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By Keith Regan
E-Commerce Times
March 12, 2003

Although observers expect AOL will avoid criminal prosecution by cooperating with investigators, civil penalties in the form of fines are more likely. In This Story: Mixed News Bigger Problems Misery and Company Pop and Circumstance  Related Stories

Federal investigators reportedly have widened their probe into AOL's (NYSE: AOL) accounting practices during the dot-com boom years, focusing on whether AOL aided and abetted the artificial inflation of revenue reports at partner companies, including embattled Homestore.com.

The Washington Post reported the probe is concentrating on the actions of two former AOL Time Warner employees.

AOL spokesperson Andrew Weinstein told the E-Commerce Times that the company has no comment on the report, but he added that AOL Time Warner has been cooperating with all ongoing probes and has conducted its own investigation. Calls to the U.S. Department of Justice and the Securities and Exchange Commission (SEC) were not immediately returned.

Mixed News

Word of the widening probe came just days after a judge excused AOL as a defendant in a billion-dollar shareholder lawsuit against Homestore. Both AOL and Cendant (NYSE: CD) were removed from the case, which is being pursued by the California State Teachers' Retirement System.

But even as she let AOL out of that suit, U.S. District Judge Marsha J. Pechman said she was doing so on technical legal grounds, sharply criticizing AOL in the process and noting that federal probes into the online service's actions will continue.

Bigger Problems

Although observers expect AOL will avoid criminal prosecution by cooperating with investigators, civil penalties in the form of fines are more likely. Regardless of penalties, Gartner research director Rob Batchelder said what AOL and other companies most want is to have the investigations closed as soon as possible.

"They become a source of speculation and rumor that can be worse than the actual outcome," he told the E-Commerce Times.

Given AOL's other problems -- parent company AOL Time Warner reported a record-setting US$99 billion loss in 2002 and has seen massive upheaval in its executive ranks -- ongoing probes are another needless distraction.

"What AOL wants is to assure everyone that things are under control," Batchelder said. "This does not lend itself to having calm investors and employees."

Misery and Company

Indeed, other tech companies have breathed nearly audible sighs of relief as they agreed to settlements that ended SEC investigations.

Last year, Amazon (Nasdaq: AMZN) closed the book on a probe stemming from its dealings with Ashford.com (Nasdaq: ASFD) , and Lucent Technologies (NYSE: LU) last month sealed a deal with the commission -- a key element in the company's bid to turn itself around.

Meanwhile, in addition to the civil lawsuit, Homestore.com has seen some of its executives plead guilty to fraud. That company also is aiding ongoing investigations and already has restated hundreds of millions of dollars in revenue reports.

Pop and Circumstance

Separately, AOL announced it will offer technology to enable its members to block pop-up ads while browsing the Web. The company said the technology is being provided in response to requests from members.

But although pop-up ads are annoying to many users, they are less widespread than they may seem. According to new Nielsen//NetRatings data, pop-up ads accounted for just 3.5 percent of all online ad impressions in the fourth quarter of 2002, up from 1.9 percent the year before.

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