The Securities and Exchange Commission is investigating $3 million worth of barter deals at EasyLink Services Corp., a New Jersey company on whose board SEC Chairman William H. Donaldson once sat, according to a financial report.
The agency is probing revenue from advertising deals that the technology services company booked in late 2000, EasyLink said yesterday in a filing with the SEC.
Two sources familiar with the investigation said the agency is moving toward building a case against the company and perhaps a corporate official. Gene King, an outside spokesman for EasyLink, said that as of yesterday afternoon the company had not received notice that the agency was pursuing civil charges. The SEC typically sends a Wells notice to potential litigation targets to give them a chance to persuade the agency not to file suit.
Donaldson, 73, has recused himself from the case because he was a member of the company's board from 1998 to 2002, sitting on its audit and compensation committees. A spokesman for Donaldson declined to comment yesterday. EasyLink's chairman is Gerald Gorman, a former banker at Donaldson, Lufkin & Jenrette, the Wall Street investment company Donaldson co-founded.
EasyLink said in its filing that the $3 million under scrutiny amounts to a small portion of its total 2000 revenue of $61.2 million. The company said the deals were not "material" to its financial statements that year.
Barter transactions among technology firms have been a focus for regulators since the Internet bubble burst. Companies including Time Warner Inc.'s Dulles-based America Online Inc. unit have come under scrutiny for booking revenue based on advertising deals in which services were traded but no money changed hands. In 2000, many technology companies cited advertising revenue growth in an attempt to distinguish themselves from rivals competing in a toughened marketplace.
EasyLink, then known as Mail.com Inc., went public during the height of the dot-com boom in 1999, and its shares rose to a high, adjusted for splits, of $271 that year. Its shares closed yesterday at $1.43.
Lon E. Otremba, chief executive of Muzak LLC, was on EasyLink's board from 1997 to November 2000 and served as president from March 2000 to November 2000 and chief operating officer for the rest of that time. He said he recalls the company's auditors as being "extremely conservative."
The $3 million in barter deals "would have been an immaterial amount, and the auditors never said anything about it" to the board when he served there, Otremba said. It is unclear whether auditors raised the issue after Otremba left.
Itzhak Sharav, an accounting professor at Columbia University, said the EasyLink transactions in question took place before financial blowups at Enron Corp. and WorldCom Inc. put corporate boards on notice that they needed to play a more active role in keeping an eye on accounting.
Board members often depend on company management and outside auditors to flag troublesome issues -- especially in areas as complex as how and when a company reports revenue, experts said.
"The board can be forgiven if they overlooked something like this because of the materiality borderline issue and also the fact that [a board member said] the auditors did not raise objections to the accounting treatment," Sharav said.
Tom Fitzgerald, a spokesman for KPMG LLP, which reviewed EasyLink's books, declined comment yesterday based on client confidentiality.
EasyLink said it sold the advertising business under scrutiny by the SEC in March 2001. That unit accounted for 36 percent of the company's total revenue in 2000, compared with 81 percent a year earlier, according to EasyLink's 2000 annual report.
Researcher Richard S. Drezen contributed to this report.