The University of California will file a lawsuit this week against AOL Time Warner, their auditor and their financial advisers, claiming AOL misrepresented its revenues and subscriber numbers prior to and after the 2001 merger with Time Warner, which led to the collapse in price of AOL Time Warner stock. The UC Board of Regents authorized the suit at their April 3 meeting.
The university owned nearly 11.3 million shares of Time Warner stock valued at $800 million at the time of the merger and owned no shares of AOL. The reduction in stock price of the company resulted in a net loss to the University of California of more than $450 million. The University of California is expected to seek recovery of these losses.
“”That’s the window of parameters that you shoot for,”” said UC spokesman Trey Davis. “”It’s seldom the situation where you recover all the money in these cases.””
A spokesman from AOL Time Warner was unavailable for comment by press time.
AOL Time Warner has restated its earnings down nearly $200 million. Due to investigations by the Securities and Exchange Commission and the Justice Department regarding some of its advertising deals, the company may be required to restate them by as much as $400 million more.
The University of California is alleging AOL engaged in “”round trip exchanges,”” where the company swapped advertising with other Internet companies and counted these transactions as revenues and allowed the company to inflate its earnings.
The lawsuit also names the company’s auditor, Ernst & Young LLP, and firms that acted as financial advisors involved in the 2001 AOL Time Warner merger, including Citigroup, Salomon Smith Barney and Morgan Stanley Inc. The University of California is also targeting AOL Time Warner’s directors and officers that the university said benefited from the misrepresentation.
“”They were involved in perpetrating the fraud that deceived investors — keeping the stock prices artificially inflated in order to execute the merger and generate large personal profits for a number of the directors,”” Davis said.
The lawsuit against AOL Time Warner differs from other corporate lawsuits the University of California pursued — namely against Enron, Dynegy and WorldCom — because it involves the merger of two companies, AOL and Time Warner.
Although there are other suits against AOL Time Warner, Davis said that the University of California felt it could better pursue its interests, which were entirely in Time Warner, alone.
As of April 11, AOL Time Warner stock was valued at $12.30 per share, down from a 52-week high of $22.19 per share and a high of $48 per share at the time of the 2001 merger.
