The University of California Board of Regents announced Thursday that it would pursue an independent lawsuit against AOL Time Warner Inc. in California state court after losing more than $450 million in the mega-corporationâ€™s stocks.
The action would also be filed against AOL Time Warner financial advisors Citigroup, Salomon Smith Barney, Morgan Stanley and the companyâ€™s auditor, Ernst & Young LLP.
Prior to the merging of AOL and Time Warner in January 2001, the university owned 11.3 million shares of Time Warner stocks and zero shares of AOL. However, as a result of the merger, the university alleges that its $800 million investment in Time Warner the parent company of major media corporations such as CNN and Warner Brothers â€” was devalued as a result of AOLâ€™s inflated accounting.
â€œThe UC made a sound investment in a solid company when it invested heavily in Time Warner prior to its merger with AOL,â€� UC Treasurer David Russ said in a statement. â€œThe value of that investment was significantly impaired as a result of the merger.â€�
UC General Counsel James Holst said in a release that â€œAOL Time Warner and its investment advisers must be held responsible for the admitted misstatements of AOLâ€™s financial condition.â€�
Information about AOLâ€™s account fraud surfaced after The Washington Post and the Securities and Exchange Commission began to question the integrity of the Internet companyâ€™s revenue reports. The university complaint specifically alleges that AOL participated in â€œswap exchanges,â€� a practice in which Internet companies swap advertisements on their websites. Instead of recording the swaps as mutual exchanges, AOL inflated its earnings by recording them as revenue.
Although a class action complaint against AOL Time Warner is also being prepared, the UC will be filing on its own behalf.
UC Counsel Christopher Patti said that the class action claims are much broader than the UCâ€™s. He said that because the UC only owned Time Warner shares, its claims would focus closely on stock transactions before and after the merger.
The case will be the fourth of its kind in which the university accuses corporations such as Enron, Dynegy Inc. and WorldCom Inc. of securities fraud.
Patti said that the issue requires legislative and regulatory action.
â€œIt is not something that any one investor, even as large as a university, can address on its own,â€� Patti said. â€œWe think that pursuing these cases is one thing we can do to clean up the market.â€�
According to Patti, there has been a â€œhuge wave of account irregularities since Enronâ€� in the late 1990s. He also said that since investors do not have access to internal documents, there is no way the university could have predicted the losses.
The UC is lead plaintiff for both class action lawsuits against Enron and Dynegy; however, the UC is filing independently against WorldCom when it pulled out of the class action in early 2003.
In each of the cases, the UC lost less than 1 percent of its approximately $50 billion total investment funds. However, the sum of the loss account for more than $1 billion 2 percent of the investment fund.