The AOL Time Warner Securities Litigation Settlement
Background of the Litigation
On July 18, 2002, and thereafter, thirty class action complaints were filed against Time Warner and Ernst & Young, among others, in the Southern District of New York, the Eastern District of Virginia and the Eastern District of Texas, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. On September 9, 2002, the actions pending in the Southern District of New York were consolidated before Judge Shirley Wohl Kram, and on December 16, 2002, the Judicial Panel on Multidistrict Litigation transferred the cases in other jurisdictions to the Southern District of New York under the caption In re AOL Time Warner, Inc. Securities & "ERISA" Litigation, MDL Docket No. 1500. On January 8, 2003, Judge Kram appointed the MSBI as the sole Lead Securities Plaintiff, and appointed Heins Mills & Olson, P.L.C. as lead counsel, ("Lead Securities Counsel").
On April 15, 2003, Lead Securities Plaintiff filed its 309-page Amended Complaint, which alleged, among other things, that AOL and Time Warner and certain of their current and former officers, directors and employees, certain Financial Institutions, and AOL's and Time Warner's auditor, Ernst & Young, violated Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 promulgated thereunder.
Defendants filed nine separate motions to dismiss the Amended Complaint. On May 5, 2004, Judge Kram denied the bulk of Defendants' motions to dismiss and formal discovery commenced. The Time Warner bond claims were dismissed with prejudice. The Court's dismissal of the bondholder claims can be appealed.
On August 23, 2004, Lead Securities Plaintiff filed its Second Amended Consolidated Class Action Complaint ("Second Amended Complaint"), which, among other things, elaborated upon the allegations against certain Individual Defendants. The Second Amended Complaint and a proposed Third Amended Consolidated Class Action Complaint also allege that Defendants issued false and misleading statements and omitted material facts concerning AOL's financial condition and performance and engaged in a systematic and fraudulent scheme to materially inflate the financial condition and performance reported in the companies' publicly disclosed financial statements and included additional allegations relating to AOL's use of bulk subscription programs and AOL Europe, including allegations regarding Goldman Sachs, which acts are alleged to be a further part of the fraudulent scheme.
There was substantial motion practice, including Defendants' motion for summary judgment on loss causation which asserted that Securities Class Members had sustained no compensable damage. The issues of loss causation and damages were hotly contested and fully briefed. A decision in favor of Defendants could have had a significant adverse effect on the Securities Class, and if their motion was granted in its entirety, the Securities Class Action could have been dismissed. Defendants' motion was still under advisement by the Court at the time of Settlement.
Lead Securities Counsel has conducted a massive and intensive investigation into the events and transactions underlying Lead Securities Plaintiffs claims. Lead Securities Counsel established a document depository that was in place for approximately one year, staffed daily by an average of 50-60 attorneys dedicated to the task of reviewing and analyzing over fifteen and a half (15.5) million pages of documents produced by Defendants in response to extensive, detailed document requests, as well as documents produced by third parties in response to sixty-two subpoenas. Lead Securities Counsel consulted regularly with its accounting and economic damage experts in preparing its pleadings and analyzing hundreds of highly complex transactions involving AOL and/or Time Warner and third parties and the accounting for those transactions.
Even prior to the commencement of formal discovery, Lead Securities Counsel engaged in extensive informal discovery and investigation, including, for example, reviewing all public filings, articles and analyst reports concerning AOL and Time Warner, interviewing over twenty former employees of AOL and Time Warner and various third parties, and conducting comprehensive legal research and analysis on numerous securities law issues, as well as the multiple claims asserted in the Securities Class Action and potential defenses thereto.
Over the course of many months, counsel for various Parties conducted intensive, arms-length settlement negotiations overseen by the Court-appointed Special Master. Each side prepared a series of thorough and detailed confidential mediation statements, which were submitted to the Special Master. The mediation sessions involved numerous presentations to and discussions with opposing counsel and the Special Master, regarding, among other things, the Parties' respective claims and defenses, expert damages analyses, legal analyses, and expert accounting and auditing analyses. Finally, on July 29, 2005, after many intense settlement negotiations, an agreement in principle was reached to settle the Securities Class Action.
