Investors hoping to extract money they lost in the dot-com meltdown lost a couple rounds Tuesday when judges in two separate rulings tossed out class action lawsuits against Merrill Lynch and other investment banks that were bullish on the Internet stocks.
Federal Judge Milton Pollack on Tuesday granted a motion by Merrill Lynch to have the lawsuits dismissed, and sided with the investment bank’s argument that there was no evidence that the analysts committed outright fraud in their buy recommendations on the stocks.
In his ruling on the Merrill Lynch class action suits, which involved thousands of investors, Pollack said the record clearly reveals that the plaintiffs, who were aware of their high-risk speculation in highly untested stocks, “now hope to twist the federal securities laws into a scheme of cost-free speculators’ insurance.”
Pollack went on to write: “Seeking to lay the blame for the enormous Internet Bubble solely at the feet of a single actor, Merrill Lynch, plaintiffs would have this Court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners. Those few lucky winners, who are not before the Court, now hold the monies that the unlucky plaintiffs have lost-fair and square-and they will never return those monies to plaintiffs.”
A Merrill Lynch spokesperson said the company was pleased by the decision.
In a separate ruling, Federal Judge Harold Baer dismissed a similar suit against Wall Street investment banks Goldman Sachs, Credit Suisse First Boston and Morgan Stanley Dean Witter, saying there was no deliberate attempt by the industry to mislead investors as to the value of Covad Communications
Despite Wall Street’s victory in the case, these decisions aren’t all that significant, according to former Securities and Exchange Commission attorney David Marder.
“It’s very difficult to quantify what contributes to a market bubble and what doesn’t,” Marder said. “It’s unfortunate that the burden of proof lies with investors. They’re the ones who have been harmed here, and they have an impossible burden.”
Marder, who as a partner in Boston law firm Robins Kaplan Miller & Ciresi focuses on securities litigation, said that these decisions made no determination on whether analysts artificially inflated the value of individual stocks. “Investors can still bring their own cases proving an individual stock was hyped,” Marder said. “People out there are very angry that they received reports based on biased research, and this war is far from over.”
Attorney Edward F. Haber, co-chair of the plaintiff’s committee in the lawsuits, disputes Pollack’s characterization of the suit as blaming Merrill Lynch for the whole bubble.
“The lawsuit was that Merrill Lynch was putting out analyst reports recommending purchase of these companies when the entire analyst operation at [Merrill] was not an objective research analyst function but rather a sales arm of the investment banking dept designed to get investment bank fees for Merrill Lynch,” said Haber, a partner in the Washington, D.C. law firm of Shapiro Haber & Urmy.
Haber also had scathing remarks for Pollack.
“I think that he seemed to pay very little attention to the very substantial amount of detailed factual allegations in the complaints that established that the reports were fraudulent,” Haber said.
He said that the plaintiffs “respectfully disagreed” with the way the judge perceived the basis of the lawsuit and said that the motion to dismiss was not the proper time and place to make such an analysis.
Investors sued Merrill Lynch after New York Attorney General Eliot Spitzer in April of 2002 released e-mail correspondence from Merrill’s then-high-flying Internet analyst Henry Blodget. The e-mails privately dissed stocks that Blodget’s official research touted as strong buys.
At the time, Spitzer said a 10-month investigation into Merrill concluded that the firm’s investment advice was tainted and biased by the desire to aid Merrill’s investment banking business. As a result, the AG said, the firm often disseminated misleading information that helped its corporate clients but harmed individual investors.
Comments that were quoted in court papers included e-mails from Blodget, who has since left Merrill, describing 24/7 Media
as a “piece of s—“, GoTo.com as “nothing interesting about company except banking fees”, and [email protected] as “such a piece of crap.”
Wall Street banks have also reached a $1.4 billion settlement with Spitzer and self-regulatory agencies as a result of Spitzer’s probe into their bullish views on dot-com and technology stocks that later plummeted in value when the market sell-off hit in early 2000. The settlement includes about $400 million for some investors who were clients of the banks involved.
The plaintiff’s attorney Haber also promised another round. “We think the judge did not correctly apply the law in deciding the motion to dismiss,” he said. “We are reviewing the situation, and we will appeal.”