Creative Transactions Earned Team Rewards

David Colburn was chief of the AOL unit that put together deals that are under investigation by the SEC and Justice Dept. (Courtesy Chai Lifeline)

Second of two articles

At noon on Dec. 21, 2000, David M. Colburn swaggered to the stage in black cowboy boots, sporting his trademark 5 o'clock shadow.

From the podium, Colburn, then president of business affairs at America Online Inc., beamed at his audience, about 100 employees assembled in the Seriff Auditorium at AOL headquarters in Dulles for the monthly all-hands meeting of his unit.

It was time to hand out the Bammy Awards.

A takeoff on television's Emmy Awards, the Bammys were given to the best performers in Colburn's division, a group of aggressive deal makers skilled in extracting maximum dollars from a prospective client. Business affairs -- "BA," as it was known around AOL -- was in the middle of many of the company's biggest and most complicated deals, which helped AOL reach or exceed its financial targets.

Theirs was a culture that grew increasingly important as America Online evolved from a Northern Virginia upstart into an online behemoth capable of taking over Time Warner Inc.

On this day, Colburn bestowed the Bammy's gold-star plaque on Kent Wakeford and Jason Witt, who had put together a complex transaction with PurchasePro.com Inc., a Las Vegas software maker.

According to several people at the meeting, Colburn praised the two men for what he called a "science fiction" deal to generate revenue, a reference some attendees took for the aggressive way the company constructed the transaction.

Colburn himself and several other attendees do not recall the statement, according to an attorney AOL hired to respond to The Post. The company declined to make Colburn or any other member of the business affairs unit available for comment.

Under terms of the agreement, AOL would sell software for PurchasePro and, in exchange, earn tens of millions of dollars in performance warrants -- a right to buy PurchasePro stock at a certain price. AOL would book the value of those warrants as advertising and commerce revenue. It was an unconventional arrangement, but one that AOL's attorney said did not violate any accounting rules.

Wakeford and Witt joined Colburn on stage and accepted the plaque. In his acceptance speech, Wakeford thanked someone who was not in attendance: "Junior," Charles E. Johnson Jr., PurchasePro's rambunctious founder and then-chief executive.

The crowd roared with laughter over the tongue-in-cheek remarks. But not everyone was amused.

"The sheer arrogance, the feeling of being untouchable, was amazing," said one attendee.

AOL's business affairs culture rewarded those who could be creative -- and those who knew how to close deals. Business affairs executives usually got involved in advertising transactions after the sales force had reached a general agreement with clients. Business affairs would draw up a list of proposed terms and talk to the company's accountants about how to structure the deal.

The unit's work was blessed by executives at the highest levels. Business affairs deal makers answered to Colburn, who reported to Robert W. Pittman, then AOL's president. Their deals also were reviewed by AOL's auditors, and were subject to what AOL said was a "strict and effective system of internal controls."

Sources said those controls were necessary to deal with a unit like business affairs, whose complex transactions were known as "BA specials" inside AOL. Typically, the unorthodox deals involved contracts that closed late in a fiscal quarter and helped AOL boost its financial results.

Though its deal makers may have been aggressive, AOL said they generally had little idea whether their efforts would produce favorable quarterly results. The company said too many deals were up in the air in the closing days of a quarter for anyone to be sure how the final tallies would turn out.