Risk Management

Time Warner, Calstrs Settle for $105M

As in last week's announcement of a settlement with Qwest, opting out of the federal class action pays off for the pension fund.
Stephen Taub and Dave CookFebruary 8, 2007

The California State Teachers’ Retirement System (Calstrs) announced Wednesday that it settled a securities fraud lawsuit against Time Warner, as well its accountants, banks, and several former executives, for $105 million.

The lawsuit charged that the media giant’s AOL unit artificially inflated its share price in 2000 and 2001, at the height of the internet bubble, before its merger with Time Warner. Calstrs — the nation’s second-largest pension fund, with an investment portfolio of $157.8 billion investment portfolio — claimed that AOL’s actions cost it about $135 million.

“Calstrs pursued this court action to safeguard our member teachers, and all stockholders for that matter,” said chief executive officer Jack Ehnes, in a statement. “This is yet another example of our commitment to protect investors and to establish higher levels of corporate responsibility in the nation’s financial markets.”

The settlement also resolved Calstrs’s claims against Citigroup Global Markets, Morgan Stanley, Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, and against former AOL senior executives, but it did not fully resolve claims against AOL’s accountants, Ernst & Young.

According to court documents, the settlement was finalized in December, reported the Associated Press.

Although a federal class action against AOL ultimately recouped $2.65 billion for plaintiffs, Calstrs opted out of the class so it could “pursue California state law claims in a California state court, resulting in a timely and much bigger recovery,” according to Ehnes. The pension fund pursued a similarly successful strategy when it opted out of a class action against Qwest Communications; the parties announced a settlement of that lawsuit earlier this month.

Had Calstrs joined about 600,000 other participants in the class action against Time Warner, it would have received a far lower award, reported the Sacramento Bee. Steve Williams of Cotchett, Pitre & McCarthy, the pension fund’s outside counsel in the litigation, estimated that Calstrs would have received $15.5 million to $16 million if it had not opted out.

About 100 institutional investors chose not to join the class action, noted the Bee. They include the California Public Employees’ Retirement System (Calpers), the nation’s largest pension fund, with an investment portfolio of $225 billion. Calpers has claimed that AOL’s actions cost it more than $200 million, according to the newspaper; that lawsuit is scheduled for trial in March.