Boom-Era Investors Lose Again in Court

A federal judge threw out another investor lawsuit against Merrill Lynch & Co. on Wednesday, dealing a further blow to individuals who are suing Wall Street in hopes of recouping bear-market losses.

U.S. District Judge Milton Pollack dismissed a class-action lawsuit that alleged conflicts of interest at a Merrill technology fund, saying there was so much media coverage of such problems on Wall Street that investors should have known about them. A day earlier, Pollack threw out two class-action suits claiming that biased research by former Merrill stock analyst Henry Blodget caused investors steep losses on two Internet stocks.

Coupled with another judge’s dismissal Tuesday of an investor suit against three other major Wall Street firms, Pollack’s rulings show how difficult it will be for many individual investors to recover their losses through lawsuits, experts said.

Investors who file legitimate claims, especially arbitration cases with clear-cut damages, could fare well, experts said. But they said that broad-based class-action suits that simply accuse Wall Street of orchestrating a stock market bubble -- even if there is evidence that analysts hyped stocks -- are likely to fail.

“These rulings are quite significant, said Michael Perino, a securities law professor at St. John’s University. “They’re a precursor for the future of these types of claims.”

In the suit dismissed Wednesday, an investor in the Merrill Lynch Global Technology fund alleged that fund managers didn’t reveal that they invested in many companies that were Merrill investment banking clients. The suit also claimed that the fund bought stocks at prices that were inflated by misleading research reports written by Merrill analysts to win investment banking business for the firm.

Like many tech offerings, the fund soared in the late 1990s before crashing in the bear market. It jumped 143% from its start in June 1998 to the end of 1999, but shed four-fifths of its value in the next three years, according to Morningstar Inc.

Beyond citing the extensive media coverage of the conflict-of-interest issue, Pollack said investors knew the fund bought risky stocks. He also ruled Merrill wasn’t required to make the disclosures cited by investors.

“Merrill Lynch and the fund are not the insurers of plaintiff’s investment in a highly speculative sector of the market,” Pollack wrote.

Daniel Krasner, an attorney representing the plaintiffs, said people who buy mutual funds are the least-sophisticated investors, relying on funds because they don’t understand how Wall Street works.

If the ruling stands, investors in all mutual funds “won’t recover a dime” in suits against Wall Street, he said, adding that he is considering an appeal.

Mark Herr, a Merrill spokesman, said the firm was “pleased by the judge’s decision.”

On Tuesday, Pollack dismissed two class-action claims against Merrill involving 24/7 Real Media Inc. and Interliant Inc. In scorching language, Pollack labeled the plaintiffs “high-risk speculators” in search of “Olympian riches.”

The rulings are noteworthy because the 96-year-old Pollack is a securities-law expert whose opinion is likely to affect other judges hearing similar cases.

“It is always easier for judges to go along with what another judge has done previously,” Perino said. “The fact that it’s Judge Pollack makes it that much easier to follow his precedent.”

In Tuesday’s other ruling, U.S. District Judge Harold Baer dismissed claims that Goldman Sachs Group Inc., Morgan Stanley and Credit Suisse Group misled investors who bought shares of Internet firm Covad Communications Group Inc.

The spate of rulings marks a shift in tone from less than a week ago, when a $1-billion settlement was announced in a separate case involving investors and more than 300 companies that launched initial public stock offerings during the 1990s market boom.

That deal had indicated that investment banks may be vulnerable to the battery of cases being filed by investors who allege they lost money because of Wall Street’s transgressions. The announcement followed by about two months a separate, $1.4-billion settlement between government regulators and 10 Wall Street firms over alleged stock-touting by analysts.

This week’s rulings show how difficult it could be for many investors to translate broad allegations of wrongdoing -- even if the actions by Wall Street seem egregious -- into favorable decisions and financial settlements. The rulings could fall hardest on do-it-yourself investors who traded at online brokerage firms, rather than at the 10 full-service brokerages in the $1.4-billion pact with regulators.

Plaintiffs must show that analyst conflicts of interest directly hurt them, experts said. Thus, the strongest claims could come from investors at full-service brokerages who received analyst research and can prove they relied on it, said Donald Langevoort, a Georgetown University securities law professor.

“If you were just a TV watcher or a newspaper reader, or just someone in the tech market, and you think Henry Blodget and others were pumping up these stocks, you’ll have a very difficult time proving a causal relationship between what they did and your harm,” Langevoort said.

Blodget was an Internet analyst for Merrill during the market boom, but agreed to a lifetime ban from the securities industry as part of the Wall Street settlement announced in late April.

Though Pollack’s rulings pose severe problems for class-action lawsuits, many investors still can recover money through arbitrations, experts said.

Unlike judges, arbitration panels have more leeway in making their decisions and don’t have to base their decisions on strict interpretations of securities law. Arbitrators may conclude that investment banks are partly at fault for investor losses, particularly if the banks broke industry rules, and may be more inclined to side with investors.

Therefore, the battle over Wall Street impropriety may shift from high-profile legal cases to thousands of arbitration claims, experts said. “This is going to be a long-term battle,” said Perino of St. John’s, “fought in many small skirmishes over a long period of time.”