America Online, Inc. - Securities Class Action

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Stanford Law School

America Online, Inc. Conclusion: According to the docket dated December 16, 1998, on December 14, 1998 the Court filed an Order and Final Judgment. Certain Plaintiffs were awarded the sum of $10,500,000.00 in fees, which the Court finds to be fair and reasonable, and $1,558,079.21 in reimbursement of expenses, which shall be paid to Plaintiffs' Counsel from the Gross Settlement Fund with interest from the date such Gross Settlement Fund was funded to the date of payment at the same rate that the Cash Settlement Amount earns. The award of attorneys' fees shall be allocated among counsel for plaintiffs and the Class in a fashion which, in the opinion of Plaintiffs' Co-Lead counsel, fairly compensates counsel for the Plaintiffs and the Class for their respective contributions in the prosecution of the litigation against America Online, Inc., Stephen M. Case, and Lennert J. Leader. The case is closed.

As reported in the firm's 10-K filing dated September 28, 1998, the Company has entered into a preliminary agreement to settle the action, subject to negotiation of final documentation and approval by the court. As part of the settlement, the Company will make $35 million in payments, a substantial portion of which it expects to be covered by insurance. A shareholder derivative suit related to such class action lawsuit has also been filed in Delaware chancery court against certain current and former directors of the Company and remains pending. The Company has entered into a preliminary agreement to settle the shareholder derivative suit, subject to negotiation of final documentation and approval by the Delaware chancery court, on terms that will not have a material adverse effect on the financial condition or results of operations of the Company.

The original complaint, as detailed below, alleges that AOL and certain of its officers, directors and AOL's outside public accountants violated the federal securities laws. AOL provides on-line services to personal computer users, in competition with other on-line service providers and with direct Internet access and service providers. During AOL's 1996 fiscal year ("F96"), ended June 30, 1996, AOL reported strong growth in net income and earnings per share ("EPS") totaling $29.8 million or $.28 per share with shareholders' equity increasing to $512 million, based on AOL's largest single asset -- "Deferred Subscriber Acquisition Costs" -- of $314 million, resulting from AOL's vastly increasing marketing expenditures to try to attract subscribers to its system. AOL's interim F96 financial results were reviewed by Ernst & Young ("E&Y") and represented by AOL as fairly presenting its financial condition and results of operations in conformity with Generally Accepted Accounting Principles ("GAAP"), as were its F96 results which were certified by E&Y as being fairly presented in conformity with GAAP, after an audit by E&Y in accordance with Generally Accepted Auditing Standards ("GAAS"). AOL and E&Y justified AOL's deferral of hundreds of millions of subscriber acquisition costs (basically direct response advertising and marketing expenditures) and their amortization over a 24-month period on the ground that the average AOL subscriber stayed with AOL for over 40 months and had a lifetime subscription value of over $700. In addition, AOL represented that its new direct Internet access service -- Global Network Navigator ("GNN") -- and its Booklink WebBrowser was very successful and attracting large numbers of subscribers -- thus enabling AOL to effectively compete in the Internet access market. As a result of its success, positive momentum and subscriber growth resulting from its increasing marketing expenditures, AOL forecast increased F97 EPS of $1.00+ and that AOL would reach 10 million subscribers by June 1997, and AOL's stock soared to an all-time high of $71 per share in May 1996.

However, during June-Oct.1996, AOL's stock declined sharply, as AOL revealed that despite its greatly increased marketing expenditures it was suffering from slowing subscriber growth and increased subscriber cancellations, such that it could not forecast future subscriber retention rates, i.e., subscriber life. Thus, AOL had to reduce its marketing expenditures and concentrate on trying to increase subscriber retention. Then, on Oct. 29, 1996, just a few weeks after AOL had issued its F96 financial statements and E&Y had certified its assets, earnings and shareholders' equity, as well as the appropriateness of AOL's accounting practices, AOL revealed that it was taking huge write-offs of $460 million, including: (i) a $385 million write-off of all previously deferred or (capitalized) subscriber acquisition costs, and would end its practice of not expensing such costs; and (ii) a $75 million "restructuring" write- off which, inter alia, would completely eliminate AOL's investment in GNN and its WebBrowser, which had failed as an Internet access product, resulting in the firing of over 300 employees. Thus, AOL instantly eliminated in its entirety the largest single asset on its balance sheet, reduced its shareholders' equity by 80% and wiped out by five times over the total pre-tax net income it had ever reported. It is now clear that AOL had never earned any profits and, in fact, had been incurring huge operating losses in prior years rather than the profits it had claimed, AOL will not reach 10 million subscribers by June 1997 and instead of the profitable growth forecast by and for it in F97, AOL will suffer huge losses. During mid-Oct. 1996, AOL stock collapsed to as low as $22-3/8 per share -- 70% below its Class Period and all-time high of $71.

However, before the truth about AOL's huge losses, improper accounting practices, failed Internet access product and inability to reach the 10 million subscriber mark by June 1997 were revealed, AOL and the 18 insiders named as defendants took advantage of the artificial inflation in AOL's stock their false and misleading statements had caused to sell off 4.9 million and 2.1 million shares of AOL stock, respectively, at prices as high as $55-3/8 per share. This enabled AOL to obtain $139 million in badly needed new capital and the 18 insiders to pocket over $95 million in insider trading profits. AOL's co-founder and Chairman Emeritus James V. Kimsey sold 82% of his AOL stock -- 651,000 shares at as high as $55-3/8 per share pocketing $24.5 million. AOL's co-founder, Chairman and CEO Stephen Case sold 76% of his AOL stock -- 575,000 shares at as high as $55 per share pocketing $29.1 million. AOL's Chief Financial Officer, Lennert Leader, sold 66% of his AOL stock -- 210,800 shares at as high as $54 per share, pocketing $10 million. Collectively, the 18 AOL insiders named as defendants unloaded 72% of their AOL holdings during the Class Period.

INDUSTRY CLASSIFICATION:
SIC Code: 7375
Sector: Technology
Industry: Computer Services

COMPANY/ISSUER NAME:	America Online, Inc.
COMPANY/ISSUER TICKER:	AOL
COMPANY WEBSITE:	http://www.aol.com

FIRST IDENTIFIED COMPLAINT IN THE DATABASE

Orman, et al. v. America Online, Inc., et al.

COURT: E.D. Virginia	DOCKET NUMBER: 97-CV-00264
JUDGE NAME: Hon T. S. Ellis III
DATE FILED: 02/24/1997	SOURCE: Business Wires
CLASS PERIOD START: 08/10/1995	CLASS PERIOD END: 10/29/1996
TYPE OF COMPLAINT: First Consolidated
PLAINTIFF FIRMS IN THIS OR SIMILAR CASE:
Milberg Weiss Bershad Hynes & Lerach LLP (San Diego, CA) 600 West Broadway, 1800 One America Plaza, San Diego, CA, 92101 (voice) 800.449.4900, (fax) , support@milberg.com Richards, McGettigan, Reilly & West, P.C. Suite 700 King Street Station 225 Reinekers Lane, Alexandria, VA, 22314-2822 (voice) 703.549.5350, (fax) , _____________________________________________ TOTAL NUMBER OF PLAINTIFF FIRMS: 2

DOCUMENTS FOR THE FIRST IDENTIFIED COMPLAINT
Class Action Complaint
Type: Complaint		Date on the document: 02/24/1997

REFERENCE COMPLAINT

Orman, et al. v. America Online, Inc., et al.

COURT: E.D. Virginia	DOCKET NUMBER: 97-CV-00264
JUDGE NAME: Hon. Claude M. Hilton
DATE FILED: 11/18/1997	SOURCE: Business Wires
CLASS PERIOD START: 08/10/1995	CLASS PERIOD END: 10/29/1996
TYPE OF COMPLAINT: Second Amended
PLAINTIFF FIRMS NAMED IN COMPLAINT:
Milberg Weiss Bershad Hynes & Lerach LLP (San Diego, CA) 600 West Broadway, 1800 One America Plaza, San Diego, CA, 92101 (voice) 800.449.4900, (fax) , support@milberg.com Morris & Morris 1105 North Market Street, Suite 1600, Wilmington Ma, DE, 19801 (voice) 800.296.0410, (fax) , firm@morrisandmorrislaw.com Richards, McGettigan, Reilly & West, P.C. Suite 700 King Street Station 225 Reinekers Lane, Alexandria, VA, 22314-2822 (voice) 703.549.5350, (fax) , _____________________________________________ TOTAL NUMBER OF PLAINTIFF FIRMS: 3

DOCUMENTS FOR THE REFERENCE COMPLAINT
U.S. District Court Civil Docket
Type: Docket		Date on the document: 04/22/1998
Notice Of Pendency Of Class Action, Hearing On Proposed Settlement And Attorneys’ Fee Petition, And Notice Of Right To Share In Settlement Fund
Type: Settlement		Date on the document: 10/21/1998
U.S. District Court Civil Docket
Type: Docket		Date on the document: 12/16/1999

OTHER DOCUMENTS

Case Name and/or Number:
Type:		Date on the document:

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