SEC's New Fraud Charges Against Ex-AOLers: It Could Happen Again

Former CFO Mike Kelly is among eight former AOL Time Warner executives ensnared by a new set of Securities and Exchange Commission charges. The suits allege Kelly, AOL unit CFO Joseph Ripp and others fraudulently inflated ad revenues during the 2000 to 2002 bust cycle — to the tune of about $1 billion. Kelly, Ripp and two others are contesting the charges, while four execs including David Cobourn have decided to settle for a combined $8.1 million.

The lawsuits are part of the agency’s five-year-old investigations into how the company cooked its ad revenue books. The ad inflation scheme worked like so, per WSJ: “AOL made so-called round-trip transactions to inflate revenue, by giving vendors money to buy online advertising they didn’t want or need.”

The new charges come at a fairly poignant moment, given display ad CPMs are in decline by some measures, and Web ad companies are feeling pressure to perform in ways they haven’t in several years. Granted I’m no financial expert, but it’s not a stretch to speculate online ad inflation could happen again — and probably will, as the nose-diving ad industry creates more downward pressure on display CPMs.

What form might those obfuscations take? Many factors can affect an online media company’s ad volume or revenues, making both appear larger than they are. Those include false ad contracts like the one described above, older ad contracts made during boom years and extending into bust ones, the reporting of donated or pro bono ad inventory, the reporting of theoretical ad inventory — for instance the number of total impressions available through an ad network versus actual ads served (We at ClickZ hear this one all the time), and the opaque ways many Web companies’ traffic acquisition costs are set up and reported.

As an aside to all of the above, it’s interesting to note that Lynda Clarizio, current president of Platform A, was at the time of the alleged transgressions a member of the company’s business affairs unit — which was also home to three of those targeted by SEC lawsuits. However, as SVP of business affairs and development between 1999 and 2002, her role was to lead the company’s merger & acquisition activities — not to calculate and report ad revenue to investors.