California Steaming at AOL Time Warner

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The California Public Employees Retirement System (CalPERS) sued AOL Time
Warner Inc. late Friday for $250 million, claiming that the company inflated its
stock price and overstated its revenue.

The suit, filed July 18 in Superior Court of Sacramento County, names AOL
Time Warner, America Online Inc. and current and former executives, including
former chairman Stephen Case, former CEO Gerald Levin and former chief operating
officer Robert Pittman, as well as agents involved in the merger, including
Salomon Smith Barney Inc. (now Citigroup Smith Barney), Morgan Stanley Dean
Witter & Co. and Ernst & Young LLP.

The lawsuit alleged that AOL’s reported advertising revenue was overstated by
at least $1.7 billion through the use of sham transactions and improper
accounting practices at a time when AOL was seeking a merger and immediately
following the merger.

AOL and Time Warner Inc. merged in January 2001 in a deal then valued at
about $106 billion. But since the merger, a federal investigation into some of
the accounting practices at the AOL unit has caused the company’s stock price to
plummet.

The CalPERS suit is one of about 30 such shareholder suits filed against AOL.
CalPERS is the largest public pension fund in the country and one of AOL Time
Warner’s largest institutional shareholders.

"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," CalPERS chief investment officer Mark Anson said in a prepared
statement.

The suit also alleged that company insiders reaped billions of dollars in
proceeds by selling their own AOL Time Warner securities at artificially
inflated prices. A large portion of this insider selling was done during the
four-month period just after consummation of the merger, which further served to
inflate the price of the stock, CalPERS claimed.

"These actions propped up the price of AOL and AOL Time Warner securities,
causing everyone to lose money in their purchases or to hold onto shares that
might not have been held had the truth been disclosed," Anson added in the
statement.

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