Credit Suisse Wins Dismissal of Claims Bank Misled on AOL Stock

Former Credit Suisse Group AG Banker Frank Quattrone
Former Credit Suisse Group AG Banker Frank Quattrone. Photographer:Photographer: Tony Avelar/Bloomberg

A Credit Suisse Group AG unit and four of its former executives, including technology investment banker Frank Quattrone, won dismissal of a lawsuit alleging they deceived investors into buying AOL Time Warner stock.

U.S. District Judge Nathaniel Gorton in Boston threw out both of the claims in the class-action complaint against the bank and the executives after finding that a study by the plaintiffs’ expert witness was flawed, according to a Jan. 13 ruling. The case was set to go to trial in March.

The case was brought by individuals and a pension fund that bought stock in AOL Time Warner Inc. from the time of its merger in January 2001 until a disclosure in July 2002 of an investigation of its accounting practices. They claimed that 35 research reports issued by the unit, then known as Credit Suisse First Boston, over that period recommended buying the stock and set unattainable financial projections even as the analysts knew the company couldn’t reach those results.

The failure by the expert witness, Scott Hakala, to “isolate the effect of defendants’ alleged fraud from other industry- and company-specific news reported on event days confounds his event study and renders it unreliable,” Gorton said in his ruling.

Frederic Fox, a lawyer for the plaintiffs, declined to comment on the ruling yesterday.

Positive Recommendations

The plaintiffs, in their original complaint, said, “When issuing those reports, defendants failed to disclose significant, material conflicts of interest which they had, with respect to links between such positive recommendations and Credit Suisse First Boston’s interest in obtaining investment banking business from AOL.”

The stock dropped almost 80 percent from the time of the merger to the time the investigation was revealed. Time Warner Inc., the owner of movie studios, cable networks and magazines, merged with America Online Inc., the Internet access provider, in a $106 billion deal heralded at the time as the combination of old and new media. The arrangement never worked. Time Warner dropped AOL from its corporate name in 2003 and spun the division off into a separate public company in 2009.

Credit Suisse argued that the bank’s reports had no effect on inflating the stock and that the research wasn’t any more positive than that of other banks.


“Credit Suisse’s approach is to fight cases that we believe are meritless,” Steven Vames, a spokesman, said in an e-mailed statement yesterday. “We fought this case for 10 years and are gratified by the outcome.”

U.S. District Judge Nancy Gertner dismissed Credit Suisse’s motion to dismiss the case in 2006 saying, “Isolating the myriad causal factors that affect stock price is a factual question that should be decided at trial, with the help of qualified experts. It is not an issue appropriate for a motion to dismiss.”

Last August she denied Quattrone’s motion to dismiss the case. He moved to reconsider that ruling, saying he had nothing to do with the reports. Gertner retired last year and the case was reassigned to Gorton.

“We’re pleased with the court’s opinion and are happy to put this flawed case behind us,” Kenneth Hausman, a lawyer for Quattrone, said in a telephone interview yesterday.

Exercise Control

Quattrone was a defendant because he was said to exercise control over the two analysts sued, James Kiggen and Laura Martin. Quattrone was dismissed by Credit Suisse in 2003 and now runs a San Francisco-based boutique investment bank, Qatalyst Partners LLC, which has been an advisor in high-profile acquisitions such as Google Inc.’s $12.5 billion buyout of Motorola Mobility Holdings Inc. in 2011.

E-mails produced during the litigation showed that the analysts disagreed about AOL’s prospects. Martin was an entertainment analyst who had covered Time Warner, and Kiggen was a technology analyst who had taken responsibility for AOL Time Warner. Martin warned Kiggen in e-mails that the company couldn’t make its numbers and that its target price was too high. Also sued was Elliot Rogers, Credit Suisse’s head of research at the time. None of the four executives sued still works at the bank.

Restated Results

In July 2002, after the Washington Post published articles about AOL’s accounting practices, such as booking stock rights and bartered computer equipment as ad revenue, the company disclosed that the U.S. Securities and Exchange Commission was investigating those practices. In October 2002 AOL said it was restating financial results from September 2000 through June 2002. Its ad revenue and earnings had been inflated.

The plaintiffs cited e-mails showing that Credit Suisse analysts had heard rumors about AOL’s being under investigation and kept that information from customers. The bank said in a filing that it “had no duty to disclose any of the unsubstantiated rumors.”

The lead plaintiff in the case is the Bricklayers and Trowel Trades International Pension Fund.

Credit Suisse Group’s American depositary receipts rose 42 cents, or 1.9 percent, to $23.05 at 4:15 p.m. in New York Stock Exchange composite trading yesterday. The company is based in Zurich, Switzerland. AOL Inc., based in New York, climbed 11 cents to $15.04 yesterday.

The case is In re: Credit Suisse-AOL Securities Litigation, 02-12146, U.S. District Court, District of Massachusetts (Boston).