UPDATED: The charge comes from Starboard Value CEO Jeffrey Smith, whose investment company controls 4.5% of AOL, in a scathing nine-page letter today to CEO Tim Armstrong.  AOL has lost about 36.5% of its market value this year and the “dismal absolute and relative stock price performance clearly demonstrates shareholders’ strong frustration with the current performance and future direction of the Company,” Smith writes. He’s particularly angry with the efforts to buy and build content sites that can attract display ads. Smith says that AOL spent $1.7B on assets such as the Huffington Post, Moviefone, Engadget, TechCrunch, and local news operation Patch. But shareholders put no value on them and instead are “penalizing AOL for its continued investments and losses.” For example, he figures Patch could lose $150M in 2011. “The current situation is unsustainable,” he says also citing executive departures that suggest there’s “a high level of frustration inside the Company over its current strategic direction.” The bottom line: Smith wants to meet with management to discuss a change in direction.

AOL says, in response, that over the last two years it “has significantly reduced costs, sold non-core assets, made significant investments for our future, and also recently repurchased over 10% of outstanding shares. AOL has a clear strategy and operational plan to provide our consumers and customers with exceptional value, which we believe will lead to the creation of shareholder value.” The company’s board and management are “firmly committed to creating value for all shareholders and we will continue to aggressively execute on our strategy in 2012 as we continue the turnaround of AOL.”