Merrill Settles Research Suits
Merrill Lynch & Co. said Friday that it would pay $164 million to settle 23 class-action lawsuits alleging that investors suffered massive losses by following its dishonest stock recommendations, including those from its former star technology analyst, Henry Blodget.
The settlement represents a fraction of the money investors lost when the Internet bubble burst in 2000 and the stocks collapsed, and it will barely dent Merrill’s bottom line. The Wall Street powerhouse reported $5.2 billion in profit last year.
But prospects that investors would get any restitution had been in jeopardy since a federal judge in New York dismissed 11 of the cases in 2003.
“Perhaps this is not as much money as I would have liked to have gotten,” said Herbert Milstein, the lead investor attorney on 20 cases. “But under the circumstances, it’s a very good settlement.”
Merrill said in a statement that it made the deal to “avoid the significant distraction and expense of further litigation and provide our shareholders with the certainty that these cases are finally resolved.”
Outside experts questioned that explanation, pointing out that $164 million was a substantial sum considering that Merrill appeared to be in a strong legal position.
“There has to be something that we don’t know,” said John Coffee, a Columbia University law professor. “To simply explain that they’re doing this to avoid litigation assumes that they’d be willing to throw money down a rat hole.”
The plaintiffs had appealed the 11 dismissals ordered by the late U.S. District Judge Milton Pollack. The other 12 had yet to be ruled on by the district court.
Pollack died in 2004, perhaps leading Merrill to conclude that its results with another judge would not be so lopsided in its favor, Coffee and other analysts speculated.
It is unclear how much each investor will receive, in part because it is unknown how many will apply for reimbursement. Plaintiffs’ lawyers normally get as much as 20% in settlements of this size, said Michael Perino, a specialist in securities class actions at St. John’s University in New York.
Investors unleashed an avalanche of lawsuits and arbitration cases after the demise of the 1990s bull market but have lost many of them.
In the Merrill suits, the plaintiffs alleged that the company and Blodget had hyped the prospects of Internet companies including Pets.com, Homestore.com and former Web retailer EToys.
Pollack sneered at the plaintiffs’ argument in 2003 that they were entitled to awards for damages, pointing out that the stocks were highly speculative in the first place.
“That was as antagonistic a treatment of plaintiffs as I’ve seen,” said Henry Hu, a securities law professor at the University of Texas at Austin.
Blodget was considered a wunderkind analyst whose telegenic looks and brash stock calls made him a darling of the Internet era. He made his name in 1998, working for CIBC Oppenheimer, by predicting that vaunted online bookseller Amazon.com would vault past $400 a share -- a feat it managed shortly thereafter, thanks in part to his forecast.
Blodget, having moved to Merrill, later agreed to pay $4 million to settle a regulatory probe into whether he touted weak stocks to curry favor with corporate managements.
Blodget, who declined to comment, has sought to resurrect his image in recent years. He covered Martha Stewart’s trial for the online magazine Slate and is now president of Cherry Hill Research, which describes itself as a publishing firm specializing in Internet businesses.
