Shares of AOL Time Warner, which has been exploring sales of certain assets to pare debt levels, and creating new services to recharge growth, closed down 42 cents at $10.69 after falling as much as 6% during the session.
Wednesday's Washington Post said federal investigations into AOL and two of its former executives - Eric Keller and David Colburn -were widened to include alleged "aiding and abetting" of schemes by other companies to improperly boost revenue.
Merrill Lynch analyst Jessica Reif Cohen said in a note to clients on Wednesday that the longer the investigations by the Securities and Exchange Commission and the Justice Department linger, the longer it will take for AOL Time Warner to complete the restructuring of its Time Warner Entertainment venture with Comcast.
That restructuring is needed before the company can take its cable business public - a much-needed step to help AOL Time Warner cut its debt load.
"In our view this may place more pressure on the company to dispose of assets," said Reif Cohen, who has a "neutral" rating on the stock.
The newspaper said investigators were looking into the roles the two dealmakers may have had in enabling other companies, such as Homestore, improperly inflate financial results. It also said they were looking into schemes to falsely boost revenue before and after AOL completed its merger with Time Warner in January 2001.
Four employees at online real estate firm Homestore pleaded guilty to fraud charges stemming from the company's scheme to overstate revenue.
An AOL Time Warner spokeswoman declined to comment on the Washington Post article but said the company "continues to seek to co-operate with the government investigation." Lawyers for Keller and Colburn, who were ousted in August 2001 and August 2002 respectively, were not available for comment.
The media company said in 2002 it would restate results for a two-year period, cutting revenue by $190m, after findings from an internal review of improper revenue recognition in some of AOL's ad/commerce deals.
Earlier this week a federal court in Los Angeles dismissed claims against AOL Time Warner and Cendant brought by a pension fund that alleged Homestore falsified its revenue to meet Wall Street expectations.
The judge in the case wrote the companies could not be liable for Homestore's statements but described a "massive conspiracy" and singled out allegations against AOL, according to court papers.
Some analysts downplayed the Washington Post report, and said the perception about AOL Time Warner was already negative as it worked to revive growth at its online division, cut its $27bn debt and regain investor confidence. Its stock has fallen about 75% since it completed the merger.
"It doesn't really change the operating profile of the company and it isn't going to change ultimately the financial structure of the entire company and it isn't going to tarnish the image of the AOL division any further," said Jeff Logsdon, analyst at Gerard Klauer Mattison.
JP Morgan's Spencer Wang said in a research note that while the news reinforced risk in AOL's stock, he did not see it as a significant change since deals have been previously reported.