WBD Investors Stand by Claims That CEO Zaslav Duped Them in Merger’s Run-Up

Warner Bros. Discovery and CEO David Zaslav “accomplished” the April 2022 WarnerMedia buy from AT&T with offering documents “that misrepresented key components of WarnerMedia’s business,” said the plaintiffs’ opposition Friday (docket 1:22-cv-08171) in U.S. District Court for Southern New York to WBD’s April 7 motion to dismiss their consolidated amended securities fraud complaint (see 2304100035). WBD’s motion to dismiss called the lawsuit “a classic case of pleading by hindsight.”

WBD investors were promised that combining Discovery and WarnerMedia content “would allow WBD to compete in the industry’s transition to streaming programming,” said the opposition. WarnerMedia also committed billions of dollars to new content development to attract new viewers to its streaming service, “purportedly further enhancing WBD’s ability to compete” in the streaming wars, it said. Investors expected the arrival of CNN+ to figure prominently in Zaslav’s forecast that WBD could deliver 200-300 million subscribers to its streaming services, it said.

Investors thus were “surprised and disappointed” by a “string” of WBD disclosures soon after the WarnerMedia buy closed that “contradicted representations” in the offering documents, said the opposition. First was the WBD announcement less than two weeks after the transaction closed that it had shut down CNN+, “dashing investor hopes for any subscriber and revenue bump associated with WarnerMedia’s news programming,” it said. Then came a series of downgrades to WBD’s 2022 and 2023 financial projections that management blamed on WarnerMedia content investments that had been “lacking.”

Next were WBD’s disclosures that 11% of the combined company’s previously reported subscriber numbers were “actually nonpaying and non-core subscribers,” said the opposition. WBD’s strategy to make future disclosures more transparent was to eliminate those subscribers from future counts, it said: “Combined, these disclosures caused the price of WBD to decline by 31.1% from the price paid by investors who acquired the new WBD shares in the Offering.”

The WBD defendants in their motion to dismiss “deploy a host of unsuccessful tactics to escape accountability,” said the opposition. They also argue, “at every turn,” that their omissions and misrepresentations weren’t “material,” it said. But the plaintiffs’ “burden to plead materiality -- a determination rarely made on a motion to dismiss -- is particularly low in asserting Securities Act claims,” it said. The complaint, where applicable, “pleads quantitative materiality, and in all instances, qualitative materiality,” it said.

The WBD defendants "disclaim knowledge of certain omitted information -- including that which they claim” the plaintiffs knew, said the opposition. “Thus, information they argue was widely known was also, apparently, not known to them,” it said. “This inference is made even more implausible” by the defendants’ yearlong due diligence process, including access to WarnerMedia’s “data room,” it said.

The complaint “pleads actionable false statements and omissions,” said the opposition. Investors and analysts, for example, were paying close attention to WarnerMedia’s and Discovery’s subscriber numbers because the ability to compete with Netflix and Disney for streaming subscribers was given as a “prime rationale” for the deal, it said.

But by not disclosing the number of nonpaying, inactive subscribers in the mix at HBO and HBO Max, or the noncore subscribers at Discovery, the WBD defendants “misled investors” to conclude that they didn’t comprise “a material amount of the totals,” said the opposition. The defendants also duped investors into believing that the subscriber numbers provided “were an appropriate comparison” with those at WBD’s competitors, Disney, Amazon and Netflix, it said: “This was false.”

WBD investors were “stunned” on April 21, 2022 -- 13 days after the transaction closed -- that CNN+ was canceled, said the opposition. The complaint alleges the decision to shutter CNN+ was made before the closing, it said. WBD eliminated the CNN+ marketing budget April 11, 2022, the first business day after the transaction closed, it said. The “rapidity” of a decision to eliminate the CNN+ budget “demonstrated that the cancellation decision had been made before the deal closed,” it said. WBD’s stock purchasers were misled by the failure to disclose that WBD’s new management had decided to cancel CNN+, it said.