The University of California filed a lawsuit against AOL Time
Warner on Monday, alleging that “illegal insider
trading” by company executives cost the university $450
million.
The UC contends AOL executives purposely overstated corporate
revenues, allowing them to merge with Time Warner and sell their
shares at a higher price.
Meanwhile, AOL Time Warner’s stock price has fallen by
nearly $50 per share in recent months, to a low of $8.60 per
share.
“We believe that AOL Time Warner and its investment
advisers must be held responsible for the admitted mis-statement of
AOL’s financial condition,” James Holst, UC general
counsel, said in a statement.
While many Internet-based companies experienced falling stock
prices because of declining advertising revenue, AOL reported
increased advertising revenue. AOL’s revenue reports came
under scrutiny in recent months as they strayed further from the
trend for Internet-based companies.
The lawsuit alleges AOL’s 2000-01 revenues were overstated
by almost $1 billion. With this apparent success, AOL was able to
merge with Time Warner, one of the nation’s largest
corporations, in Jan. 2001. This merger allowed top AOL executives
to sell their corporate stock earlier. The suit alleges former AOL
chairman Stephen Case made $157 from his shares.
In this environment, the price of AOL Time Warner stock
plummeted from a high of $58.51 per share to a mere $8.60 per
share, leaving investors out in the cold.
The UC was a large investor, owning over 11.3 million shares of
Time Warner stock valued at approximately $800 million at the time
of the merger.
When the price of the merged stock dropped, the university sold
all of its shares, with a final loss of $450 million to its
retirement and endowment portfolios.
UC press aide Trey Davis assured that despite this loss the
university will not suffer a debilitating hit to either fund and
will not be hurt like private investors. “We’re in a
better situation than many others,” Davis said.
This is not the first time the UC has suffered large losses to
its portfolio. Between the Enron and WorldCom stock controversies,
the university lost over $500 million.
Companies are supposed to provide investors with information
about their revenues and costs, among other things, and when they
try to shield this information, as the UC alleges AOL Time Warner
did, “it’s hard to prevent these kind of losses,”
Davis stated.
After each major stock loss, the UC sued the corporation it had
invested in, along with some of that company’s top
executives.
While previous lawsuits had been part of large class action
lawsuits including other public agencies, the UC is filing a
private suit against AOL Time Warner, Davis said.
One other plaintiff, Amalgamated Bank, is joining the university
in this suit.
Davis mentioned that four or five additional lawsuits have also
been filed against AOL Time Warner in other courts across the
nation.
The U.S. Department of Justice and the Securities and Exchange
Commission are also investigating the corporation for alleged
fraud.