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
- 1999: $25 million for their first settlement for securities fraud including $18 million for settlement of Orman v. America Online, Inc.
- 2004: $210 million to settle with the Justice Dept. for fraud charges
- 2004: $2.6 billion (final figure) to settle shareholder suits for fraud
- 2005: $300 million to settle over fraudulent deals with Bertelsmann AG
- 2007: $50 million to settle Alaska’s fraud suit
- 2007: $105 million to settle Calstrs’ fraud suit
- 2007: $405 million to settle more fraud claims
- 2007: $260 million to settle the University of California’s fraud suit
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.)
- 1998: $34 million to settle state’s class-actions for overbilling and anti-cancellation policies
- 2002: $15 million to settle claims against their 5.0 software
- 1998-2007: $28 million to pay off various states for over-billing and anti-cancellation policies
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
- 2006: For releasing member’s search records online, with an estimated worth of over $686 million
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.