by Kara Swisher
“In the circumstances,” he went on, “I believe it is important to be proactive. Accordingly, I had our folks call the SEC and give them a heads up before the Post articles were published to assure the SEC that we would cooperate fully with any questions they may have after reading the articles.” Then, he revealed the bad news. “After the articles came out, the SEC informed us that they are conducting a fact-finding inquiry.”
Coming on the heels of Pittman’s departure, as well as reports a few days earlier that the company was planning more layoffs in Dulles, the news of an SEC investigation made it look like AOL was falling to pieces. The New York Post, always eager to trumpet the company’s troubles (real or imagined), put Porky Pig on its July 25 cover, next to the headline “That’s AOL, Folks! Feds to Probe Media Giant’s Books.” AOL’s stock plummeted, dropping below $10 a share, reaching an all-time low.
Less than a week later, as July staggered toward its end, word leaked out that the Department of Justice was launching an investigation as well. Unlike the SEC, which sought out civil violations of securities laws, the DOJ was focused on criminal violations. And the DOJ could issue subpoenas at will—a potentially serious distraction at AOL. As AOL marketer Jan Brandt later put it in an attempt to find some humor in the dire situation, being deposed was “sort of a part-time job when you’re at AOL.”
If you had a job at all, that is. Given all the attention, one executive seemed the most culpable and also the easiest to point the finger at: David Colburn, the godfather of the Business Affairs team responsible for the deals now in question. The company took immediate steps to distance itself from Colburn, although he had stayed in power through early 2002. But by the end of July, he had to give up oversight of the Business Affairs unit on a daily basis. And a little more than a week later, he was out completely just as a new CEO, Jonathan Miller, was confirmed as head of the online unit.
Colburn’s ouster in mid-August came as a result of AOL Time Warner’s own internal investigation, led by its law firm Cravath, Swaine & Moore. Soon enough, the investigation revealed more questionable deals—such as one with the tarnished telecom giant WorldCom—related to the dubious practice of “round-tripping.” This was the all-too-common dot-com era trick of making payments to a company for services, fully expecting to get them back in another form of revenue. Like many other companies, AOL had actively pursued round-tripping deals. While the practice was not illegal if done with disclosure, one AOL employee reportedly had brought emails to Cravath lawyers suggesting that Colburn might have kept some aspects of the deals from others at AOL.
AOL’s lawyers had a heated confrontation with Colburn. “David, this doesn’t look good,” AOL Time Warner counsel Paul Cappuccio told him by phone. Colburn denied vehemently that he’d done anything wrong, insisting that all the deals had been signed off on by lawyers and accountants. Parsons called Colburn soon enough to deliver the bad news. In the atmosphere of distrust, he was out, and his office was sealed to search for evidence.
But despite news reports that Colburn had been fired, his contract forbade AOL Time Warner from terminating him without cause. When I asked a company spokeswoman in an email about the fact that Colburn was gone without being fired, she wrote back rather cryptically, “All the company has said is that David left the company.” It was an odd purgatory, meaning Colburn was in a state of limbo—roundly considered guilty of something bad, but not convicted of anything at all. Colburn was to wait in atypical silence for his fate to play out.
Well, not convicted yet, given that more enemies would soon line up against him and other AOLers and more investigations and lawsuits would pile up. As CNBC pundit and TheStreet.com online columnist James Cramer would put it, payback time had finally come for AOL, and deservedly so. “AOL had the finesse of Stalin, the sweetness of the KGB and the manners of the SS Druzhina and Kaminski Brigades when it came to dealing with partners,” he wrote. “Sometimes I would marvel to my fellow dot-commers that AOL better elect a president of the U.S., because it was making more enemies than Nixon at his savage worst.”
Meanwhile, AOL’s new Gromyko, Dick Parsons, had only a week after Colburn’s departure to certify AOL Time Warner’s financial statements to comply with a new federal law—the Sarbanes-Oxley Act of 2002. The law, the political reaction to the blame game that had gripped Wall Street in the wake of the many corporate scandals, required top executives of public companies to vouch for the accuracy of their reported results. This presented a problem for Parsons—who had little real visibility yet into the online unit’s possible accounting problems—since the law also had stiff penalties of up to 20 years in prison and $5 million in fines for anyone who certified false reports.
Very quickly, and operating without much of a map, AOL Time Warner cobbled together a statement saying that the online unit might have improperly accounted for $49 million from three unspecified ad transactions spread out over six quarters. Noting that the company was still trying to determine if the accounting was appropriate, Parsons promised the investigation would continue.
Though only three months had passed, it must have seemed to Parsons like much longer since he’d taken over the CEO job in May at the annual shareholders meeting. At that meeting, which was held at the legendary Apollo Theater in Harlem, the man who was leaving Parsons in charge had bade a moving farewell to the company. “Now I intend to just fade away,” Gerald Levin had told the crowd in the theater, before offering shareholders and executives a final plea. “Have faith in this company.”
If not in Gerald Levin, he probably hoped. But that was not likely to be for a long while, if ever, since Levin had become—and remains to this day—a deeply despised man in the company he helped build. Any credit he’d previously gotten for the company’s successes was questioned, many of its problems were blamed on him, and his reputation had been irreparably damaged. Instead of being known as the great visionary he had hoped he would be remembered as, he was now forever to be known as the man who got suckered at the peak of the dot-com frenzy. When he struck the biggest deal of his life, Levin had likely thought it would be written, “He did this!” with glory and huzzahs. It would be said that “he did this,” but instead with scorn and brickbats.
At a farewell party for Levin at Dick Parsons’s apartment, there had been a revealing and amusing moment that summed it all up. Levin gave a speech that waxed poetic about many things, taking care to point out how critical Parsons’s judgment and help had been to him over the years. From the back of the room, Parsons’s deep voice rose up with the perfect retort: “Now don’t go blaming me for things.”
He needn’t have worried. With Levin and Pittman gone, only one person was left who would get that blame: Steve Case.
This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.
WINSTON CHURCHILL
Chapter Seven
THE END OF THE BEGINNING
Case Closed?
It was weirdly appropriate, I suppose, that when Steve Case bid his last farewell to AOL in May of 2003, he quoted Winston Churchill, whose notoriously volatile career is now widely seen in only the bravest and noblest of lights.
Paraphrasing the British wartime leader, as he had often over the past year, Case noted in his speech to shareholders gathered at a northern Virginia conference center for the company’s annual meeting, “This isn’t the end, or even the beginning of the end. It is merely the end of the beginning.”
Actually, for Case and AOL, it was pretty much the end of the end. He was stepping down as chairman of AOL Time Warner after almost two decades of running the online company. He had finally and correctly realized that the rage of many Time Warner employees and major investors would not abate until he was sacrificed in some way. But he had also seemingly saved his head by having willingly given up his title without losing his seat on the board. It was one more clever move by the crafty Case to stave off losing it all.
Still, some angry s
hareholders—led by Capital Research and Management’s stalwart Gordon Crawford—remained furious with Case even after his partial acquiescence, and fully 22 percent refused to vote to reinstate him to the board. The move added another layer of tarnish to Case’s farewell, even though Time Warner’s new chairman and CEO Dick Parsons had—with typical class—praised his predecessor as an important pioneer. Case had led “a revolution that introduced the Internet and connectivity to this country and the world,” said Parsons generously. “This is a legacy that will be with you for the rest of your days.”
Well, Case could hope so, given that his personal reputation was now in tatters at the company, in the media, and on Wall Street. The word “beleaguered” had been attached to him almost as soon as Gerald Levin had announced that he was stepping down in December of 2001. And after Bob Pittman had also cleared out in July of 2002—I think the media-savvy Pittman must have anticipated the hurricane of fury that was coming—Case had become the target of the unending anger over the deal’s failure.
This was to be expected, given that this was a disaster so huge that everyone had to pay, and pay big. And, naturally, that meant Case most of all, as the man who’d been most responsible for the merger’s creation, and who’d also steadfastly refused to go until the calls for his ouster as chairman had become almost deafening.
The drumbeat was constant, especially in newspaper and magazine accounts that began to pop up regularly in mid-2002. They started with simple questions about Case’s role and degenerated into flat-out demands for his removal. In his July 2002 column about Pittman’s departure, for example, New York magazine’s Michael Wolff summed up the widespread bafflement about Case’s position. “Case is a strange, even eerie figure,” wrote Wolff. “[N]o one quite knows what to make of him. It’s bewildering, and embarrassing, if you’re a student of power, which almost everyone at AOL Time Warner is, not to know if someone is all-powerful, or if someone is of no consequence at all.”
Soon enough, the pondering about Case’s power turned to outright analyses of when and how he would be gone. The Wall Street Journal’s Martin Peers soon wrote a story in September 2002 titled, “Will Steve Case Leave AOL?” Calling Case a “lightning rod for intense anger at AOL,” Peers detailed all the reasons why investors and employees wanted him out. Employees had “lost small fortunes when the value of their stock options was wiped out because of the collapse of the company’s stock price. . . . Some staff members believe Mr. Case should take responsibility for the merger’s failure, as well as for the aggressive business culture at America Online that led to questionable deals now under investigation by government authorities.”
The anger was intensified by revelations that Case had sold massive amounts of company stock just before and during the merger, netting almost $400 million before taxes from 1999 to 2001, according to Thomson Financial. While he had also bought a lot of shares—some $36 million worth—in early 2002 and still held one of the largest individual stock positions at AOL Time Warner, that mattered little. And he was not alone among AOL Time Warner executives in reaping big gains—Pittman and Parsons, for example, did so as well. But for employees whose jobs had been cut, savings had been lost, and stock had tanked, the image of Case socking away a fortune while spinning his grand visions was too much to bear.
Worst of all was Case’s refusal to take blame for the sorry situation in both public appearances and private sessions with employees and investors. Espousing a firm conviction that the idea of the merger was still valid, Case acted as if the obvious troubles were just another bump in the road. Even as he gave up his chairman’s post in May 2003, he remained defiant. “As I step down as chairman, you might expect that I would be inclined to reflect back on the company and its achievements over the years, or use the time to set the record straight about recent events,” he said. “If so, you’d be right. The temptation is great.”
But while he didn’t set the record straight at that meeting, Case still refused to back off his visions of what could have been—and what still could be—from the union of AOL and Time Warner. “Brighter days are ahead,” he promised the shareholders. This sentiment got Case a standing ovation before he left the stage, since the audience at the annual meeting was stuffed full of AOL employees who’d driven over from its headquarters in nearby Dulles, Virginia, where Case remained an icon, admired as the greatest leader of the digital era.
Case’s AOL fans also had financial reasons to revere their boss—his perfectly timed trade for Time Warner in 2000 had sheltered the company’s stock from the harshness of the Web bust. Columnist Allan Sloan first made this salient point in his “Deals” column for the Washington Post, and others soon picked up on it.
“[Case] actually took wonderful care of his old America Online shareholders by snookering Time Warner into taking bubble-inflated AOL stock without any safeguards against price declines during the year it took the deal to close,” Sloan wrote. “AOL stock is probably selling for about twice what it would be fetching without the deal.” Internet stocks, as Sloan noted, were mostly down 95 percent, and if AOL hadn’t merged it might have gotten as low as $6 a share, rather than languishing in the mid-teens as AOL Time Warner stock.
Even a major Time Warner shareholder who lost billions on his stock couldn’t help but agree with this alternative take on Case. “Steve was fabulous for his shareholders,” John Malone, the cable baron, admitted to me, even though the value of his stake in AOL Time Warner had plummeted. “They should build a statue to this guy.”
But knocking down any statues of Steve Case was more the mood on the Time Warner side as Case departed the scene. Many employees remained so angry at him that it seemed nothing he could do—short of jumping off the top of the future AOL Time Warner headquarters under construction at Columbus Circle in Manhattan—would suffice. In one encounter I had with a former Time Warner employee after Case had stepped down, the wrath and hatred of Case was still so strong that I worried the employee would pop a blood vessel. This person talked eloquently, if a bit too fervently, about the “little people” at the company who had lost jobs and savings because of Case’s false dreams, even as he had lined his own pockets.
While I tried to make the point that this was a complex situation, and that it was hard to boil the merger’s failure down to one or two black-and-white reasons, this employee, like many, wasn’t having any of it. Steve Case was, in many eyes, evil, pure and simple. And I, having spent too much time with Case and in the heady Internet sector, was too stoked up on the fumes of the Web mania to see that.
Maybe so. But I was still not certain what the true legacy of Steve Case and the entire Internet era would be. I couldn’t disagree that much had been lost. But I wondered too, was there still something to salvage for both AOL and the digital future it had once led? Before I got to that, though, I had to find out how the story ended.
It Sticks in My Craw(ford), Part II
Gordon Crawford was still very, very angry.
Still piqued over the deteriorating situation at AOL Time Warner, he was now annoyed at himself too. After laying into AOL Time Warner CFO Wayne Pace in early 2002 over what he perceived as hyping by COO Bob Pittman and dissembling by former CFO Mike Kelly in 2001, the powerful media investor from Capital Research and Management in Los Angeles had decided over the spring to continue investing in the company.
He visited AOL and was heartened that executives were hard at work on a solution, even as the other divisions of the company were excelling and new CEO Dick Parsons had boosted morale. Crawford calculated that the stock price had fallen well below the potential breakup value of the various parts of the company, and he’d decided AOL Time Warner stock was being beaten down unnecessarily. It now seemed a good buy. After all, how much worse could things get?
A lot, actually, as the online unit continued its downward spiral as new accounting allegations were revealed over the summer and more signs appeared that both subscriber numbers and ad revenue were in troubl
e. Crawford would later kick himself for ignoring the signs he had flagged earlier.
“When there is one cockroach, one should always assume there are others,” said Crawford to me in 2003. “It was a stupid mistake.”
And Crawford wasn’t going to make another one, especially after he began hearing more and more angry voices from his network of sources across the divisions of AOL Time Warner. Almost all the complaints were now centered on one person: Steve Case.
After Levin and Pittman had left, Case had begun to reassert himself at the company, visiting various divisions and doling out guidance on how to better achieve synergies. But few divisional executives welcomed the advice, especially coming from the man they held most responsible for the huge decline in the company fortunes, who was also a constant reminder of how Time Warner had been tricked. “To have to sit there and listen to him was extremely aggravating for them,” said Crawford. “His continued presence was taking a terrible toll on morale.”
As the protests mounted, Crawford took it upon himself to gather key allies among the big shareholders—beginning with Ted Turner, who had now soured on Case much in the same way he had on Levin. Crawford then contacted Malone, who had wanted to stay neutral, but agreed to hear them out in an August visit to Denver. There, Crawford and Turner made their argument to Malone.
“Their view was that it was a disaster and no one could stand to have Case around,” recalled Malone. “The numbers lost were just too big, so he had to go.” Lingering in the background, noted Malone, was the sense that Case had outsmarted everyone at Time Warner, a fact that further grated on them.
Since Crawford was headed east to New York for a series of meetings at various media concerns, including AOL Time Warner, the trio decided that he would be the one to deliver the news that Case should go. Crawford first met with Dick Parsons and Wayne Pace on other topics at the company’s Rockefeller Center headquarters. During the meeting, Case joined the group and invited Crawford to his office when the meeting was done for a private talk.
