In 1997, a young law student named Gregory Todd Lawrence concluded in a 35,000-word analysis that faulty legwork by a state court had plunged a Maryland insurance case into the "dreaded Serbonian bog."
The poetic flourish, immortalized in Milton's "Paradise Lost," describes a legendary Egyptian marshland "where armies whole have sunk."
Now the challenge facing Lawrence is to avoid slipping into just such a swamp — and perhaps taking AOL Time Warner Inc.'s legion of shareholders down with him.
For the last year, the 32-year-old attorney has been spearheading the Securities and Exchange Commission's far-reaching investigation of possible accounting fraud at the New York-based media giant.
According to people familiar with the inquiry, Lawrence — working with prosecutors in the U.S. attorney's Eastern District office in Virginia — has demanded and received hundreds of thousands of pages of AOL documents, many of them related to claims that the company's America Online Inc. unit inflated advertising revenue through a variety of questionable techniques.
As the complex investigation drags on, uncertainties weigh heavily on AOL's stock price. Investors, unable to gauge the final damage, worry that government action will feed a frenzy of private litigation or creep into other AOL Time Warner divisions that have thus far been unaffected.
AOL officials who once hoped the matter would conclude in a few months now say it's impossible to predict how or when the investigation will end.
No charges have been filed, and key players, including fired AOL deal maker David Colburn, have yet to be interviewed. In another sign that a quick resolution is unlikely, federal officials recently assigned a second prosecutor to the case, according to sources familiar with the inquiry.
The probe is shaping up as a test of nerves not only for the company but also for government investigators such as Lawrence, who either must deliver results from the time-consuming effort or face the potential embarrassment of backing off.
"I don't see the government walking away from its investment in this," said one attorney involved in the case.
In fact, AOL Time Warner's first attempt to bring closure to the case — a restatement earlier this year of $190 million in advertising revenue — appeared only to whet the appetite of SEC investigators. Lawrence is demanding that the company restate as much as $400 million more from a deal with German media giant Bertelsmann. AOL officials are balking.
AOL shares closed Wednesday at $16.40, about half last year's peak price.
Lawrence declined to comment, as did a spokeswoman for the U.S. attorney's office. AOL executives declined to be interviewed. A company spokesman said only: "We continue to cooperate with the SEC."
Privately, people familiar with the investigation say it has been hampered by a quirk of the electronic era: America Online executives, addicted to e-mail, created an extraordinarily dense thicket of potential evidence that now must be recovered, indexed and analyzed by both sides. A single deal — and there are scores under review — could yield thousands of messages. "AOL is drowning in its own e-mail," said one person with knowledge of the inquiry.
Some close to the case say it also has been slowed by Lawrence's determination to avoid mistakes in his biggest case yet. Closing the inquiry too early could prove a fatal misstep, similar to when the SEC concluded its probe of Tyco International Ltd. in 2000, only to find itself compelled to reopen the case amid allegations of lavish corporate spending missed in the first review.
For its part, AOL Time Warner has unleashed about three dozen attorneys and accountants to battle the government. Chairman Richard Parsons, a Republican with ties to the Bush administration, has vowed to make the government probe a top priority.
The AOL team recently suffered a setback when its deputy general counsel, Jonathan Schwartz, decided to quit. The former Justice Department attorney, hired last August to lead AOL's response to the government, is expected to take a job as general counsel for Cablevision Systems Corp. But AOL quickly raided the Justice Department for another star, hiring David Kris, best known for defending Atty. Gen. John Ashcroft's efforts to beef up the agency's anti-terrorist surveillance powers.
In addition, the company retained several Ivy League graduates and SEC veterans at a number of top firms in New York, Washington and Virginia, including: Cravath, Swaine & Moore; Williams & Connolly; Foley & Lardner; and McGuireWoods.
Although the credentials of the SEC's Lawrence are more modest, he is widely described as a smart, fair and intensely methodical lawyer who is performing well with limited resources.
Admitted to the Maryland bar only five years ago, Lawrence received his law degree from the University of Baltimore. The Ohio native graduated from West Liberty State College, a small state school in the Northern Panhandle of West Virginia, where he was student body president and captain of the wrestling team.
After two years with the law firm Saul Ewing in Baltimore, Lawrence arrived at the SEC in December 1999 as part of a wave of ambitious young "comers," who saw the enforcement division as a hot career track in an age of corporate scandals, according to one securities lawyer.
Lawrence was lead staff attorney in the SEC's investigation of accounting issues at Menlo Park-based Informix Corp., which led to last year's indictment of the software company's chief executive, Phillip White. "My impression is the kid's well-organized," said a private attorney involved in the AOL case.
His assertiveness early on surprised some AOL executives, who complained that he appeared to be attempting to hang his career on the high-profile case. Former SEC officials said the agency typically gives big cases to young self-starters while building in numerous layers of supervision.
"The genius of the SEC system is that it gives huge amounts of responsibility to very junior, energetic people, who as a result will work their hearts out," said Stephen Crimmins, former deputy chief litigation counsel of the SEC enforcement division. "But whenever a critical decision is made, there are about 10 layers of review You need to make sure the enthusiasm is monitored."
Lawrence's counterpart at the U.S. attorney's office is Claudius B. Modesti, a former SEC enforcement branch chief who is now an assistant U.S. attorney in the Cybercrimes Unit.
Depending on what Lawrence and his colleagues uncover, AOL Time Warner and its executives could face a multimillion-dollar fine and perhaps even criminal charges.
More important, the outcome of the federal investigation probably will play an important role in determining how much the company will have to pay to fight or settle numerous class-action suits over shareholder losses.
Based on the average payout of recent settlements in high-profile investor suits, AOL Time Warner could face a payout of $500 million, according to Mark May, analyst at Kaufman Bros. in New York. Insurance probably will pick up much of the tab.
But costs will depend on whether government and private investigations turn up compelling evidence of fraud or wrongdoing. Franchise giant Cendant Corp., for example, paid about $3 billion to settle its investor suits.
Nevertheless, May said he's more worried about how the company can turn around its business operations than the risk of a big settlement. "What's a bigger deal," he asked, "a cash liability which may end up being immaterial or trying to fix the AOL division?"