Lehman Must Face Suit Over Stock Reports, Judge Rules

Lehman Bros. Holdings Inc., the fourth-biggest U.S. securities firm, must defend a lawsuit accusing the bank of misleading investors by issuing biased research reports about RealNetworks Inc., a judge said Monday.

U.S. District Judge Jed Rakoff of Manhattan said there was sufficient evidence for the case to proceed based on allegations that Lehman and analyst Michael Stanek issued favorable reports to win investment-banking work from the Seattle-based Internet company.

Lehman publicly recommended the stock to investors while privately urging others to sell, a lawsuit said.

The ruling conflicts with decisions by other judges who have dismissed suits over analyst research against Merrill Lynch & Co. and other securities firms that came under scrutiny by regulators. Plaintiffs’ lawyer Marc Gross said he expected an appeals court to resolve whether the cases may go forward.

“The stark difference between what Stanek was effectively recommending to readers of his reports” and what he told preferred customers supports an “inference of an intent of mislead and defraud the former,” the judge said in his opinion.

Wall Street securities firms agreed last year to pay $1.4 billion to settle state and federal regulatory allegations that they issued tainted research. Lehman spokeswoman Kerrie Cohen declined to comment on the decision.

The Securities and Exchange Commission last year released e-mails from Stanek as part of its investigation into Wall Street research practices.

In July 2000, Stanek told an institutional investor that he expected the price of RealNetworks to fall, Rakoff wrote in his decision.

“We bank these guys so I always have to cut the benefit of the doubt,” Stanek also wrote, according to the judge.

While expressing those views about the company, Stanek publicly urged investors to buy the stock, Rakoff said.