Thursday, April 3, 2003
Trey Davis (510) 987-0056


The University of California will file an action in California state court against AOL Time Warner Inc., its directors and officers, its auditor, Ernst & Young LLP, and the financial advisors involved in the 2001 AOL Time Warner merger, Citigroup, Salomon Smith Barney and Morgan Stanley Inc., claiming securities fraud arising out of the collapse in the price of AOL Time Warner stock. UC's Board of Regents authorized the move at its meeting in San Francisco today (April 3).

The university’s complaint will allege that AOL materially misrepresented its revenues and number of subscribers during the period prior to and immediately after its January 2001 merger with Time Warner Inc., using such impermissible techniques as “round trip exchanges” in which it swapped advertising with other Internet companies and counted these transactions as revenues. AOL Time Warner has restated AOL’s earnings from this period downward nearly $200 million and announced on March 28 that, as a result of questions raised by the Securities and Exchange Commission, it might be required to restate them by as much as $400 million more.

As a result of AOL’s misstatement of its financial condition, its share price at the time of the merger was substantially inflated, causing the share price of the new merged company to be inflated as well. Time Warner shareholders were thus forced to exchange their shares for inflated shares in the merged company and were damaged when the AOL Time Warner share price fell as the true facts about AOL’s financial condition became known. AOL Time Warner’s stock price has dropped substantially, from $48 per share at the time of the merger to approximately $11 per share today.

“Under the law, a company issuing new stock, as the merged AOL Time Warner did in January 2001, is liable to the purchasers of that stock for material misstatements that inflate the stock’s value,” said James E. Holst, UC’s general counsel. “We believe that AOL Time Warner and its investment advisers must be held responsible for the admitted misstatement of AOL’s financial condition.”

At the time of the merger, UC owned more than 11.3 million shares of Time Warner stock worth approximately $800 million, and no shares of AOL. The reduction in the value of UC’s investment as a result of the subsequent decline in AOL Time Warner’s share price is in excess of $450 million.

“The University of California made a sound investment in a solid company when it invested heavily in Time Warner prior to its merger with AOL,” said David H. Russ, UC treasurer. “The value of that investment was significantly impaired as a result of the merger.”

In addition to UC’s suit against AOL Time Warner, the company is facing a class action securities suit and investigations by the Securities and Exchange Commission and U.S. Department of Justice.

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