The lawsuit, filed in U.S. District Court in Alexandria, Virginia, charges that AOL withheld information that would have deflated the price of its stock between August 10, 1995 and October 29, 1996. The complaint also alleges that AOL executives sold large percentages of their own holdings, knowing that the information they would reveal later would reduce the share price.
AOL has denied any wrongdoing. "AOL is confident that we acted in full compliance with all applicable securities laws," company spokeswoman Tricia Primrose said.
The complaint was filed on behalf of shareholders by several law firms, including Milberg Weiss, Bershad Hynes & Lerach, Morris and Morris, and Richards McGettigan, Reilly & West. All of these firms specialize in such suits.
Law firms specializing in securities class-action complaints file several hundred such suits every year, often against technology firms. Last November, the practice became a national issue when a California ballot initiative was introduced to make such lawsuits easier to file. The measure, known as Proposition 211, failed.
Karen Morris, a partner with Morris and Morris, said this was not just any boilerplate lawsuit. She said her firm spent several months investigating AOL after an investor complained about losing money in May.
"We do a lot of class-action work," Morris said. "We do it in the securities area, the antitrust area, the limited partnership area. We try to be careful about what we file."
Specifically, the suit alleges that AOL should not have deferred its subscriber acquisition costs. Instead of taking charges for the costly program to attract customers, AOL had spread out its expenses over two years. AOL also told shareholders at the time that its Internet service, Global Network Navigator, and its Web browser made the company more attractive and competitive.
The combination of those factors caused AOL's stock to soar "to an all-time high of $71 per share in May 1996," according to a statement released by the plaintiffs.
But the stock dropped from June through October when AOL revealed that "it was suffering from slowing subscriber growth and increased subscriber cancellations," according to the statement.
When AOL announced its reorganization in October, the company said it was taking a $385 million writeoff for the previously deferred subscriber acquisition costs, a move that was widely praised by investors at the time. It also announced that it would take a $75 million charge for restructuring and added that it was eliminating its GNN service and Web browser, which had failed in the quickly changing market.
With those moves, the plaintiffs allege, "AOL instantly eliminated in its entirety the largest single asset on its balance sheet, reduced its shareholders' equity by 80 percent and wiped out by five times-over the total pretax net income it had ever reported."
But others would argue that AOL could not have predicted how the market would turn in an industry that changes hourly, if not daily.
In addition, the suit alleges that AOL won't be able to make good on its goal of 10 million subscribers by June and that the company will be far less profitable than it had led investors to believe.
The suit also alleges that 18 AOL "insiders" profited handsomely by selling large amounts of stock in the period cited. In one instance, it alleges that CEO Steve Case himself sold 76 percent of his stock, or 575,000 shares, netting $29.1 million.
But AOL's Primrose said those figures are misleading because the percentages "fail to take into account all the shares the individual has under stock options."
In other words, she said, an employee might be entitled to purchase 10,000 shares but decide to buy only 1,000 of them and then sell 750. She said she did not know why company executives chose to sell their stock when they did.