Time Warner unit AOL booked more than $400 million in questionable advertising revenue, believes the US Securities & Exchange Commission.

According to unnamed federal insiders, the alleged malfeasance occurred in the wake of Time Warner's ill-starred merger with America Online in January 2001.

Among a number of deals under investigation, the spotlight is on the largest single transaction -- a $400 million (€335.25m; £220.16m) advertising deal with German media mammoth Bertelsmann, which AOL at that time partnered in a joint venture, AOL Europe.

The main thrust of the SEC case against Time Warner and AOL, say federal sources, is that the merged company misled investors about the financial wellbeing of the online unit by inflating ad revenues across numerous deals, and by exaggerating the number of AOL subscribers.

Claims one Fed investigator: "There were a lot of deals that were not kosher." But while many of these can be laid at AOL's door prior to its union with TW, the largest single item in dollar terms is that with Bertelsmann, entered into under the post-merger aegis of TW chairman/ceo Richard D Parsons and other senior TW executives -- all allegedly aware of the transaction.

Formal notification (known as a Wells notice) of the allegations against the media giant will be served on TW, possibly next month or early June. The company will then have a set period, weeks rather than months, to review the charges, meet face-to-face with its accusers and respond in writing.

At which point TW would have two options: to negotiate a settlement; or face enforcement action by the SEC. The agency may also impose financial sanctions against the company for reportedly failing to cooperate sufficiently with the investigation.

Data sourced from: The Washington Post Online; additional content by WARC staff