Fraud Case Over AOL Advice Heads to Trial

(CN) - A trove of suspicious emails convinced a Boston federal judge to advance a securities fraud class action alleging that Credit Suisse misled investors about AOL-Time Warner's financial health.

AOL investors who bought stock between 2001 and 2002 say they relied on research reports from Credit Suisse First Boston when trading. "These faulty recommendations, plaintiffs argue, were the products not of naïve optimism, or an honest disagreement, but of calculated misdirection," according to the court's summary.

The class filed suit against the bank, its subsidiary, two analysts and two managers.

They claim the analysts knowingly issued bogus research reports with an eye toward generating business for Credit Suisse's investment banking division

In July 2002, The Washington Post published articles revealing that AOL engaged in accounting gimmickry and was artificially inflating its numbers to hide declining advertising revenues. Investors say these revelations confirmed what Credit Suisse had known all along.

U.S. District Judge Nancy Gertner rejected motions for summary judgment filed by each group of defendants.

"While in many securities cases, the parties rely on circumstantial evidence to recreate what defendants must have known, plaintiffs have provided striking direct evidence to buttress their claims," Gertner said [italics in original].

Credit Suisse issued 35 research reports from January 2001 to July 2002 encouraging investors to purchase AOL stock, but contemporaneous emails show that the analysts knew the company's finances "to be far more precarious than their reports reflected," a 14-page ruling states.

Certain emails between Credit Suisse analysts show they knew AOL's earnings projections were misleading, Gertner found. The emails also suggest that the bank negotiated with AOL about what information it would release in its reports.

To avoid "pissing off the company," one analyst, defendant Laura Martin, wrote that she "would NOT lower numbers on AOL, even though they can't make them."

Martin warned that AOL's earnings projections were "not honest" and explicitly referred to the company's "accounting gimmickry."

Other defendants' emails referred to the importance of "muffling" Martin's concerns.

Credit Suisse did not downgrade AOL's stock until September 2001, and then only to a limited degree. AOL stock plummeted when the Post published its exposé.

Gertner balked at claims that the emails were "merely internal professional disagreements," with analysts using "provocative language" in pursuit of an "honest intellectual debate" about AOL's financial prospects.

"Defendants' arguments, however, are just that, arguments providing an alternative narrative, not dispositive as a matter of law," Gertner wrote.

Regarding whether they intentionally mislead investors, "a jury could reasonably infer that they did so to curry favor with AOL in the hopes of obtaining lucrative investment banking business," she ruled.

The court concluded that summary judgment is inappropriate at this stage because sorting out the plaintiffs' claims "requires more than warring affidavits and strident briefs. It requires an evidentiary hearing."

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