Pennsylvania Pensions Pounce on Time Warner –

Last week lawyers for Time Warner, the company formerly known as AOL Time Warner, may have heard the ubiquitous email chime “You’ve got mail” augmented with “You’ve got a lawsuit” as two public pensions filed suit seeking over $100 million in damages. The Pennsylvania Public School Employees’ Retirement System (PSERS) and the Pennsylvania State Employees Retirement System (SERS) announced their filing of the lawsuit last week, claiming the media mastodon misled investors.

The two pension funds were joined as plaintiffs in the case by the Tobacco Settlement Investment Board and the State Workers’ Insurance Fund. The suit was filed in the Court of Common Pleas for Philadelphia County. The suit also names Banc of America Securities, Citigroup Global Markets, Ernst & Young, J.P. Morgan Chase & Co. and Morgan Stanley as co-defendants.

The lawsuit claims that Time Warner and those backing its January 2001 merger with AOL gave false and misleading statements about the financial condition of the companies and violated Pennsylvania and federal securities laws as well as sound accounting and financial practices. The funds claim they paid an inflated price for AOL Time Warner shares and suffered more than $100 million in losses. PSERS and SERS seek to collect on damages as well as institute new governance procedures designed to prevent future incidences of what they describe as fraud.

PSERS Chair and Pennsylvania State Treasurer Barbara Hafer and SERS Chairman Nicholas Maiale said in a statement that the pension funds were dedicated to recover losses from Time Warner and vowed that they would “not be passive victims of corporate fraud.” Time Warner declined to comment on the lawsuit.

Both PSERS and the Pennsylvania State Employees’ Retirement System (SERS) lost more than $20 billion over the last two years. The state of the public markets prior to late last year has been largely to blame for the losses. PSERS has 44.4% of its assets in domestic stocks. The bad returns led the PSERS board to raise its subsidy from individual school districts to make up for the losses, which may lead to higher property taxes in some school districts.

Two weeks ago, PSERS disclosed that its return on investments for 2003 was 25.11 percent (see story on page 50.) The pension fund’s return for the two quarters ended in December was 9.46 percent. Last August, whent PSERS announced its investment performance for the fiscal year ended in June, it ranked as the first positive returns the system had posted since the 1999-2000 fiscal year. Last fall, SERS increased its allocation to several private equity funds with $109.5 million in additional capital. The pension fund’s alternative investments program has a market value of $2.4 billion, for 11.7% of its total fund, according to SERS’ last asset allocation report. SERS has commitments to 102 buyout funds and 84 venture capital funds.

As of Dec. 31, PSERS had more than $47.3 billion in assets. The pension fund has 9.5% of its assets, which comes to about $4.5 billion, in alternative investments. PSERS is a limited partner in firms including Adams Street Partners, Spectrum Equity Investors, TA Associates, Madison Dearborn Partners and Landmark Partners. SERS manages approximately $24 billion, and its portfolio includes New Enterprise Associates, Summit Partners, Blackstone Capital Partners, Lexington Partners, HarbourVest Partners and Apax Partners.