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6 Indicted in AOL Accounting Case

Prosecutors Allege Scheme With Partner

By Alec Klein and Jerry Markon
Washington Post Staff Writers
Tuesday, January 11, 2005; Page E01

A grand jury yesterday indicted two former America Online Inc. officials and four former executives of a business partner on conspiracy and fraud charges in connection with an alleged scheme between the two Internet companies to prop up each other's financial results just as the dot-com market was beginning to collapse.

The 31-count indictment accuses the executives of inflating revenue and lying to investors about the true nature of the companies' financial results. According to court documents, some of the executives forged and back-dated contracts and lied to auditors -- and then attempted to cover up the scheme by destroying documents and e-mails and lying to federal authorities.

U.S. Attorney Paul J. McNulty said the investigation of accounting at AOL is "a very active, ongoing investigation." (Jay Mallin -- Bloomberg News)

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The indictment also alleges that some executives of AOL's business partner, PurchasePro.com Inc., personally benefited from the scheme by collecting millions in bonuses and stock options.

The indictments follow a decision by AOL's parent, Time Warner Inc., to pay $510 million to settle criminal and civil charges stemming from a wide-ranging accounting scandal at the online unit, including AOL's dealings with PurchasePro. Time Warner did not admit or deny wrongdoing, and it said it would restate hundreds of millions of dollars in revenue. The deal, however, did not protect current or former employees from prosecution.

The Justice Department previously said "six or more" unidentified AOL executives were involved in the scheme with PurchasePro, in which both companies overstated ad revenue.

"This is a very active, ongoing investigation," said U.S. Attorney Paul J. McNulty in a news conference yesterday. "We will take the time to work through all the records to try to find the truth behind the numbers."

When the alleged scheme first took place, in late 2000 and early 2001, AOL was in the critical stages of consummating its acquisition of Time Warner, the largest merger in U.S. history. PurchasePro, a software maker based in Las Vegas, was scrambling to shore up its balance sheet just as its business was evaporating.

Kent D. Wakeford, a former executive director in AOL's business affairs unit, and John P. Tuli, a vice president in its Netbusiness unit, become the first two former AOL employees to be charged in the probe, which began more than two years ago and includes the FBI, the U.S. attorney's office for the Eastern District of Virginia in Alexandria, and the Securities and Exchange Commission.

Prosecutors say AOL and PurchasePro used a number of accounting schemes to boost financial results to satisfy Wall Street's expectations. In early 2001, for example, when PurchasePro was well short of meeting its publicly stated revenue goals, company executives "created fraudulent arrangements and documentation to inflate artificially" the company's revenue, the indictment alleged. As part of that, according to the indictment, PurchasePro forged an AOL signature to make it appear that AOL owed PurchasePro $3.65 million. PurchasePro, in turn, helped AOL inflate its revenue, in one case giving it $12.2 million for commissions that AOL had not fully earned, the indictment says.

Each man faces potentially extensive prison terms and large fines. The conspiracy count alone could bring a maximum prison term of 20 years and a fine of up to $250,000. Authorities also are trying to reclaim any ill-gotten payments, real estate and other assets.

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