By David A. Vise Washington Post Staff Writer
Thursday, May 6, 2004; Page E01
A federal judge in New York yesterday denied most requests by Time Warner Inc., its America Online division and various current and former senior officials to throw out billions of dollars of shareholder claims that the parties engaged in sham transactions before and after the companies merged in 2001.
U.S. District Judge Shirley Wohl Kram concluded that the lead plaintiff in the class-action lawsuit, the Minnesota State Board of Investment, had established sufficient circumstantial evidence of misbehavior or recklessness for the case to move forward. The plaintiffs argue that the transactions in question artificially boosted AOL's stock price and led to the losses suffered by shareholders in the $112 billion merger.
"This is a very strong and favorable opinion for the plaintiff class, and we look forward to discovery and to vigorously prosecuting this matter," said Sam Heins, attorney for the plaintiffs. Lawyers for the defendants either declined comment or could not be reached.
The judge did throw out some claims, including those against former AOL chairman Steve Case, Time Warner chief executive Richard D. Parsons and former Time Warner chief executive Gerald M. Levin. She also dismissed various bondholder claims.
But in her opinion, the judge used strong language in characterizing the alleged misconduct of others, including former AOL chief operating officer Robert W. Pittman, former senior vice president David M. Colburn and former senior vice president Eric Keller.
Time Warner has corrected its financial statements about some of the questioned transactions and has said it is cooperating fully with federal investigations into other deals.
The merger took place in January 2001. The judge wrote that in the fall of 2000 and in early 2001, Pittman publicly spoke of the strength of AOL's advertising, even though he allegedly knew that AOL faced plunging ad revenue. She wrote that Pittman personally sold hundreds of millions of dollars of stock at inflated prices during the period.
"When coupled with the alleged discrepancy between his knowledge and his public statements," the opinion said, "Pittman's sales of AOL securities only add to the inference of scienter." The term "scienter" means to knowingly undertake wrongdoing.
"During the class period, Pittman sold over 3.3 million shares of AOL and AOLTW stock for proceeds of over $262 million. In the four months following the merger, Pittman sold 1.5 million shares for over $72 million. As of January 31, 2002, Pittman owned just 13,388 shares of AOLTW stock," the opinion said.
The judge wrote that Colburn reported directly to Pittman before and after the merger, and she described his role in an alleged round-trip transaction between AOL and Veritas Software Corp. in September 2000. The plaintiffs alleged that AOL agreed to pay Veritas $50 million in return for $30 million in software, while Veritas secretly agreed to use the extra $20 million to buy advertising on AOL.