The University of California announced it is going to sue AOL Time Warner. The UC claims accounting problems at the company led to plummeting stock prices and nearly a half billion dollars in lost University investments.

At an April 3 meeting in San Francisco the UC Board of Regents approved a lawsuit in California State Court against the company, its auditor, Ernst & Young LLP, and the financial advisers Citigroup, Solomon Smith Barney, and Morgan Stanley Inc. All the companies were involved in the 2001 merger of AOL and Time Warner. The University accuses them of securities fraud and alleges AOL materially misrepresented its revenues and number of subscribers before the merger, inflating its stock prices.

UC owned more than 11.3 million shares of Time Warner stock prior to the merger and traded them for inflated shares in the new company following the merger, a press release from the University stated. The value of the shares fell as the truth about AOL’s financial condition became public and the company’s shares dropped from $48 per share at the time of the merger to $11 per share today.

AOL Time Warner has restated its earnings from the period prior to and immediately after the merger, admitting to earning nearly $200 million less than originally claimed. The company also announced on March 28 that it might be required to adjust the figures downward by as much as $400 million more as a result of questions from the Securities Exchange Commission.

The UC suit will allege that AOL used illegal techniques such as “round-trip exchanges” in which it traded advertising with other Internet companies and counted the transactions as revenues.

“Under the law, a company issuing new stock … is liable to the purchasers of that stock for material misstatements that inflate the stock’s value,” UC general counsel James E. Holst said in a statement. “We believe that AOL Time Warner and its investment advisers must be held accountable for the admitted misstatement of AOL’s financial condition.”

UC has lost over $450 million of the $800 million it held in Time Warner stock at the time of the merger, an investment it considered safe.

“The UC made a sound investment in a solid company when it invested heavily in Time Warner prior to its merger with AOL,” UC treasurer David H. Russ said in a statement. “The value of that investment was heavily impaired as a result of the merger.”

AOL Time Warner is also facing a class action securities suit and investigations by the SEC and the U.S. Dept. of Justice.