If there is a headache in the shape of activist investor Elliott Management already, AT&T executives will be reaching for the aspirin once again as investors sue over suspect figures.

Filed in the US District Court for Southern New York, Melvin Gross is the man leading a coalition of investors to sue AT&T, suggesting the management team misled investors over the performance of its DirecTV video products. The massaged figures might be viewed as an attempt to save face (as well as jobs), though the lawsuit also suggests executives were attempting to justify the incredibly expensive acquisition of Time Warner through nefarious means.

“Moreover, several of the Executive Defendants had strong personal interests in promoting the success of DirecTV Now in order to persuade the market of the logic behind the Time Warner Acquisition,” the filing states.

“The failure of DirecTV Now, prior to the closing of the Acquisition, could have jeopardized the transaction, a result that would have been disastrous for the Defendants.”

Through a combination of fake email addresses and additional charges for customers without consent, practises which were allegedly encouraged by managers, AT&T is effectively accused of fraud. Investors are also suggesting the executive team presented misleading numbers down the omission of promotional numbers. 500,000 net adds disappeared once a three month for $10 deal disappeared, though this risk was apparently not appropriately communicated.

By hyping the performance of DirecTV Now, investors might be encouraged to double-down on momentum in the content unit, funding another monstrous acquisition. However, as the lawsuit states, investors might not be buoyed to spend $108.7 billion (including debt) should the 2014, $67.1 billion DirecTV purchase be viewed as a failure.

This is somewhat of a conspiracy theory, though the DirecTV Now numbers were not anywhere near as attractive during the financial earnings call once AT&T was committed to the Time Warner transaction. As you can see from the table below, the timing is a bit suspicious:

The Time Warner acquisition was first announced in October 2016 and closed in June 2018. In the financial earnings call following the closure of the transaction (Q3 2018), the DirecTV gains started to crumble away.

With the aggressive expansion and success the AT&T executive team was suggesting up-to Q2 2018, investors will of course have been enthusiastic about adding to the momentum. On the other side, you can see why some are reasonably irked by the reality of the situation. It does appear the fact many of these gains were either irresponsibly attributed or unlikely to be anything more than short-term gain.

Although DirecTV is the focal point of the lawsuit, the Time Warner acquisition is the central cog which the saga flows around.

The content strategy from AT&T is relatively simple. The DirecTV acquisition offered a mobile-friendly content delivery model, and the Time Warner purchase offered a horde of content allowing the telco to compound gains. Both, theoretically, work independently, but the combination is more attractive if you have a bank account big enough to fund the expansion.

However, as the lawsuit suggests, investors might be a bit sheepish in giving the greenlight to a $108 billion acquisition if the ROI from the $67 billion purchase are not living up to the original promise. The AT&T theory and business model is theoretically sound, though if the lawsuit is successful, heads may roll due to the route the management team took to get to the finish line.

The content bet from AT&T is already looking suspect, and this lawsuit will not help the situation.

Alongside this filing, the management team is also under attack from Elliott Management, the vulture fund which specialises in restructuring businesses, promoting a shift towards a utilitised business model and realising short/mid-term gains through increased dividends and share price increases.

The activist investor has taken a $3.2 billion stake in AT&T and has recently sent a letter to shareholders attacking the AT&T strategy and competency of the management team. The content business has come under-fire, with Elliott Management pushing for divestments and a more stringent focus on traditional connectivity products. It’s a strategy which could force the telco down the utilitisation path, something which is unlikely to benefit the business in the long-term.

The emergence of this lawsuit certainly aids the Elliott Management case, however we think the timing is more coincidental. Some might suggest the vulture fund is behind the lawsuit, but we think it is more a case of pleasant timing.

For the AT&T management team, this is a potential disaster. Not only do these executives have an aggressive activist investor calling for their heads, they have now been named in the lawsuit, with the complainants suggesting they encouraged under-handed tactics to directly mislead the market. This is turning into a very uncomfortable month for the AT&T management team.