Before Steve Case can pull on his favorite Hawaiian shirt and retire to his 28,000-acre pineapple farm on Maui, he's going to have to reenact of one of the mythic rituals of the South Pacific: walking barefoot on hot coals.
The coals are being stoked by lawyers for investors who are irate because Case, the AOL Time Warner chairman who announced last week that he would resign in May, and other AOL insiders cashed in while outsiders lost out.
Insider-trading records compiled by Thomson Financial show that Case and his fellow insiders have collected nearly $1.5 billion by selling AOL stock since 1996, most of it during AOL's high points from 1999 to 2001. They're set for life, even though AOL Time Warner stock has been such a disastrous investment that a few big shareholders finally banded together to try to kick out Case.
Shareholder lawyers are going to hold Case's feet to the fire over AOL's use of what has become known as "Internet accounting" to boost revenue. AOL Time Warner has said it did improperly account for some transactions that boosted revenue, though it said the amounts involved were immaterial.
Accounting questions are not the only reason why AOL Time Warner stock tanked, but when you add accounting issues to millions of dollars of stock sales by AOL insiders, you get a lawsuit.
The shareholders' lawsuit contends that Case and others at AOL committed securities fraud by pumping up the stock price and then dumping millions of shares. AOL's lawyers have denied wrongdoing in their response to the suit.
The lawsuit and investigations by the Securities and Exchange Commission and the Justice Department are focusing on the plunge in AOL Time Warner stock since the merger and on the accounting problems uncovered last year by Washington Post reporter Alec Klein. Several dubious advertising deals made AOL's business look healthier than it really was when Time Warner was considering the merger offer from AOL.
There is no evidence that Case knew about the transactions. But AOL's history of accounting irregularities is well-documented.
In early 1997, under pressure from the SEC, AOL admitted it had reported phony profits in several previous years while running up $385 million in losses. A few months later the company again was forced to restate its quarterly results, turning the profit first reported into a loss. The company was also nailed by the SEC in 1998 for taking a big upfront write-off for what truly was a brilliant deal: the purchase of the Israeli company that popularized instant messaging on the Internet. By writing off the purchase upfront, AOL would have been able to report bigger profits for years to come. But the SEC refused to allow it.
Given that history, and his timely stock sales, Case's position is not attractive: He must defend himself against charges that he made $100 million selling about 2 million shares of AOL Time Warner from February to May 2001, the months immediately after the merger, after the company reported questionable transactions and before those deals were disclosed to investors.
This is not one of those shareholder lawsuits in which some small investor shows up claiming to be acting on behalf of all the stockholders. The lead plaintiff in the case is the Minnesota State Board of Investment, which manages the state's pension plans and says it lost $249 million on its investment in AOL Time Warner.
Such huge losses make it worthwhile for the Minnesota pension fund and other investors who suffered multi-million dollar hits on AOL Time Warner stock to spend a lot of money on lawyers.
And the mega-millions Case and other AOL insiders have made selling AOL stock give the irate stockholders more people to sue who clearly have deep pockets. Shareholders who sue often settle for whatever they can collect from the insurance company that provides liabilty coverage for the officers and directors. In the case of Case, he and other AOL insiders have so much money of their own that lawyers believe they are worth going after.
The amounts AOL executives have made by selling their stock in the company are staggering by any standard.
Case has sold more than $697 million worth of stock since 1996, insider-trading reports compiled by Thomson Financial show. He got most of his shares by exercising stock options. Back in 1994, AOL gave Case options free -- more than a million of them. That year and the next he got more than 2 million shares for 2 cents apiece. Millions more came at equally incredible prices: 9 cents a share, 10 cents a share, 11 cents, 13 cents, 15 cents, 18 cents, 34 cents, 55 cents. His insider-trading reports fill up pages and pages of spreadsheets.
There was a time, before the tech stock boom, when insider selling of huge blocks of stock was considered a red flag for investors. But while they were pumping up the Internet bubble, analysts told investors not to worry about it: Selling large blocks of company stock only made sense for an insider like Case, they said. He needed to diversify his holdings . . . blah, blah, blah.
Thomson tallies up nearly $1.5 billion in stock sales since 1996 by AOL executives and board members whose positions with the company required them to file special insider-trading reports with the SEC, which doesn't demand those reports from the rank and file.
The A to almost-Z list starts with board member Daniel F. Akerson, a local telecom executive and AOL director, who sold $10 million worth of AOL stock from 1998 to 2001. It ends with Audrey Y. Weil, who sold $1 million of stock back in 1996.
In between are Netscape founder James L. Barksdale, who sold his company for AOL stock and later sold $219 million worth of those shares; former political press liaison Kathryn A. Bushkin, who became an $11 million woman doing PR for AOL; and former secretary of state Alexander M. Haig Jr., whose term on the AOL board is his least known but most lucrative job in Washington.
From 1996 to July 2001, Haig sold $56.7 million worth of AOL stock, which he got with options granted him as a board member for as little as 7 cents a share. The reports show Haig paid only $286,000 for his shares.
Five years as a part-time board member at better than $10 million a year. Is it any wonder that AOL stockholders are outraged at how much money AOL insiders took home while AOL Time Warner investors were being taken to the cleaners?
Which leads us back to the central figure in this Shakespearean tragedy. History will show that along with transforming life in America by doing with AOL what Henry Ford did with the Model T, Case also will be known as the man who cost AOL Time Warner shareholders $200 billion and AOL its independence. After this spring's shareholders meeting, AOL will be little more than a struggling division of a New York media conglomerate.
The plaque outside the headquarters of what was once the Washington area's most successful technology company should read: Here lies AOL. It brought America the Internet. And it blew it.