Merrill Lynch Faces Threat Beyond Spitzer: Investor Lawsuits
By David E. Rovella
New York, May 15 (Bloomberg) -- Merrill Lynch & Co. faces 28 shareholder lawsuits stemming from information New York Attorney General Eliot Spitzer obtained in investigating whether the world's largest securities firm misled investors with biased stock research.
Investors sued to recover losses after the collapse of inflated shares of Internet Capital Group Inc., Aether Systems Inc., Excite@Home Inc., now a unit of At Home Corp., and IPET Holdings Inc., formerly pets.com Inc., court records show.
Merrill may face damage claims of $4 billion, based on its clients' buying and selling volume of such Internet stocks and on its settlement of a similar analyst suit last July for 80 percent of damages sought, said Brad Hintz, a research analyst with Sanford C. Bernstein & Co. That's a fraction of the $118 billion in lost market value suffered by seven Internet stocks Spitzer is examining, he said.
``The New York attorney general has opened a Pandora's box of class action lawsuits and provided plaintiffs' counsel all the information needed to make their cases,'' Hintz said.
Spitzer said analysts gave favorable ratings to companies that their firms were wooing as investment banking clients.
Merrill is working to forge a settlement with Spitzer that may include a fine, increased disclosure of research and investment banking ties and the appointment of an independent board to monitor its 800 stock analysts.
Merrill Lynch spokesman William Halldin declined to comment for this article. Merrill Lynch is a passive, minority investor in Bloomberg LP, parent of Bloomberg News.
Suits Dismissed
As many as 40 percent of securities fraud suits are typically dismissed before trial, said securities law professor Joel Seligman of Washington University Law School in St. Louis. The suits against Merrill, which also name its star Internet analyst, Henry Blodget, have a better-than-average chance of success, given the e-mails and other evidence they are using from Spizter's investigation, he said.
``Cases that follow government evidence often do better,'' Seligman said.
Many investors' suits are dismissed because the allegations aren't detailed enough to satisfy the federal law under which they are brought, Seligman said. Most of those that survive are settled for less than the damages initially demanded, he said.
A suit against Morgan Stanley Dean Witter & Co. and its top Internet analyst Mary Meeker was thrown out last August for failing to state sufficient facts about her allegedly fraudulent analyst comments. It cited no company e-mails or documents, quoting instead media stories about her and other analysts.
Rules on Damages
Suits that survive dismissal face obstacles before damages may be collected. Only group suits known as class actions present a financial threat to Merrill because of the amount of damages a large number of shareholders may claim. To be certified as a class, shareholders must show they have common factual issues, such as uniform reliance on analyst comments.
Merrill may be able to argue that shareholder losses were caused by other market factors, said New York lawyer Frederic S. Fox, whose firm represents shareholders of At Home, Aether, and Internet Capital Group in suits against Merrill. In a class action, though, investors are presumed to have relied on the integrity of the market, a presumption Merrill would have to rebut, he said.
In contesting allegations of fraud, Merrill would be hampered if it has to admit any wrongdoing to settle Spitzer's case, said Herbert Milstein, a Washington, D.C. lawyer who represents Internet Capital Group shareholders.
The InfoSpace Litigation
Shareholders already suing InfoSpace Inc. before Spitzer revealed his findings added Merrill as a defendant, citing its subpoenaed e-mails in alleging fraudulent analysts' comments.
More suits involving other Internet companies touted by Merrill may follow, said New York lawyer Fred Isquith who represents another group of At Home shareholders. He is reviewing analyst statements about more than a dozen Internet companies whose stock offerings Merrill managed, he said. They include e-Bay Inc., eToys Inc. and Priceline.com Inc.
Hintz said investors may also sue because of losses they had on stocks other than the seven Spitzer is investigating: Aether, At Home, InfoSpace, Internet Capital Group, 24/7 Real Media Inc., formerly 24/7 Media Inc., Lifeminders Inc. and Overture Services Inc., formerly GoTo.com Inc.
Merrill's Internet Research Group, the focus of Spitzer's investigation, rated more than 30 such Internet stocks, which lost $360 billion in market value from their highs to their collapse, he said.
Other Investment Banks Targeted
Securities fraud suits alleging biased statements by analysts at other investment banks with brokerage units, including Morgan Stanley and Citigroup Inc.'s Salomon Smith Barney Inc., are ``certain to be filed within weeks,'' he said.
``The speculation of more cases to come suggests self-serving interests,'' said Salomon Smith Barney spokeswoman Susan Thomson. Morgan Stanley spokeswoman Diana Quintero had no comment.
Spitzer subpoenaed Citigroup, Morgan Stanley, Goldman Sachs Group and other investment banks, demanding e-mails and other relevant analyst evidence.
Spitzer's findings on Merrill, including subpoenaed e-mails, were also incorporated into 310 fraud suits accusing investment banks of rigging initial public stock offerings to inflate secondary sales prices.
Publicity about Spitzer's investigation reduced Merrill's market value by $9.98 billion since Spitzer revealed findings of his 10-month investigation April 8. Merrill shares were unchanged at $43.10. |
