AOL Shareholder Recoveries: Opting Out Goes Global

As an alternative method to passive participation in a securities class action, the virtues of “opting out” and pursuing individual actions in certain circumstances have proven their worth – and word is getting out. In recent settlements with shareholders over the disastrous Time Warner and America Online merger, institutional investors – from California to Ohio, over the pond to the United Kingdom and Continental Europe, and as far as Australia – have achieved significant recoveries through individual “opt-out” litigations, rather than seeking recovery as a passive member of the class action.

“The total losses to all shareholders from the disastrous merger of Time Warner with AOL were enormous – over $200 billion. Given the potential difficulties of significant asset recovery in the $2.4 billion shareholder class action, a number of investors made the tactical decision to opt out and pursue potentially higher recoveries on their own. We are pleased to announce what we feel is a solid asset recovery for these investors,” said William S. Lerach.

The Regents of the University of California approved a $246-million settlement of the University’s lawsuit against Time Warner. According to a University press release issued on February 28, “UC opted out of [the] ongoing federal class action to file its own case in state court in April 2003. The University’s net recovery, which will be just over $200 million if the settlement is approved, is estimated to be between 16 and 24 times the amount that it would have received through the class action case.”

The University’s General Counsel Charles Robinson was quoted in the same press release as saying, “Opting out of the federal class action suit allowed the University to assert unique claims that were unavailable in the class action.”

A number of Ohio funds also reached a $144-million settlement with Time Warner, including five Ohio state pension funds and the Ohio Bureau of Workers’ Compensation. The Ohio funds lost almost $400 million when the truth about AOL’s misrepresentation of its previous earnings and sales was revealed, plunging the stock value of the merged company from $48 to less than $10 per share. In announcing the Ohio funds’ settlement, Ohio Attorney General Marc Dann told Bloomberg, “We are sending a loud and clear message to corporate America and to Wall Street: We will not tolerate fraud, stock manipulation or deceit in this state.”

The opt-out option is also taking root abroad. Given the particular challenges inherent in the class action lawsuit, the utility of opting out was not lost on a number of shrewd investment funds in the UK, EU, and Australia.

Six Australian superannuation funds recovered $11 million for their investors via an opt-out action, including SAS Trustee Corporation, Cbus and Hesta. SAS Trustee Corporation Trustee Ron Davis told InvestorDaily that in addition to the substantial monetary recovery his fund obtained, the settlement was “also a great win for corporate governance because AOL Time Warner was held accountable. Changes resulted and that is now reflected in the higher share price."

The pursuit for the return of defrauded investments does not stop here. Many of the investment funds in question continue to pursue companion litigation against AOL’s auditor, Ernst & Young.

The Regents of the University of California v. Parsons, JCCP Nos. 4322 & 4325 (Ca. Super. Ct., Los Angeles Cty.); Ohio Public Employees Retirement System v. Parsons, No. 03-CVH07-7932 (Oh. Ct. of Common Pleas, Franklin Cty.).