Investors Opt Out Of Time Warner Class Action Suit
A renowned plaintiffs' lawyer, William Lerach, has persuaded more than 100 institutions to withdraw from the $2.6 billion class action settlement Time Warner reached with investors in the wake of the company's unprofitable merger in 2000 with America Online.
"My firm represents something in excess of 100 institutional investors located all over the world that have opted out of the class action settlement to pursue their own claims and lawsuits," Mr. Lerach said in a conference call with reporters yesterday. The attorney said a number of other major investors have also opted out of the settlement and are pursuing lawsuits with other attorneys.
Investors faced a January 9 deadline to inform a federal court in New York whether they wished to opt out of the settlement. Judge Shirley Kram, who is overseeing the class action, is scheduled to hold a final settlement hearing on February 22.
In signing up with Mr. Lerach, the institutional investors are taking a high-stakes gamble that he can get them more money than they would be entitled to under the settlement. "They feel they want to try and maximize whatever recovery they can," the attorney said. "This stock has in essence been dead money since August of 2002 when the final revelations came out."
The stock, which once traded as high as $58 a share, bottomed out in 2002 at about $13 after Time Warner restated its earnings, and acknowledged accounting errors related to certain advertising deals. Last year, the merged company, which was known as AOL Time Warner before dropping AOL from its name in 2003, set aside $3 billion to cover liabilities related to shareholder lawsuits.The company also paid about $500 million to the Securities and Exchange Commission and the Justice Department to avoid criminal prosecution and settle charges that the firm violated securities laws.
Mr. Lerach said his clients, who hold or held about 100 million shares of the company's stock, do not include New York's state pension funds. However, Amalgamated Bank and a fund run by Local 1199 of the Service Employees International Union have joined Mr. Lerach's opt-out group.
Mr. Lerach said losses related to the unsuccessful merger totaled between $220 billion and $300 billion.While noting that the class action recovered just a small fraction of that amount, Mr. Lerach refrained from criticizing those who worked out the settlement. "The class action was certainly successful in recovering $2.5 billon," he said.
The lead plaintiffs' lawyer on the settlement, Samuel Heins, said the number of opt-outs did not meet an agreed but secret threshold at which the company could back out of the deal. "It does not jeopardize the settlement going forward," Mr. Heins told The New York Sun. "We're aware of a significant effort on the part of Mr. Lerach to recruit opt outs. ... The fruits of that determined effort are trivial."
A spokeswoman for Time Warner, Susan Duffy, confirmed that the company has no plans to abandon the settlement. Asked about the lawsuits brought by those opting out of the deal, she said, "We're going to defend against those actions vigorously."
The vast majority of the money used to fund the settlement and any future deals or verdicts obtained in separate lawsuits will come from Time Warner's current shareholders. Asked if that unfairly penalizes long-term holders of the stock, Mr. Lerach said, "One of the risks of equity ownership of any enterprise is that the managers of the enterprise will violate the laws, whether they're the antitrust laws, the civil rights laws, the environmental laws, or the securities laws, in operating the business and that this will result in liability being imposed on the company."
A law professor critical of class action securities lawsuits, Lester Brickman, said the danger of misconduct by company officers is not the only peril of investing. "One of the risks when you buy shares is that class action lawyers will deplete the assets of the corporation," he scoffed.
Mr. Brickman, who teaches at Yeshiva University, said that while some shareholders may recover some money through the Time Warner litigation, they will probably lose it, and then some, because of a lawsuit against another firm in which they hold stock. "For most shareholders, class action litigation is a losing proposition because mostly it takes money from the shareholder's right pocket, transfers it to the shareholder's left pocket and charges the shareholder a commission of 30% or more for having had the assets transferred," the professor said.
Under the Time Warner settlement, attorneys for the class may seek fees of up to $175 million plus interest from the settlement pool. Mr. Lerach's fees will be governed by agreements with his individual clients. He noted that he led a similar end-run around a $6 billion settlement in the Worldcom litigation. That maneuver picked up $651 million for his institutional clients.
