AOL Slapped with Shareholder Lawsuit

The company has recently been besieged by numerous actions, including a U.S. Securities and Exchange Commission (SEC) inquiry into its accounting practices and a federal lawsuit.

Distressed financials and the departure of AOL head Bob Pittman, followed by the hiring of former USA Interactive executive Jon Miller to replace him, have left the company on unsure footing.

Going Another Round

The latest suit, charging securities fraud, was filed in federal court in Texarkana, Texas. It seeks to make the company pay for actions that led to the downward spiral of its stock price, which has fallen by more than two-thirds this year.

Shareholders filing the suit claim that AOL Time Warner's stated advertising revenue strongly influenced their purchase of the company's stock, and convinced them to retain the stock rather than offload it.

Company chairman Steve Case and chief financial officer Wayne H. Pace are named as co-defendants in the suit, as is chief operating officer Michael Kelly, who is also the former CFO of the company.

Support Waning

AOL has not only seen its prospects dim and its value decline precipitously, it has watched support in the investment community drop as well.

The SEC is focusing its attention on millions of dollars' worth of deals involving AOL and e-commerce giant PurchasePro. And the U.S. Department of Justice has opened its own criminal inquiry into accounting practices at the media giant's online unit.

The company has stood behind its accounting practices and business dealings.

"We are comfortable with the accounting practices and policies in place at our company. Our accounting is appropriate for the businesses in which we operate," CFO Pace said during a conference call with analysts, after company chairman Richard Parsons confirmed an investigation is under way.

Heading It Off

AOL Time Warner has vowed to cooperate with the authorities. "In the current environment, when anyone raises a question about accounting, it's not surprising that the relevant government agencies will want to look into the facts," the company said. "We are cooperating 100 percent with the SEC, and we will cooperate with the Department of Justice as well."

Yankee Group analyst Michael Goodman pointed out to the E-Commerce Times that the company did report alleged problems with its accounting to the SEC, most likely in an effort to "head things off."

News of the investigations came on the heels of AOL's improved financial picture. After posting the largest quarterly loss in the history of corporate America in the first quarter of 2002, AOL Time Warner reported a US$384 million net profit and a 10 percent increase in revenue, to $10.6 billion, in the second quarter.

Regardless of the outcome of the investigations and lawsuits, AOL faces a difficult climb to regain the confidence of its customers and investors.