SEC SETTLES CHARGES AGAINST EASYLINK SERVICES CORPORATION AND ITS FORMER CFO FOR OVERSTATING ADVERTISING BARTER REVENUE

FOR IMMEDIATE RELEASE
2005-51

Washington, D.C., April 7, 2005 - The Securities and Exchange Commission announced today the institution of a settled enforcement action against EasyLink Services Corporation, headquartered in Piscataway, NJ, for improperly recognizing and reporting advertising revenue from barter transactions in 2000 as a result of its failure to apply the appropriate accounting standards.

Also named in the Commission's action is Debra L. McClister, age 50, of River Edge, N.J., who served as executive vice president and chief financial officer of EasyLink and is a certified public accountant.

Simultaneous with the institution of the Commission's order, EasyLink and McClister each agreed, without admitting or denying the findings in the order, to cease and desist from violating or causing violations of the issuer reporting, record-keeping, and internal control provisions of the federal securities laws. McClister also consented to the entry of an order denying her the privilege of appearing or practicing before the Commission as an accountant, with the right to apply for reinstatement after two years.

During the relevant period, EasyLink was known as Mail.com, Inc. and was a provider of Internet messaging services based in New York City.

The Commission's order finds that during 2000, EasyLink engaged in two types of barter transactions - cash barter, in which EasyLink traded advertising on websites it owned or operated for advertising on another company's website and "swapped" checks of identical or similar amounts with the other company, and trade barter, in which EasyLink and a third party simply exchanged advertising but not cash payments. In the cash barter deals, EasyLink recognized 100% of the stated value of cash barter deals as revenue. For trade barter, EasyLink used a formula provided by its auditor and generally recognized 60% of the stated value of the deal. This formula was not in conformity with Generally Accepted Accounting Principles (GAAP).

EasyLink overstated barter revenue because it failed to comply with GAAP, specifically Emerging Issues Task Force Issue No. 99-17, "Accounting for Advertising Barter Transactions" (EITF 99-17). EITF 99 17 generally permits recognition of barter revenue only if the fair value of advertising surrendered in a barter deal can be determined based on a company's comparable cash transactions in the prior six months. McClister did not become aware of EITF 99 17 until 2003, and thus failed to apply it to the company's barter transactions during 2000. By failing to comply with EITF 99-17, EasyLink overstated its revenue for fiscal 2000 by $4.85 million, or 8.6% of total revenue. It also overstated its revenue for the third quarter of 2000 by 16.1%. (Expenses were also overstated by the same amount, resulting in no impact to net income during these periods.) EasyLink reported its overstated revenues in financial statements contained in its 2000 Form 10-K and its Form 10-Q for the third quarter of 2000.

Because of its overstated barter revenue, EasyLink was able to tout in press releases its increasing advertising revenue and the fact that the company met or exceeded analysts' revenue expectations during the third quarter and fiscal 2000.

The Commission's order further finds that McClister knew about the trade barter and cash barter deals, failed to account for them properly, failed to implement EITF 99-17, failed to inform the outside auditors that EasyLink was engaged in cash barter transactions, and failed to ensure that the company's financial statements were accurate. She prepared and signed EasyLink's Form 10-K and Form 10-Q that included the overstated barter revenue.

The Commission found that EasyLink violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder, and that McClister caused these violations and violated Rule 13b2-1 of the Exchange Act. The Commission also found that McClister engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice.

SEC Chairman William H. Donaldson was a member of EasyLink's board of directors and the audit committee of the board during the relevant period. He voluntarily provided testimony and cooperated willingly and fully in the investigation, which was led by the Commission's career staff.

Chairman Donaldson did not participate in any matter before the Commission involving EasyLink. At the outset of its consideration of this matter and without the participation of Chairman Donaldson, the Commission unanimously agreed that Daniel Nathan, the chief of the Commodity Futures Trading Commission's Office of Cooperative Enforcement within the CFTC's Enforcement Division, would act as a Special Advisor to the Commission to closely monitor all staff actions in this matter. Mr. Nathan has acted in this oversight capacity, although he did not conduct or lead the staff's investigation. The four Commissioners sought Mr. Nathan's assistance to ensure that any action taken by the staff relating to EasyLink would be both thorough and consistent with the Commission's historical practices.

Today's enforcement action, unanimously approved by the four Commissioners, includes all of the charges that the Commission deemed appropriate in light of the investigative record developed by its staff. This action concludes the Commission's investigation of EasyLink's accounting practices related to barter advertising revenue.

Additional Materials: Administrative Proceeding

Contacts:

Stephen M. Cutler
Director, Division of Enforcement
(202) 942-4540

Randall R. Lee
Regional Director
Pacific Regional Office
(323) 965-3807

http://www.sec.gov/news/press/2005-51.htm