• by John Gaffney , April 14, 2003

A whole new chapter of trouble may be opening for AOL TimeWarner as two institutional shareholders filed suit yesterday against the company, alleging insider trading and using "tricks, contrivances and bogus transactions" to inflate the company's value.

"If there's one it is more than likely we will see others," said Yankee Group media and entertainment analyst Mike Goodman. "I guess a good analogy would be sharks and blood in the water, but we still have to determine whether this suit is reasonable and that still remains to be seen."

The lawsuit, filed Monday by the University of California and Amalgamated Bank's LongView Collective Investment Fund, spares few top executives at AOL/TimeWarner. Richard Parsons, Ted Turner and Gerald Levin are alleged to have participated in insider trading. The suit reserves its most specific allegations for former AOL COO Bob Pittman and AOL outgoing chairman Steve Case.

"The lawsuit details a more deliberate and widespread scheme on the part of AOL executives than has previously been reported," said a press release from Milberg Weiss, the firm retained by The University of California. "Case and two of his AOL colleagues, Vice Chairman Kenneth Novack and President/COO Robert Pittman, are accused of carrying out a scheme to overstate the number of the company's Internet subscribers and inflate its e-commerce advertising revenues, profits and backlog of future business to help secure a merger with Time Warner. While the stock was still at an artificially high level, AOL and Time Warner executives used the closing of the merger in January 2001 to take advantage of a "change of control" proviso to cash in millions of stock options on an accelerated basis. The merger triggered early vesting of 35 million shares valued at $1.7 billion for the five top AOL executives alone."

As of the close of business Monday, AOL/TimeWarner had not responded to the suit. Reactions from observers ranged from conservative counsel to more liberal measures.

Jack Trout, branding expert and author, believed it was no coincidence that the suit was filed on the same day that Worldcom officially changed its name to MCI. "My advice would be to just move on," he said. "You have to get away from the past, and you can't leave your brand stuck in the mire of these problems. They need to spin off AOL. Let the lawyers handle AOL Time Warner. They need to let the media and marketing people focus on Time Warner."

Goodman counseled a more conservative approach. "The advertising community will still look to individual AOL/Time Warner properties for metrics like ratings and demographic data," he said. "They media buyer may look a little bit closer now at that data, but I think the strong properties there still remain strong media properties."