgorgement and prejudgment interest of $493,629 and a penalty of $250,000; and Keller will pay disgorgement and prejudgment interest of $699,868 and a penalty of $250,000. Colburn and MacGuidwin have agreed to be barred from serving as officers or directors of a public company for ten years and seven years, respectively. The settlements are subject to court approval.

For related actions, see http://sec.gov/litigation/litreleases/lr19147.htm.

Complaint SEC v. Kelly et al.
Complaint SEC v. Colburn et al.

http://www.sec.gov/litigation/litreleases/2008/lr20586.htm