Litigation

From whistleblower to charges of financial fraud

By Tracy Coenen

The New York Times published a very interesting story about Joseph Ripp, the former AOL CFO who went from being a whistleblower, to finding himself with civil charges of financial fraud.

Ripp became a whistleblower in May 2001 when he faxed a letter to auditing firm Arthur Andersen about one of AOL’s business partners. He told Andersen that their client (AOL’s business partner) had forged a signature on a contract and booked millions of dollars of phony revenue.

Ripp had worked at Time Inc. for 25 years but wasn’t aware of Time Warner’s deal talks with AOL until late in the game. Co-workers say that he was very conservative when it came to accounting issues. Ripp was caught off-guard when he finally found out that the two companies were merging. He essentially had no job after the deal because AOL’s CFO went on to become the CFO of the new entity. Ripp had four years left on his contract and could have walked away with cash in hand, but he was encouraged to take a new position at AOL, and he did.

Soon after taking his new position, Ripp suspended Eric Keller, an AOL dealmaker who was involved in questionable transactions with software company PurchasePro. Ripp was instrumental in finding fraud between AOL and business partners PurchasePro and real estate company Homestore. Those at PUrhcasePro and Homestore who were involved in the fraud were eventually federally prosecuted.

So it’s a bit of a shocker that the person instrumental in uncovering fraud by these parties would eventually be under federal indictment for fraud too.

After investigating accounting at AOL for six years, the SEC filed civil fraud charges against eight former executives last month. Ripp was one of them. And those who worked with him say they don’t believe it; that he was one of the most stand-up guys they’d ever met or worked with.

The SEC alleges that RIpp was part of a scheme to materially inflate AOL’s reported advertising revenue. Indeed, there have been public mentions of AOL’s accounting problems: One involved German company Bertelsmann and ultimately resulted in Time Warner’s restatement of 2005 earnings. The current case involves round-tripping, in which AOL would inflate advertising revenue based upon a deal to overpay for products and services in exchange for the vendor purchasing advertising from AOL.

SEC officials say that Ripp wasn’t heading up the schemes, but that he definitely played a role in them. What a turn of events. From whistleblower to accused.

Full post as published by The FRAUDfiles Blog on June 09, 2008 (boomark / email).