AOL faces $1 billion insider trading suit

By Reuters

April 14, 2003

Two institutional shareholders said Monday they filed suit against AOL Time Warner, accusing Chairman Steve Case and other top executives of insider trading while using "tricks, contrivances and bogus transactions" to inflate the company's share price.

The University of California and Amalgamated Bank's Longview Collective Investment Fund said in a statement that they filed the suit in California Superior Court in Los Angeles. In addition to AOL Time Warner and Case, the lawsuit also names as defendants Vice Chairman Ted Turner, CEO Richard Parsons, former CEO Gerald Levin, and former Chief Operating Officer Bob Pittman.

The complaint alleges that the defendants reaped nearly $1 billion by selling shares while using "tricks, contrivances and bogus transactions'' to inflate the company's shares, according to a statement issued by Milberg Weiss, the law firm representing the university and the bank.

Case, who had been sharply criticized by shareholders who were disappointed with the performance of AOL Time Warner, said in January he will resign in May so he won't become a distraction to the company. Turner, the largest single shareholder of AOL Time Warner, is due to resign as vice chairman in May.

The suit claims that America Online overstated earnings from 2000 to 2001 by almost $1 billion, that it overstated subscribers to its Internet service, and that it inflated its e-commerce and ad revenue to help secure its acquisition of Time Warner.

AOL Time Warner executives could not immediately be reached for comment.

The suit also named the company's auditor, Ernst & Young. Executives from the accounting firm were not immediately available for comment.

AOL Time Warner is already the target of government investigations into its accounting. The company disclosed last month in its annual report that the Securities and Exchange Commission asserts the company improperly booked some of the about $400 million in advertising revenue it recognized as part of deals with Bertelsmann.

The company said at the time of last month's filing that it stood by its treatment of the deals.

In October, the company said it would restate results for a two-year period, cutting revenue by $190 million.

The University of California and the Longview fund allege that AOL and Time Warner executives took advantage of the firms' January 2001 merger to cash in stock options on an accelerated basis. The merger, they said, triggered early vesting of 35 million stock option shares valued at $1.7 billion for the top five AOL executives alone.

"The University of California made a sound investment in a solid company when it invested heavily in Time Warner prior to its merger with AOL,'' David Russ, the university's treasurer, said in a statement. "The value of that investment was significantly impaired as a result of the merger.''

The University of California said at the time of the merger it owned more than 11.3 million shares of Time Warner worth around $800 million and no shares of America Online. The school said it lost $450 million as a result of the AOL Time Warner deal.

The suit also named the AOL and Time Warner's financial advisers, Morgan Stanley and Salomon Smith Barney and its parent, Citigroup. Morgan Stanley executives could not immediately be reached for comment, and Citigroup had no immediate comment.

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