It’s a slow news day so I’ll catch up on the dot-com bust as it relates to AOL. Their double-dealing and questionable activities near the end of the first dot-com bubble (we’re in the second one right now, hence Bubble 2.0) have taken four years to work through court. In fact, the show’s not over yet, but I’m sure the final acts will turn out no more exciting than parts One and Two did.
While at least three AOL executives could’ve used some jail time to straighten out their moral compasses (the settlement document shows these crooks came as close as possible to admitting their misdeeds without saying “I’m guilty”) they walked out of court free men with tears in their eyes and no doubt thanking God for good lawyers.
Such is the way in a world where money, power, and good legal representation gets you further than values, ethics, and good judgment ever will; the latter, last I heard, merely gets you laughed out of Silicon Valley. Welcome to the dot-com cesspool; the star of our show today is AOL.
The litigation still underway dates back to AOL’s financial misdeeds starting in 2000, performed to buck a massive industry-wide downturn in advertising revenue, and propelled by a meeting at AOL’s headquarters where it was announced they faced losing more than $140 million in ad revenue the following year.
The Washington Post did an exhaustive investigation in 2002 into the true nature of AOL’s deals by perusing SEC and other public filings to unravel a kitchen sink of complex schemes that turned what would have been a significant ad revenue downturn into a series of stunning gains.
These well-thought-out shell games made them a Wall Street darling and made the AOL-Time Warner merger (in which AOL bought TW, not the other way around) look like the deal of the century. AOL, using inflated ad revenue figures, made news for being the only major dot-com to beat bleak revenue expectations of the era. The deals they pulled off were complex and sinister. (Quotes that follow are taken from the Washington Post.)
AOL converted legal disputes into ad deals. It negotiated a shift in revenue from one division to another, bolstering its online business. It sold ads on behalf of online auction giant eBay Inc., booking the sale of eBay’s ads as AOL’s own revenue. AOL bartered ads for computer equipment in a deal with Sun Microsystems Inc. AOL counted stock rights as ad and commerce revenue in a deal with a Las Vegas firm called PurchasePro.com Inc.
AOL also found ways to turn the dot-com collapse to its advantage, renegotiating long-term ad contracts it risked losing into short-term gains that boosted its quarterly revenue….
The company said the total revenue represented by all the deals reviewed by The Post was “truly microscopic” — less than 2 percent of AOL’s overall revenue, including subscriber fees — and therefore immaterial to the company’s business.
If the amounts in question were “truly microscopic” and “immaterial,” why go through all the (il)legal maneuvers? Why take the time and the trouble to pull those deals off? Clearly they were worried about showing up as less than capable of surviving the dot-com collapse.
Collectively, the deals helped AOL beat Wall Street analysts’ expectations for earnings per share — a crucial profit yardstick for investors — by a penny per share in two quarters in 2000. At the time, investors punished companies whose earnings were off by even a cent. For example, when AOL announced its earnings that October, Apple Computer Inc. announced it missed Wall Street’s reduced projections by one cent, sending its shares down 6 percent the next day.
I remember when a penny a share made a huge difference and holding my breath in anticipation of earnings reports from companies I supported, and what it felt like when a company I believed in missed by that one crucial penny. It was an absurd way to gauge a company’s success, but also the de facto performance benchmark, so AOL made sure they could win in that climate by hook or crook.
It was their now-defunct Business Division that did the wheeling and dealing at AOL, especially for ad deals. AOL didn’t get into selling ads last summer when they officially changed their subscriber-based model to a more ad-driven one; that’s been going on since 1996, and they’ve only been trying to strengthen their grip on ad-based revenue since then. Dot-com stocks were falling in 2000 and AOL was coming under fire for buying Time Warner, but with inflated ad revenue figures, that didn’t matter:
Several analysts at the time took AOL’s reports of a big jump in ad and commerce revenue in the Sept. 30 quarter as a sign of the company’s strength in the face of a slowing ad market, and they encouraged investors to buy AOL shares as the merger neared.
In a research note a day after AOL’s Oct. 18 conference call, analyst Youssef H. Squali, then of ING Barings LLC, reiterated his “strong buy” rating on AOL’s stock. “Solid advertising revenues attest to AOL’s hybrid subscription/advertising model, which so far has provided the company with more protection from the dot-com meltdown than other large new media companies,” he wrote…
What the analysts failed to note — or didn’t know — was that many dot-coms no longer had the cash to pay for all the ads they had agreed to buy in their premium-priced long-term contracts with AOL.
An internal AOL memo the WP said described “shaky deals” that could lose AOL $23.2 million in revenue by Sept. 30, 2000 was just the tip of the iceberg:
…other internal company documents obtained by The Post said that AOL was “at risk” to lose more than $108 million in ad revenue in fiscal 2001, from July 2000 to June 2001, with most of that jeopardized revenue coming from dot-coms.
Would AOL make those deals and vulnerabilities public? Not willingly. It took the Washington Post to do that but still AOL denied anything was wrong, using their crooked accounting firm, Ernst & Young, to back their claim that the companies involved would survive the dot-com bust and pay them as needed, and even claimed the overall amounts in question were “too small” to affect their bottom line.
AOL could’ve chosen to take some of their deadbeat business partners to court, but they didn’t because it would risk their carefully cultivated “financial warrior” image. Over a possible image problem they chose to hide the truth from everyone until they no longer could.
The Washington Post detailed just a smattering of the deals AOL made during that time; the actual list is much longer. The PurchasePro fiasco, for instance, is still in litigation today. According to a 2003 article from C|Net:
…[senior VP] Anderson and an employee at the media company [AOL] engaged in a complex shell game that was hidden from auditors and investors. PurchasePro offered the media company employee $30 million in warrants, which the employee exchanged for future guarantees of revenue for PurchasePro, the Justice Department said. These guarantees were achieved when the media company employee entered into side deals with suppliers and partners that then bought PurchasePro software licenses, the department said.
While PurchasePro Inc. chief executive Charles E. Johnson Jr. got off on an unknown technicality (a mistrial was declared for him last November) thanks to the PurchasePro/AOL scheme:
…Jeffrey R. Anderson, PurchasePro’s former senior vice president of sales and strategic development, pleaded guilty to charges of inflating the company’s revenue during the fourth quarter of 2000 and the first quarter of 2001. Scott H. Miller, the former controller, entered a guilty plea for obstructing a federal criminal investigation…Anderson faces up to five years in prison and a fine of up to $250,000. Miller faces a maximum of 20 years in prison and a $250,000 fine.
That brings us to this week’s news, which might be shocking to the general public but is standard fare for anyone in the know. In the case of any big class action against a well-known and deep-pocketed company with fancy legal representation, it’s better to opt out and start another lawsuit than to take what you’ll get otherwise. As FuckedGoogle has pointed out, class-actions are rife with fraudulent players, including the lawyers who start them, and the defense lawyers (Stephen Moulouf, anyone?) who try to manipulate the outcome. The amount of people covered is so vast that dilution of payment is almost inevitable once the case is settled rather than brought to trial, and these companies would rather pay out big bucks to shut everyone up than admit wrongdoing.
Calstrs, the California teachers’ union, is one such entity that chose to pursue a separate class action against AOL for dot-com bust scams that resulted in them inflating their stock price in 2000 and 2001, before their merger with Time Warner. Starting a separate lawsuit was the smartest move they could make; they collected a $105 million judgment against TW. According to an article on cpf.com:
Had Calstrs joined about 600,000 other participants in the class action against Time Warner, it would have received a far lower award…Steve Williams of Cotchett, Pitre & McCarthy, the pension fund’s outside counsel in the litigation, estimated that Calstrs would have received $15.5 million to $16 million if it had not opted out.