University of California has sued AOL Time Warner and a number of its top executives,including former chairman Stephen Case, to try to recoup $450 million in stock losses incurred after the 2001 merger of the media giants.
A lawsuit filed Monday in Los Angeles County Superior Court accuses the executives of insider trading to profit from the deal and of using trickery and subterfuge to falsely inflate the value of AOL’s stock.
“This case should fuel renewed concern about how America’s big corporations do business and earn the trust of investors,” said William Lerach, a senior partner at the law firm representing the plaintiffs.
UC was joined in the suit by Amalgamated Bank’s LongView Collective Investment Fund, which lost $55.9 million on stocks. Amalgamated Bank, headquartered in New York, is the nation’s oldest union-owned and operated labor bank, the lawsuit said.
The suit claims that America Online’s earnings from 2000 to 2001 were overstated by almost $1 billion and that the Internet provider overstated subscribers and inflated its e-commerce and advertising revenue to help secure the acquisition of Time Warner.
AOL Time Warner’s shares have lost three-fourths of their value since the merger. The company reported $98.7 billion in losses in January, a U.S. record.
UC owned more than 11.3 million shares of Time Warner worth about $800 million at the time of the merger, the suit says.
“The University of California made a sound investment in a solid company when it invested heavily in Time Warner prior to its merger with AOL,” UC treasurer David Russ said in a statement. “The value of that investment was significantly impaired as a result of the merger.”
The suit also names as defendants company Vice Chair- man Ted Turner, Chief Executive Officer Richard Parsons, former CEO Gerald Levin and other past and present directors of AOL Time Warner.
The company’s auditor, Ernst & Young, LLP, and financial advisers Morgan Stanley and Salomon Smith Barney and Smith Barney’s parent group, Citigroup Inc., are also named.
Officials at AOL Time Warner and Morgan Stanley declined to comment on the lawsuit Monday and a representative from Ernst & Young did not return a call seeking comment.
A Citigroup spokesperson said “we believe the allegations to be without merit.”
UC is also pursuing a shareholder action in connection with the collapse of WorldCom Inc., in which the university lost $353 million in stocks.
The suit filed Monday claims that, while the price of AOL Time Warner stock was artificially high following the merger, executives cashed in millions of dollars in stock options. At the same time, officials spent $1.3 billion of company cash reserves to repurchase 30.2 million shares, effectively propping up the stock’s value and shielding themselves from a stock collapse, the suit says.
The suit says the executives made about $936 million through the illegal insider trading.
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