Merrill Settles With Former Client In Wake of Analyst's Stock Call
By CHARLES GASPARINO
Staff Reporter of THE WALL STREET JOURNAL
Merrill Lynch & Co. settled a high-profile arbitration case brought by a former client who claimed he was misled by a bullish stock call by technology-stock analyst Henry Blodget, potentially paving the way for similar actions by other aggrieved investors.
The nation's largest brokerage firm agreed to pay $400,000 to Debases Kanjilal, a 46-year-old pediatrician, capping a case he filed in March with the New York Stock Exchange, according to people with knowledge of the matter. In the civil case, Mr. Kanjilal contended that Mr. Blodget maintained a "buy" recommendation on InfoSpace Inc., an Internet stock, to support a lucrative financial deal for Merrill. Mr. Kanjilal said he had a loss of about $500,000, following Mr. Blodget's advice.
The case could have broader ramifications for the brokerage business, which has come under pressure in recent months for conflicts involving often-bullish research it provides to investors.
"It's like putting out warm milk for a stray cat that meows," says John Coffee, a law professor at Columbia University in New York. "You get 30 more cats the next night. This will create an incentive for others to" seek a legal remedy.
Arbitration cases have no precedential value, of course, and investors would have had to have suffered big losses to make it worthwhile for them to pursue similar claims against Wall Street firms or analysts.
All-Star Analyst Faces Arbitration After Internet Picks Hit the Skids (March 2)
Still, by settling the matter, Merrill could open the door for more legal action by investors who believe they were burned by snapping up shares of once-highflying technology stocks hyped by, among other things, aggressive "buy" recommendations by analysts. In most cases, Wall Street firms only made minimal disclosures about any potential conflicts, including lucrative investment-banking relationships with firms whose stocks they were touting.
For months, Merrill had said Mr. Blodget did nothing wrong in the matter and that the company would vigorously contest the charges. Thursday, a Merrill spokesman said in a written statement: "The matter was resolved to avoid the expense and distraction of protracted litigation." He declined to comment further.
Mr. Blodget, through the spokesman, declined to comment. Meanwhile, Mr. Kanjilal and his family "have settled this matter to their complete satisfaction," says Jacob Zamansky, Mr. Kanjilal's lawyer in New York.
Conflicts between analysts and investment bankers -- who believe negative research will hurt their chances of winning corporate-finance deals -- have drawn attention in the wake of last year's tech-stock meltdown. Many prominent analysts remained wildly optimistic on stocks, particularly technology shares, long after those stocks crashed, leaving many investors with big losses.
Of course, the problem isn't new: For years, some analysts at Wall Street's most prominent firms have compromised their work, caving in to pressure from their investment-banking colleagues. But now stock regulators, Congress and state prosecutors are looking into these issues, and asking Wall Street to justify its recommendations.
Mr. Blodget, a 35-year-old technology-stock analyst, has been at the center of the current storm. Merrill has long defended Mr. Blodget against his critics. Merrill had called the arbitration complaint "unsubstantiated" and said Mr. Blodget's research was not compromised.
Mr. Blodget achieved fame during the bull market in November 1998 while at Merrill rival CIBC Oppenheimer (now CIBC World Markets). That is when he predicted that Amazon.com Inc., the online bookseller, would trade at $400 a share. The stock, then trading at $240, blew past Mr. Blodget's target within four weeks -- and the analyst became a New Economy darling.
Last year, he received a pay package at Merrill exceeding $5 million and was a regular on both business television and print for his opinions on tech stocks. And, to his credit, Mr. Blodget has predicted over the years that 75% of Internet companies would fail.
But as tech shares began to stumble in the spring of 2000, so did Mr. Blodget's reputation. Many of his picks have hit the skids along with the slide in the tech-heavy Nasdaq Stock Market, and he became the focal point of criticism among some investors who argue that Wall Street analysts helped hype Internet shares so their firms could win fat fees from investment-banking deals for the same companies.
Wall Street analysts' pay increasingly is based partly on the amount of investment-banking business generated by their firms. Merrill says the pay of its analysts isn't tied directly to a banking deal, but that analysts' bonuses come from a pool of money that includes banking profits.
For his part, Mr. Kanjilal contends that he bought shares of InfoSpace in March 2000 through his Merrill broker and maintained the position despite the stock's decline based on Mr. Blodget's "buy" recommendations.
Mr. Kanjilal says he bought about 4,600 shares of InfoSpace at a split-adjusted price between $122 and $133 a share, according to Mr. Zamansky, his lawyer has said. The claim -- which names Merrill and his broker, in addition to Mr. Blodget -- contends Mr. Kanjilal wanted to sell his InfoSpace shares after they had fallen to about $60 a share in May 2000. But he says in the claim that he didn't, because his broker told him to hold on.
He also says in his claim that the broker, Michael Healy, later told Mr. Kanjilal that Mr. Healy had spoken directly to Mr. Blodget, and that Mr. Blodget said he continued to be bullish on the stock, with a price target of $100 a share. Merrill Thursday said Mr. Healy has no comment; previously, however, the company said Mr. Healy never told Mr. Kanjilal he spoke with Mr. Blodget. (Mr. Kanjilal subsequently sold his InfoSpace shares.)
InfoSpace, of Redmond, Wash., rose 14 cents to $3.29 a share Thursday in 4 p.m. Nasdaq Stock Market trading.
Mr. Kanjilal contends that Mr. Blodget had a reason to provide overly optimistic projections; he says they would help Merrill's investment-banking business -- and Mr. Blodget's paycheck.
Last summer, Merrill had been retained as a financial adviser for another Internet company, Go2Net Inc., which InfoSpace purchased in July 2000 for about $4 billion. The acquisition would have been jeopardized, the arbitration case says, if shares of InfoSpace fell before the deal closed.
"Blodget's recommendations lacked a reasonable basis in fact and Blodget failed to disclose a serious conflict of interest with the company whose stock he was touting," the arbitration filing said. |
