A judge approved a settlement of a lawsuit brought against Time Warner Inc. by shareholders that alleged America Online improperly accounted for revenue in the years preceding and following the companies’ merger.
Time Warner agreed last August to the settlement with a group of shareholders who accused AOL of inflating its revenue by $1.7 billion between January 1999 and August 2002.
U.S. District Judge Shirley Wohl Kram, from the U.S. District Court for the Southern District of New York, ruled that the US$2.65 billion settlement of this class action lawsuit is fair, reasonable and adequate. She also pointed out that the plaintiffs’ lead attorney distributed about 4.7 million settlement notifications, but the court only received six objections to the agreement. About 600,000 claimants stand to benefit from the settlement, the judge wrote in the decision. She had given the settlement tentative approval in September 2005.
AOL and Time Warner announced they were merging in early 2000. AOL’s steadily declining dial-up subscriber base became a drain on Time Warner, though the Internet provider has risen in stature with the recent boom in online advertising.
When AOL and Time Warner announced their intention to merge in January 2000, the all-stock deal was valued at $350 billion. When the transaction closed a year later, the value was estimated at less than a third of that original price due to the declining value of AOL’s stock.
As the Internet bubble burst, the merged company, renamed AOL Time Warner Inc., failed to meet the lofty expectations sketched out for it, namely that Time Warner’s media assets would help propel AOL into the broadband world, and that AOL’s Internet savvy would accelerate Time Warner’s growth.
At the heart of the lawsuit is the allegation that AOL fraudulently accounted for advertising sales for fifteen quarters between 1998 and 2002, inflating revenue by at least $1.7 billion and ultimately harming investors and violating securities laws. Time Warner announced in August 2005 that it had reached this settlement and established a $3 billion reserve fund for that and other securities litigation.
In February, the Lerach Coughlin Stoia Geller Rudman & Robbins LLP law firm announced it is representing about 100 institutional investors who opted out of this settlement and will be seeking $1.6 billion. That is on top of other institutional investors the firm was already representing and who are seeking about $1.6 billion in damages.
According to the deal approved by Kram, Time Warner will pay the bulk of the settlement while its auditor, Ernst & Young LLP, will pay $100 million.
The judge noted in her ruling that the settlement resulted from seven months of intense negotiations overseen by a court-appointed special master.
She said it was clear that class members will not recover their entire loss, but added that the settlement was "all the more impressive" when the parties continue to dispute the very existence of damages.
With the most recent settlement, Time Warner has paid more than $3.5 billion to resolve the accounting issues.
The lead plaintiff was the Minnesota State Board of Investment, which manages the investment of retirement fund assets of the Minnesota State Retirement System, Teachers Retirement Association and the Public Employees Retirement Association.
The Minnesota board, with total assets exceeding $50 billion, lost an estimated $249 million and had the largest financial stake in the litigation, Kram said.
Kathy McKiernan, a Time Warner spokeswoman, declined to comment on the settlement.