On-line service provider America Online is being sued for alleged insider trading.
In a class action suit, the company is accused of withholding information that would have lessened the value of its stock.
The suit has been filed in the US District Court for the Eastern District of Virginia, Alexandria Division, on behalf of purchasers of AOL common stock, during the period 10 August 1995 to 29 October 1996.
The suit suggests the company had been optimistic in predicting it would reach 10 million subscribers by June 1997, with estimated fiscal 1997 earnings of at least $1 per share. This optimism, it claims, prompted the company's stock to soar to $71 per share in May 1996.
Currently, the number of subscribers is 8 million and America Online is temporarily barred from advertising its service following legal action over its flat-rate scheme.
The suit also alleges that despite claiming profits, America Online was actually accumulating "large operating losses". It claims before the company's losses were revealed, it and 18 named executives took advantage of an artificial inflation in the stock to sell off 4.9 million shares of America Online stock at prices as high as $55.37 per share. The suit claims this action enabled America Online to obtain $139 million in much needed capital and the 18 insiders to pocket over $95 million in insider trading profits.
Jonathan Bulkeley, managing director of the company's UK operation, defended its position. He said America Online was on track for 10 million subscribers, although the advertising ban may now "slow down" the rate of growth.
He added: "There are very stringent laws in the US and I'm very confident that these laws would have been followed by the book."
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