A New York law firm has filed suit against AOL Time Warner Inc. (AOLTW) on behalf of shareholders, claiming the company misstated and artificially inflated revenue from online advertising.
The suit, filed Thursday with the U.S. District Court for the Southern District of New York and seeking class-action status, is on behalf of shareholders who bought AOL common stock between July 19, 1999 and January 10, 2001, and those who bought AOLTW common stock -- following the merger of America Online Inc. (AOL) and Time Warner Inc. -- from January 11, 2001 and July 17, 2002. The suit seeks to recover unspecified damages.
On behalf of its client, AOL shareholder Jennifer Fadem, the law firm of Lovell & Stewart LLP states that AOLTW "made misrepresentations and/or omissions of material fact" by including in its revenue statements from online advertising one-time payments that advertisers made to the company in order to terminate advertising contracts, according to a press release issued by the law firm on Thursday.
The suit goes on to allege that AOLTW artificially inflated its online ad revenues in its first fiscal quarter of 2001 by including US$16.4 million worth of online advertising payments from 24dogs.com, which the smaller company made in order to settle a legal dispute with the Internet provider. It also inflated revenues by counting sums received for selling advertising for eBay Inc., the law suit alleges.
"This lawsuit is without merit and we intend to vigorously contest it in court. All company accounting has been appropriate and in accordance with GAAP (generally accepted accounting principles), and we have provided our investors with all appropriate material information about our business," said an AOL spokesman on Friday.
Also named in the suit is accounting firm Ernst & Young LLP, for certifying AOLTW's 2001 financial statements "even though it knew (or recklessly failed to discover) that AOL Time Warner had counted in revenue sums received in connection with selling online advertising for online auction site EBay," the press release read.
An article in Thursday's Washington Post brought AOLTW's misstatements to light, the press release said, followed by a drop in the stock price to as low as $11.75, from a high of $58.51 during the period covered by the lawsuit. The law firm encourages investors who purchased AOL or AOLTW stock during the period outlined by the case to join the class action.