Lawsuit Accuses AOL Time Warner Execs of Insider Trading

April 15, 2003 ( - The University of California has filed a lawsuit alleging America Online (AOL) Time Warner Inc executives made approximately $936 million through insider trading during the merger of AOL and Time Warner Inc two years ago.

This is the latest action by the university, adding accusations of insider trading and inflating subscriber growth at AOL to previous allegations.   In a separate lawsuit the university accused the company of improperly booked advertising revenue, according to a Bloomberg news report.

The latest lawsuit says Chairman Stephen Case, chief executive Richard Parsons, former chief executive Robert Pittman and others knew subscriber totals and ad revenue were inflated and sold accelerated stock options.   Their inside knowledge of the alleged erroneous information came through an overstatement in the number of AOL’s Web subscribers and advertising revenue to ensure the takeover of Time Warner, the suit charged.

This was done, t he university says, by AOL employing “improper tactics” to inflate subscriber numbers, including counting free-trial customers as paying subscribers and giving customers who tried to cancel as much as six months’ service free while counting them as paid.   Through this overstatement AOL’s 2000 and 2001 earnings were inflated by almost $1 billion, the suit alleged.

Case has said he will step down in May because of investor dissatisfaction with the merger. Pittman left the company in July. Other architects of the merger, who have left the company, including former Chief Executive Gerald Levin and former Vice Chairman Ted Turner, are also named in the suit along with Citigroup Inc, Salomon Smith Barney Inc, Morgan Stanley & Co and Ernst & Young LLP.

The suit says the financial institutions “helped orchestrate the merger” and secured its approval “by misleading Time Warner’s shareholders,” thereby gaining more than $135 million in fees.   The suit also charged the auditors “helped falsify financial results before and after the merger, collecting “over $1 million per week in fees.”

“Financial reversals,” the suit says, have left the company “riddled with $28 billion in debt,” necessitating the sale of “billions of dollars of truly valuable assets to raise cash.”

The school is seeking about $506 million in damages from AOL Time Warner, financial institutions, auditors and individual directors after a jury trial. Earlier this year the university moved a similar action against WorldCom from federal to state court (See UC Seeks Home Court Advantage in WorldCom Suit ).

Earlier Actions

The latest actions build on allegations made in the earlier suit that claimed AOL misrepresented its revenues and subscriber numbers in the period before and after the merger.  At the time of the merger, the university system owned more than 11.3 million shares of Time Warner stock worth about $800 million, and no shares of AOL – an investment that took a $450 million hit after a drop in the merged firm’s stock price.

This inflation of revenue occurredas advertising sales weakened and the company entered into bogus deals including contracts in which AOL provided money to its “purported customers to purchase the advertising,” the earlier suit contended.