Attorney
General Gregg Renkes filed a complaint in Juneau Superior
Court today against America Online, Inc. ("AOL"),
Time Warner, Inc. (formerly known as AOL Time Warner
("AOLTW")), Historic TW Inc. ("Time Warner"),
Ernst & Young, Morgan Stanley, and several former
corporate officers of AOL. The complaint alleges that
various State of Alaska funds incurred substantial losses
in their investments in AOL, Time Warner, and AOLTW stock
because the defendants misrepresented AOL's and AOLTW's
revenues and subscriber numbers before and after the
merger of AOL and Time Warner. The State of Alaska lost
over $70 million after the merger.
"The corporate
scandals of the past few years resulted in the State
of Alaska losing millions of dollars from our investment
portfolios," stated Attorney General Gregg Renkes. "Public
funds all across the country from New York to California
and now to Alaska are standing up and holding the responsible
businesses and persons accountable for their actions.
This office is committed to aggressively protecting
the financial interests of the state and the people
of the State of Alaska."
The complaint alleges
that the defendants' actions violated Alaska law. The
State will seek recovery of losses under Alaska law,
and will also seek a punitive damages award to deter
future fraudulent corporate conduct.
"We are
no longer going to rely on the federal courts located
in far flung jurisdictions to protect our interests," Renkes
added. "The
defendants' actions violated Alaska's state law and
so we are seeking recovery right here in the Juneau
Superior Court."
The complaint seeks recovery
from each of the corporate entities involved (AOL,
Time Warner and Historic TW), the public accountant
(Ernst & Young),
the underwriter (Morgan Stanley), and the AOL corporate
officers who were responsible for the sham transactions
(Steve Case, Robert Pittman, Michael Kelly, David Colburn,
and Eric Keller). The State may add additional defendants
as it learns more through the discovery process.
The
Alaska funds with investments in AOL, Time Warner,
and Historic TW stock include the Alaska Permanent
Fund, the various state pension funds (public employee,
teachers, judicial, and military), the Mental Health
Trust Fund, the Exxon Valdez Oil Spill Trust Fund,
the University of Alaska Trust Fund, as well as smaller
funds such as the Constitutional Budget Reserve Fund
sub-account, the Public School Trust Fund, and the
Alaska Children's Trust Fund. The State estimates that
aggregate losses exceeded $70 million.
Although the
State's losses are large, there is no material impact
on the payment of the Permanent Fund Dividend, the
check sent annually to all Alaskans, or the payment
of pension benefits. The Alaska Permanent Fund lost
over $50 million, but this equals only 0.2% of the
$28 billion total fund. The more than $20 million loss
sustained by other funds equals less than 0.1% of the
other funds' aggregate values.
The Attorney General
is committed to protecting the $50 billion of invested
State funds from securities fraud. All of the State's
investment portfolios are actively and regularly monitored.
The Attorney General is also seeking recovery of losses
related to its investments in WorldCom bonds, and is
prepared to file cases in the future when warranted
by particular facts.
In the late 1990s, AOL experienced
explosive growth as a result of the internet boom.
AOL's stock price skyrocketed, and the company had
a market capitalization of over $200 billion.
In January
of 2000, AOL and Time Warner announced a proposal for
a non-cash merger of their two companies. Because consummation
of the merger depended on AOL maintaining its high
share value, it was vitally important that AOL continue
to report positive growth and earnings. The company
reported positive growth and earnings for the period
between the announcement of the proposed merger and
the approval of the merger in January of 2001.
However,
in 2002, shareholders learned that AOL's reported growth
and earnings in 2000 were false. To report continued
growth, the Business Affairs unit of AOL engaged in
a series of sham transactions designed only to report
revenue on paper. The transactions continued after
the companies consummated the merger in January of
2001. When the truth surfaced in 2002, the federal
Securities Exchange Commission commenced an investigation,
and AOLTW began to restate its earnings. A share of
Time Warner stock that traded for more than $60 before
the merger trades for less than $17 today.
A federal
class action lawsuit on behalf of all aggrieved investors
is currently awaiting class certification in federal
court in the Southern District of New York. The lead
plaintiff is the Minnesota State Board of Investment.
Since the filing of the federal lawsuit, however, a
number of large institutional investors decided to
file their own independent lawsuits. Such institutional
investors include the University of California and
public funds from the states of California (CalPERS,
CalSTRS), New Jersey, Ohio, Pennsylvania, and West
Virginia.
The Alaska Department of Law has retained
the law firm of Lieff Cabraser Heimann, and Bernstein,
LLP, to handle this matter on a contingency fee basis.
Partner Richard Heimann will lead the litigation efforts.
The
Department of Law will handle local counsel duties.
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