Neowin.net

The Securities and Exchange Commission has widened its probe of AOL Time Warner Inc., investigating the company's former business relationship with a Las Vegas software firm.

Last week, AOL Time Warner chief executive Richard D. Parsons disclosed that the SEC had launched a fact-facting inquiry into the business practices of the world's largest Internet service, Dulles-based America Online. The Justice Department also is conducting a criminal investigation of the online unit, according to sources.

PurchasePro Inc., a struggling dot-com that markets business software, yesterday confirmed that it has been contacted by federal regulators as well. "As far as we know, the SEC is looking into our transaction with AOL that occurred under prior management," said PurchasePro spokesman Steve Stern. "Our accounting for this was conservative and appropriate, and we expect to hear further from the SEC shortly."

Stern also said PurchasePro began to withdraw from its AOL partnership last summer and terminated it in the fall of 2001.

AOL spokesman John Buckley declined to comment. SEC spokesman John Heine also declined comment.

News source: TechNews - SEC Expands Probe of AOL

Sources familiar with the SEC probe said the regulatory agency, which has oversight over the financial reporting of U.S. companies, has so far had only preliminary talks with attorneys for PurchasePro about its business dealings with AOL. It was unclear yesterday which aspect of the AOL-PurchasePro partnership was under review. The SEC probe follows a Washington Post report that examined various business dealings between the two companies.

In one unorthodox arrangement, AOL gave $9.5 million in cash to PurchasePro for $30 million in stock warrants in the firm, and AOL booked the difference -- $20.5 million -- as ad and commerce revenue. PurchasePro also bought advertising space from AOL and paid AOL commissions for selling PurchasePro software.

AOL earned its warrants under a marketing deal that included distributing PurchasePro software. The warrants, similar to stock options, gave AOL the right to buy shares in PurchasePro for 1 cent each, according to internal company documents. AOL calculated the value of the warrants and booked it as $20.5 million in advertising and commerce revenue in the quarter ended December 2000 and another $7 million in the quarter ended March 2001.

The PurchasePro deal was one of several unconventional transactions carried out by AOL at a critical time before and after its takeover of Time Warner Inc. in January 2001.

AOL has said it booked these deals properly, and its outside auditor Ernst & Young LLP has confirmed the accounting.

At least two AOL executives have already retained attorneys in connection with the company's partnership with PurchasePro, sources said. That includes Myer Berlow, a former AOL advertising executive who now is a company consultant, and David M. Colburn, executive vice president and president of business affairs and development for AOL Time Warner's subscription services and advertising and commerce businesses, the sources said. The firm declined to make Berlow or Colburn available for comment.

Colburn recently relinquished his day-to-day duties overseeing the Internet division's business affairs unit, which negotiated many of the company's unconventional transactions. Colburn's move follows the recent resignation announcement of Robert W. Pittman as AOL Time Warner's chief operating officer.

PurchasePro has faced its own turmoil -- widening financial losses, hundreds of layoffs and a plunging stock price that closed yesterday at 33 cents. In November 2001, Arthur Andersen LLP resigned as PurchasePro's independent auditor after noting what it considered deficiencies in the design and operation of PurchasePro's internal controls.

Also last year, Eric Keller, an AOL senior vice president, was placed on administrative leave, pending an internal investigation of the company's relationship with PurchasePro, sources said.