Ohio Attorney General Dave Yost is taking the lead in a securities class-action lawsuit against Warner Bros. Discovery. The suit alleges that the company purposely misled investors, resulting in $25.5 million in losses for the State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System.
The lawsuit revolves around AT&T’s spin-off of WarnerMedia and the subsequent merger of WarnerMedia with Discovery, Inc. this April. The suit was originally filed in the U.S. District Court for the Southern District of New York as Collinsville Police Pension Board v. Discovery, Inc. Allegedly, both Warner Bros. Discovery President and CEO David Zaslav and CFO Gunnar Wiedenfels knew, or at least had access to, unfavorable financial information about WarnerMedia but did not disclose it prior to the merger closing. The disclosure of this sort of information is required by law.
WarnerMedia’s finances were in disarray prior to the merger and the company intentionally hid that fact from Discovery investors, the lawsuit goes on to allege. The adverse financial information Zaslav and Wiedenfels allegedly chose not to disclose included several important facts regarding the company’s health, such as that, unless its high churn rate could be reversed, WarnerMedia’s HBO Max streaming business was not “viable;” that AT&T had overinvested in streaming content for WarnerMedia entertainment; and that the number of HBO Max subscribers had been drastically overstated (by as many as 10 million) by WarnerMedia.
It was not until after the merger, Yost claims, that Zaslav disclosed the fact that the company would be closing many of its money-losing business lines. Later, Zaslav announced that, due to those closures, the company would need to write down between $3.2 billion and $4.3 billion.
“Warner Bros. Discovery willfully withheld financial information that it was legally obligated to reveal for one highly self-serving reason – to ensure the merger’s approval,” Attorney General Yost said in a statement. “In doing so, it created market distortions that cost Ohio’s pension systems and other institutional investors dearly.”
From April 11 (the first trading day after the merger was completed) to September 23, the price of Warner Bros. Discovery’s common stock dropped by more than 52%, according to the lawsuit. The share price plummeted from $24.78 to $11.79, which reduced the company’s market capitalization by more than $31 billion.