AOL Time Warner faces $250m lawsuit

AOL Time Warner, the American media giant, faces a multi-million pound legal action over allegations that it defrauded investors by artificially inflating its sales figures.

The California Public Employees' Retirement System (CalPERS) has filed a lawsuit to recover more than $250m (£156m) in compensation for losses incurred as the share price tumbled.

The suit names AOL Time Warner, America Online and certain current and former executives including Stephen Case, who stepped down as chairman in January, and Gerald Levin, its former chief executive. CalPERS is also suing Salomon Smith Barney, Morgan Stanley and Ernst & Young.

Mark Anson, CalPERS' chief investment officer, said: "Because of the magnitude of the fraud perpetuated upon investors, we are filing this suit in California to be in the strongest possible position to aggressively obtain recovery of assets lost through this fraud and deception upon investors."

The action relates to accounting irregularities in AOL before and after the January 2001 merger of the two companies. At the heart of the lawsuit is a restatement of AOL advertising revenues and a flurry of share sales to the new company by insiders soon after the merger was completed.

The lawsuit alleges AOL's reported advertising revenue was overstated by "at least $1.7bn" through improper accounting practices before and after the merger.

AOL Time Warner has since had to restate these revenues, which has resulted in SEC and Department of Justice investigations, further devaluing the stock price.

The suit alleges AOL artificially inflated its reported advertising sales, and kept them inflated to avoid a reaction by the stock market prior to the merger with Time Warner. The fraud led AOL to be forced to write down more than $54bn in goodwill - the largest writedown in corporate history.

Meanwhile, certain executives reaped billions of dollars by selling their own AOL Time Warner securities at artificially inflated prices, it is alleged.

The recent stock market rally has lifted AOL Time Warner's shares by nearly a third this year, but they are still down more than 70 per cent from their May 2001 peak.