Does AOL print its own money?

Does AOL print it's own money?

03-04-2007: Updated and recalculated after AOL’s latest settlement. Updated again 03-11-2007, 4-02-2007 and 5-10-2007.

AOL is painting their bad news in a positive light. Now they claim a recent stack of accounting fraud lawsuits against them are going to be paid for with a special fund that they set up years ago with $20 million, that they added another $600 million to in Dec. 2006. They’re wrong. They’re not even close to telling the truth.

These lawsuits began over one issue: AOL inflating ad revenue through scurrilous deals with other companies using round-trip accounting and other methods, which became one huge scandal in 2001 after key players in the scam cashed out with a combined $1 billion (though the creative accounting and deal-making really began way back in 1994 — that’s not a typo; it began back in 1994, maybe earlier).

I’ve recounted the stories behind and the recent acquittals of some major players, but I’ve never written about the huge amounts of money that were vacuumed out of AOL over the years thanks to the conniving thieves who orchestrated these deals.

Plenty of outstanding lawsuits remain, and the price to settle them hovers around $3 billion. AOL had only $215 million in reserve before they paid $665 million this month to settle more lawsuits arising from the scandal, so they have some explaining to do. While TW has enough money (and if all else fails, enough paper) to cover a worst-case scenario, they seem to be telling their favorite fairy tale again, the one that always begins with the line, “The truth is better than what you’re hearing, people, we promise!”

No, it’s not.

Do the Math

Settled Accounting Fraud Lawsuits Against AOL

Cost to settle accounting lawsuits to date: $3,995,000,000

More Settled Lawsuits Against AOL

(With known dollar amounts — many more were settled for undisclosed amounts, so I’ve omitted them.)

Cost to settle other lawsuits to date: $72,000,000

Cost of all settled lawsuits to date: $4,027,000,000

They’ve spent $4 billion over the years that was never in reserve to cover those settlements. Where did the money not held in reserve come from?

Ongoing Accounting Fraud Lawsuits Against AOL

More Ongoing Lawsuits Against AOL

Let’s go over this again. How much is left in their reserve? That’s right, folks: nothing. They had to find $45 million that wasn’t in reserve just to pay for the last settlement a few days ago. How will they pay for up to $2.3 billion in future settlements with no reserve at all?

Is it just me, or does a close look at the figures prove AOL is trying to diminish the severity of their losses while never explaining to the public how they cover them in the first place?

Update 03-11-2007: Without explaining the irreconcilable figures above, AOL’s gone ahead and created another reserve to handle remaining lawsuits for their fraudulent activities. The only problem is, the amount in the new reserve is already spent — $144 million — exactly what they must now pay to the state of Ohio for a settlement reached last week with The Ohio Bureau of Workers Compensation and five of their state pension funds. Like everyone else who’s sued them, they lost out when AOL’s stock price plunged from $85 to $10 a share shortly after the ruinous AOL-Time Warner merger. Ohio lost $400 million, to be exact, so throwing them $144 million is purely symbolic, given their losses.

That leaves $45 million unaccounted for that they spent last week to cover a larger-than-expected settlement with the University of California and the unsettled lawsuits mentioned above. It should be fun to see just how far they’ll dip into TW’s profits to cover future settlements, how secretive they’ll be about where the money comes from, and how it affects their bottom line.