California, Ohio Pensions File AOL Time Warner Suits

July 21, 2003 ( - Three of the nation's largest pension funds filed suit against AOL Time Warner on Friday, claiming that the media giant inflated its stock price by overstating advertising revenues.

On Friday the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), and the Ohio State Teachers Retirement System (see  Ohio To AOL: You’ve Got Accounting Fraud Suit ) all filed suit against AOL Time Warner, alleging losses of $250 million, “about $200 million,” and $100 million, respectively as a result of their investments in AOL Time Warner.

The CalPERS suit claims that advertising revenue at the company’s AOL Internet division was overstated by at least $1.7 billion through the use of sham transactions and improper accounting practices, both before and after it merged with Time Warner.   The suit alleges that AOL artificially inflated its publicly reported advertising sales, and kept it inflated to avoid a reaction by the stock market prior to the merger with Time Warner.   The suit names AOL Time Warner, Inc., America Online, Inc., and certain current and former executives including Stephen Case, Gerald Levin, Robert Pittman, and David Colburn, as well as agents involved in the merger, including Salomon Smith Barney, Inc., Morgan Stanley & Co., and Ernst & Young LLP.

“Because of the magnitude of the fraud perpetuated upon investors, we are filing this suit in California to be in the strongest possible position to aggressively obtain recovery of assets lost through this fraud and deception upon investors,” Mark Anson, chief investment officer of CalPERS said in a statement.

Restate “Mint?”

AOL and Time Warner agreed to merge in January 2001 in a deal valued at $106.2 billion. However, amid growing scrutiny into its accounting practices, the company said last year that it would restate results for the prior two years and reduce revenue by some $190 million.

AOL Time Warner posted a 2002 loss of nearly $100 billion — the largest annual loss in U.S. corporate history — much of it as a $45 billion charge to write down the value of its America Online business and other assets.

Meanwhile, the suit alleges, insiders in the company reaped billions of dollars in proceeds by selling their own AOL Time Warner securities at artificially inflated prices (see  Lawsuit Accuses AOL Time Warner Execs of Insider Trading ).   The suit alleges that much of this selling was done during the four-month period just after consummation of the merger, which further served to inflate the price of the stock.

“In order to inflate AOL’s stock prior to the merger and to secure Time Warner shareholder approval of the sale of Time Warner to AOL and then to continue to inflate the price … after the merger, defendants presented AOL’s business as achieving record growth and profitability,” Ohio’s lawsuit says.

Earlier this year CalPERS withheld its vote in an election to approve AOL Time Warner’s board of directors, saying not all the directors were independent (see  AOL Time Warner Returns Director Nominee Slate Amid Shareholder Flack ).