AOL Time Warner is claiming some of the fraud accusations it faces are groundless as it tries to counter a shareholder lawsuit.
The media mammoth this week filed a motion to have the suit – led by the Minnesota State Board of Investment but with the potential to gain class-action status – thrown out of court.
The plaintiffs are angry at the multiple accounting irregularities alleged to have occurred around the time of the merger between America Online and Time Warner. Among other accusations, they claim reported revenues were improperly boosted by ‘round-trip’ ad deals that amounted to little more than just swapping cash with the group’s business partners.
Last year AOL TW admitted improperly booking revenues of $190 million (€169m; £118m) from such pacts [WAMN: 24-Oct-02]. Then in March the Securities & Exchange Commission queried deals worth a further $400m [WAMN: 31-Mar-03].
However, the AOL TW motion claims there are no accounting problems beyond the $190m already admitted.
In addition, it argues there is no evidence in the suit that earnings were overstated before investors approved the merger in June 2000. If the shareholders want to nail AOL TW for fraud during the merger, they have to show only that the company misrepresented results. For events after the merger, claimants need also to demonstrate that AOL TW executives purposefully misled shareholders – a harder point to prove.
Lawyers for the media giant argue that AOL made public its ad deals with clients, and that this tactic “made good business sense”. They quote former chief operating officer Robert W Pittman as saying: “If we’re one of their big customers, we expect them to be one of our big customers.”
Such statements, argue the lawyers, informed shareholders of the way AOL TW did business at the time – meaning that the deals now under scrutiny cannot retrospectively be classed as fraud.
The motion also claims that the collapse of AOL TW’s share price – down around 70% in the two-and-a-half years since the merger was completed – reflects the bursting of the dotcom bubble rather than what the company put in its statements.
Whether or not AOL TW’s arguments will prevail – and legal experts reportedly expect not – the motion will delay the case for months.
Data sourced from: New York Times; additional content by WARC staff