AOL Time Warner Inc. Chairman Stephen Case and other executives were accused in a lawsuit of making about $936 million through insider trading when America Online Inc. and Time Warner Inc. combined two years ago to form the world’s largest media company.
The lawsuit, filed by the University of California, adds accusations of insider trading and inflating subscriber growth at America Online to allegations in a separate shareholder lawsuit that the company improperly booked advertising revenue.
U.S. prosecutors and securities regulators are also investigating the ad revenue accounting.
The company’s shares have lost three-fourths of their value since America Online took over Time Warner, which publishes Time magazine and operates the Warner Bros. movie studio.
The lawsuit says 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.
“It doesn’t throw a good light on any executives involved, if proven,” said Harold Vogel, an independent media analyst who doesn’t own the stock.
AOL Time Warner in January reported a $98.7 billion loss, a U.S. record, after writing down the value of assets.
The university withdrew from a federal class-action suit to file the suit in California state court in Los Angeles, where it could be easier for investors to recover damages than it is under federal law.
The school is seeking about $506 million in damages from AOL Time Warner, financial institutions, auditors and individual directors after a jury trial.
“The scheme they were engaged in was, `We’re successfully transitioning from a mere Internet company and we’re successfully monetizing an ever-growing subscriber base to e-commerce advertising,’ ” said William Lerach, a partner at Milberg Weiss Bershad Hynes & Lerach LLP, which is representing the university and Amalgamated Bank’s LongView Collective Investment Fund in the suit.
AOL Time Warner spokeswoman Tricia Primrose in New York said the company had not seen the lawsuit and declined to comment.
The suit says Case, Pittman and Vice Chairman Kenneth Novack overstated the number of AOL’s Web subscribers and advertising revenue to ensure the takeover of Time Warner. AOL’s 2000 and 2001 earnings were inflated by almost $1 billion, according to the lawsuit.
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.
The suit also names Citigroup Inc., Salomon Smith Barney Inc., Morgan Stanley & Co. and Ernst & Young LLP.
The suit says banks “helped orchestrate the merger” and secure its approval “by misleading Time Warner’s shareholders,” gaining more than $135 million in fees. Auditors “helped falsify financial results before and after the merger, collecting “over $1 million per week in fees,” the suit says.
“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 suit says the U.S. Justice Department and the Securities and Exchange Commission “are pursuing widespread criminal and civil investigations of AOL Time Warner’s financial and accounting falsifications and phony forecasts.”
The university says AOL employed “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-up.
As advertising sales weakened, bogus deals included entering into contracts in which AOL provided money to its “purported customers to purchase the advertising,” thereby inflating revenue, the suit says.
Shares of New York-based AOL Time Warner rose 21 cents, to $12.51, in New York Stock Exchange composite trading. The shares have fallen about 38 percent in the past year.