Actual Affidavit filed by the NY Attorney General
Within the link below, of a two page 4/12/2002 article about the Merrill Lynch case titled,
MOPING UP AFTER MERRILL LYNCH
A perfect storm of wrongdoings, illegal maneuverings, and shady deals has shaken investors' confidence in business institutions.
can be found (about half was down the first page of the two-page article) a ".PDF" link (which can be downloaded) of the actual public affidavit filed by the New York State Attorney General Elliot Spitzer against Merrill Lynch, Henry Blodget, et al. It was filed one week ago today, on April 8, 2002. Perhaps he didn't file it exactly one week prior (on April 1), as it would have made the long-term shareholders feel like even bigger "Fools" then they already do):
business2.com
It's just shocking...I mean REALLY SHOCKING! To read some of the purportedly actual e-mail quotes attributed to Blodget and other Merrill Lynch people regarding their true opinions of InfoSpace, contained in the the affidavit. And some of the things they said about the beloved CEO Naveen Jain are just plain nasty and mean. I mean really REALLY mean...and I'm just shocked to my very core. ;) Heck, I've always thought of Jain as such a sweet little man, who's just been a little misunderstood by virtually the entire world, and has just been trying his very best to become an incredibly filthy rich Arrogant A**hole (his words), while building the "World's First Trillion Dollar Company"...with "A Little Help From (his) Friends"...like the Merrill gang and their absolutely brilliant tech stock guy, the late 90's darling of Wall Street...good old Henry the B. himself).
Below are a few excerpts from the 38 page Affidavit
(lots of other stuff in the full document):
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(From Pages 1-2)
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
-----------------------------X
IN THE MATTER OF
An Inquiry by ELIOT SPITZER, Index No.
Attorney General of the State of New York,
AFFIDAVIT IN SUPPORT OF
APPLICATION FOR AN ORDER
PURSUANT TO GENERAL
BUSINESS LAW SECTION 354
Petitioner,
Pursuant to Article 23-A of the General Business
Law of the State of New York with regard to the
acts and practices of
Merrill Lynch & Co., Inc., Henry Blodget,
Justin Baldauf, Kirsten Campbell,
Virginia Syer Genereux, Sofia Ghachem,
Thomas Mazzucco, Edward McCabe and
Deepak Raj,
Respondents,
In the offer, sale, issuance, promotion, advertisement,
exchange, marketing, distribution and transfer of,
or investment advice for, securities in and from
the State of New York.
-----------------------------X
County of New York )
ss:
State of New York )
Eric R. Dinallo, being duly sworn, deposes and says:
I am the Chief of the Investment Protection Bureau of the New York State Department of Law and am of counsel to Eliot Spitzer, Attorney General of the State of New York.
I am familiar with the facts and circumstances of the above-captioned investigation that give rise to the within application. The following statements are made upon information and belief based upon an examination of records and documents in the possession of the New York State Department of Law and testimony taken before the Attorney General's Office. On behalf of Attorney General Eliot Spitzer, I submit this affidavit, together with exhibits, in support of the Attorney General's ex parte application for the attached order pursuant to Section 354 of the General Business Law ("GBL").
In June 2001, the Office of the Attorney General commenced an investigation pursuant to GBL Article 23-A (the 3Martin Act2) into stock recommendations issued by research analysts. The investigation includes recommendations on all stocks covered by the internet research analysts at Merrill Lynch and, very recently, has expanded to include recommendations made by analysts at several additional financial institutions.
The Office of the Attorney General has to date reviewed over 30,000 documents, comprising over 100,000 pages, including thousands of e-mails. It has examined close to twenty witnesses under oath, and has consulted with other witnesses, their lawyers, and experts. While Merrill Lynch has been cooperative in producing evidence, some of the witnesses examined have displayed an implausible lack of recollection of key conversations and documents, even when they authored or received such document and it was placed before them. This lack of recollection often related to events and documents that one would be unlikely to forget. The credibility of these witnesses is consequently suspect. Thus, further testimony is sought under judicial supervision and with public scrutiny.
(From Pages 32-35)
2. INFOSPACE
Merrill Lynch initiated coverage of InfoSpace in December 1999 with a rating of 2-1 (accumulate-buy) and a price objective of $160. The stock then traded at $152.50. Shortly thereafter, Merrill Lynch upgraded the rating to 1-1. As of March 2, 2000, the price had reached $261, but thereafter the stock steadily dropped. Yet Merrill Lynch's internet group maintained a 1-1 rating on the stock to December 10, 2000, when the price was $13.69. (7) No sell rating was ever issued.
Throughout 2000, Merrill Lynch strongly supported InfoSpace. By March 21, 2000, it had upgraded its rating to a 1-1 (buy-buy), even though the stock was down considerably from its high, and concerns about the company's accounting practices had surfaced. The price objective nevertheless was then at $200. (ML 00002).
Around this time, Merrill Lynch was courting investment banking business from Go2Net, a technology company. On an April 5, 2000 conference call, Blodget and Mazzucco gave Go2Net a "presentation" about Merrill Lynch's investment banking and research abilities. In written materials, Blodget was promoted with a photograph and InfoSpace was listed as one of Merrill Lynch's covered stocks. (ML 09260-61; ML 09279-80).
While the internet group continued to promote InfoSpace stock with buy/buy ratings, Merrill Lynch brokers began to raise numerous and serious questions about Merrill Lynch's support of the stock in e-mails to Blodget and respondent Sofia Ghachem between April and July: "What is the deal with InfoSpace . . . [I] feel reluctant to push it these days," (ML 05795) "should we be concerned about this . . . InfoSpace reported a loss of 38 cents a share, compared to a loss of 3 cents per share a year ago . . . " (ML 05902) and "the stock continues to underperform and . . . few mutual fund managers are buying this stock . . . maybe we should re-evaluate our stance, i am really
(*Footnote #7: From December 1999 to December 2000, the stock split twice, each time at two for one.)
concerned for our clients." (ML 06230). Ghachem also was questioned about InfoSpace's management selling their shares of the stock. (ML 06228-29).
By June 1, 2000, the stock price had fallen to $43, but Merrill Lynch continued its buy/buy ratings. (ML 00049-50). On June 15, 2000, Blodget e-mailed Ghachem, confessing "enormous skepticism" about the stock. (ML 06257-58). On June 20, Ghachem e-mailed Blodget to inform him that investment banking was meeting with InfoSpace on June 27 th, and the bankers had promised InfoSpace that Blodget would appear. (ML 06334).
Merrill Lynch's buy ratings continued into early July 2000. On July 10, 2000, Go2Net went on Merrill Lynch's Grey Scan list, because Go2Net had asked Merrill Lynch to undertake a sale of Go2Net to InfoSpace. (ML 02026-27). The next day, Merrill Lynch issued a "company update" commonly referred to as a "booster shot" on InfoSpace reiterating its buy rating. (ML 00068-69). Unlike several other company updates on InfoSpace, no discernable reason was given for the update. In mid-July, Blodget complained to Ghachem, "I'm getting killed on this thing," (ML 06417), yet his buy ratings for InfoSpace continued, even as the stock dropped further in price.
On October 26, 2000, Merrill Lynch completed the sale of Go2Net to InfoSpace. (ML 02027). On December 11, 2000, Merrill Lynch finally reduced its rating to accumulate; the price had hit $13. On December 20, 2000, Merrill Lynch issued a research bulletin indicating that InfoSpace's Vice-President had filed a lawsuit against InfoSpace's CEO, alleging multiple securities violations and racketeering. (ML 00384-87; ML 00397).
From July 2000 through April 2001, e-mails reflect tremendous doubts by the Merrill Lynch analysts as to the future of InfoSpace and the ethics of its CEO. While Merrill Lynch's rating sat at 1-1 with a price objective of $100, its analysts graphically observed that the stock "is a piece of junk" and "toast" if the CEO leaves. (ML 06578; ML 6407-08). When a Merrill Lynch broker wrote to Blodget commenting on InfoSpace's poorly written 1999 annual report. Blodget responded, to Ghachem that he "would love to reset the price target to $30 or something." (ML 06577). Even after Merrill Lynch finally downgraded the stock to 2-1 in December of 2000, the stock still enjoyed an 'accumulate' rating, despite the internet group's frank internal comments about "what a sleazebag" the CEO was and how Blodget now was "officially not comfortable" with the CEO being associated with the company. (ML 00397; ML 06769-70; ML 06771-72).
The evidence suggests that business considerations influenced the internet group in maintaining its buy rating for InfoSpace as long as it did. The group regarded InfoSpace important to Merrill Lynch's banking business, as evidenced by a May 17, 2000 e-mail to a member of the Merrill Lynch retail staff:
This company [InfoSpace] is very important to us from a banking perspective, in addition to our institutional franchise. ...
(ML 48862) (adding that "non-deal roadshows" for companies such as InfoSpace "have a tremendous effect on our banking efforts").
III. NECESSITY OF THE SECTION 354 ORDER
The foregoing summary of some of the evidence gathered by the Attorney General's investigation to date pursuant to GBL § 352 demonstrates that profoundly troubling questions pervade Merrill Lynch's research and rating system, as that system has been employed by the company's internet group. Contrary to the image of objectivity that Merrill Lynch has sought...
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