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Essenmacher, Et Al. V. Merrill Lynch & Co., Inc., Et Al. 02-CV-10172-Class

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Essenmacher, Et Al. V. Merrill Lynch & Co., Inc., Et Al. 02-CV-10172-Class UNITED STATES DISTRICT COURT DISTRICT OF MICHIGAN GEORGE ESSENMACHER, individually and No. 0 2 - 1 0 17 2 on behalf of all others similarly situated , Plaintiff, CLASS ACTION COMPLAINT FOR VIOLATION OF THE V. FEDERAL SECURITIES LAWS MERRILL LYNCH & CO ., INC. and HENRY BLODGET, JURY TRIAL DEMANDED Defendants. DAVID M. L AWSON '1 R! ,rem ~~`~ IF MArn~r~rW ' JU L; . BK~t.DE CLASS ACTION COMPLAINT Plaintiff George Essenmacher (" Plaintiff') alleges the following based upon the investigation of counsel, which included a review of United States Securities and Exchange Commission ("SEC") filings by Lycos ("Lycos," "LCOS," or the "Company"), as well as regulatory filings and reports, securities analysts' reports and advisories about Lycos issued by Merrill Lynch & Co. ("Merrill Lynch"), press releases and other public statements issued by Merrill Lynch, and media reports about Lycos. Plaintiff believes that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable op rtunity for discovery. NATURE OF THE CLAIM rn 1 . This is a federal securities class action brought by Plaintiff g pst Dendant . CD Merrill Lynch and Henry Blodget ("Blodget") on behalf ofa class (the "Class consi1g of all persons or entities who purchased Lycos securities from June 15, 1999 through May 17, 2000, inclusive (the "Class Period") . Plaintiff seeks to recover damages caused to the Class by Defendants' violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule IOb-5 promulgated thereunder, and Section 20(a) of the Exchange Act . 2. This action arises as a result of the manipulation by means of deceptive and -t- manipulative acts, practices devices and contrivances, of the market prices of Lycos securities with the intent, purpose and effect of creating and maintaining an artificial high market prices. Defendants accomplished the manipulation by issuing Merrill Lynch analyst reports regarding Lycos that recommended the purchase of Lycos common stock, and set price targets for Lycos common stock , which were materially false and misleading , lacked any reasonable factual basis were contrary to the actual beliefs held by the analysts. When issuing their Lycos analyst reports, Defendants failed to disclose si gnificant, material conflicts of interest which resulted from their use of Blodget's reputation and his ability to influence the actions of buyers and sellers of Internet securities by issuing favorable analyst reports, in order to cur ry favor with internet companies and thereby to obtain the their investment banking business for Merrill Lynch. Throughout the Class Period , Defendants maintained at least an "ACCUMULATE/BUY" recommendation on Lycos in order to obtain and suppo rt lucrative financial deals for Merrill Lynch. 3 . The Class Period begins on June 15, 1999 . The Class Period ends on May 17, 2000, the date of the announcement of the merger of Lycos and Terra Networks SA . 4. As demonstrated herein, Blodget's highly-publicized reputation as an analyst o f Internet companies, coupled with Defendants' positive reports and "ACCUMULATEIBUY" and "BUY/BUY" recommendations on Lycos, significantly and artificially inflated the price of Lycos securities throughout the Class Period . Defendants' recommendations of Lycos and the price targets which they set for Lycos common stock lacked a reasonable basis in fact, failed to state the true beliefs of the analysts, and were dominated and influenced by Defendants' undisclosed serious conflict of interest arising out of Merrill Lynch's desire to act as a financial advisor to Lycos, and to obtain the highest possible price for securities of Lycos held by Merrill . 5 . On April 8, 2002, the Office of the Attorney General of the State of New York (the "Attorney General") filed in the Supreme Court of the State of New York, County of New York an Application for an Order Pursuant to [New York] General Business Law Sec . 354 (the -2- "Application"), which Application named Merrill Lynch, Blodget and other past or present officers or employees of Merrill Lynch as Respondents . In support of the Application, the Attorney General filed an Affidavit in Support of Application for an Order Pursuant to General Business Law Sec. 354. The Affidavit was sworn to by Eric Dinallo, Chief of the Investment Protection Bureau of the New York State Department of Law (the "Dinallo Affidavit" or "Dinallo Af ") . A copy of the Dinallo Affidavit is attached hereto as Exhibit A, and it is incorporated herein, in full by reference. JURISDICTION AND VENUE 6. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U .S.C. §78aa, and 28 U.S.C. § 1331 . This action arises under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §78j(b) and §78t(a), and the rules and regulations promulgated there under, including SEC Rule IOb-5, 17 C .F.R. 240.1Ob-5. 7. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15 U.S.C. §78aa) and 28 U .S.C. §1391(b) and (c). Substantial acts in furtherance of the alleged fraud and/or its effects have occurred within this District and Merrill Lynch maintains multiple offices in this District. 8. In connection with the facts and omissions alleged in this Complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications, and the facilities of the national securities markets . PARTIES 9. Plaintiff George Essenmacher purchased Lycos securities, as set forth in the attached certification, and was damaged thereby. 10. Defendant Merrill Lynch has its headquarters located at 4 World Financial Center, 250 Vesey Street New York, New York . Defendant Merrill Lynch is the largest securities broke r -3- in the United States and maintains multiple offices in this District . Merrill Lynch claims to be one of the world's leading financial management and advisory companies with offices in 44 countries and total client assets of about $1 .6 trillion. As an investment bank, Merrill Lynch claims to be the top global underwriter and market maker of debt and equity securities and a leading strategic advisor to corporations, institutions, and individuals worldwide . 11 . Defendant Blodget was at all relevant times an Internet stock analyst and Firs t Vice President of Merrill Lynch. In the Fall of 2001, Merrill Lynch asked Blodget to resign by offering him a buy-out offer which would pay Blodget approximately $2 million. On November 14, 2001, it was announced that Blodget was resigning as an Internet analyst at Merrill Lynch. SUBSTANTIVE ALLEGATIONS Background 12. Since 1999, the internet research analysts (the "internet group") at Merrill Lynch have published on a regular basis ratings for internet stocks, including Lycos, that were materially false and misleading because : (1) the ratings in many cases did not reflect the analysts' true opinions of the companies ; (2) no "reduce" or "sell" recommendations were issued as a matter of undisclosed, internal policy, thereby converting a published five-point rating scale into a de facto three-point system; and (3) Merrill Lynch failed to disclose to the public that Merrill Lynch's ratings were tarnished by an undisclosed con flict of interest: the research analysts were acting as quasi-investment bankers for the companies at issue , often initiating, continuing , and/or manipulating research coverage for the purpose of attracting and keeping investment banking clients, thereby producing misleading ratings that were neither objective nor independent, contrary to Merrill Lynch's representations . 13 . There was a serious breakdown of the separation between the Merrill Lynch banking and research departments, a separation that was critical to the integrity of the recommendations issued to the public by Merrill Lynch. Merrill Lynch's stated policies reflect an understanding that this separation is crucial. -4- I. 14. The pressure put on the Merrill Lynch internet group to appease both investment bankers and potential investment banking clients led the group to ignore the bottom two categories of the five-point rating system ("reduce" and "sell") and to use only the remaining ratings ("buy", "accumulate" and "neutral") . The absence of clear guidance from Merrill Lynch management on how to resolve the conflicts created by these pressures led Blodget, the head of the internet group, in an internal Merrill Lynch e-mail, to threaten to "start calling the stocks (stocks, not companies) . .. like we see them, no matter what the ancillary business consequences are." The Internet Group 's Stock Ratings Were Misleadin g 15. Merrill Lynch and Blodget rated internet stocks, including Lycos, both for Intermediate-Term and Long-Term growth as follows : BUY/BUY (1-1), ACCUMULATE/BUY (2-1), ACCUMULATE (2-2), NEUTRALBUY (3-1) and NEUTRAL (3-2) . Although Merrill Lynch's published rating system provided for 4s (reduce) and 5s (sell), the internet group never used 4s or 5s. The list of covered internet stocks for the second quarter of 2000, for instance, lists 24 stocks, none of which was rated less favorably than a 2. From the spring of 1999 to the fall of 2001, Merrill Lynch never published a single reduce or sell rating on any stock covered by the internet group. In sworn testimony,' both Blodget and his subordinate, Kirsten Campbell, confirmed that the group never rated a stock 4 or 5 . Thus, although represented to be a five point system, it was in actuality a three-point system . 16. Defendants represented that their Ratings Criteria for the combined Intermediate- Term and Long-Term ratings on all of the Internet stocks that they rated, including Lycos, were as follows: BUY/BUY (1-1 ) • Dominant leader with a clean story in a sector with strong growth prospect s References to sworn testimony and internal Merrill Lynch a-mails are based upon testimony taken and documents received by the New York State Attorney General in connection with his investigation of Merrill Lynch.
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