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Jury Trial Demanded .41M' Defendants 105). ttne 194' s4 UNITED STATES DI p, co vi 4/1 SOUTHERN DISTRIC i W YORK - _ —1 SANDRA and RONALD BLAIR, on behalf of Civil Action No. themselves and all others similarly siWfttbci, Plaintiffs, FEDERAL SECURITIES -against- CLASS ACTION COMPLAINT MERRILL LYNCH & CO., INC. and HENRY M. BLODGET, 1=1 Jury Trial Demanded .41M' Defendants. - • • , Plaintiffs, individually and on behalf of all other persons similarly situated, by4iteir'l undersigned attorneys, for their complaint, allege upon person& knowledge as to themselves and their own acts and upon infortnation and belief as to all other matters, based upon the investigation made by and through their attorneys, which investigation included, among other things, a review of analyst reports published and disseminated to the investing public by defendant MertillLynch & Co., Inc. ("Merrill Lynch"), internal communications of Merrill Lynch employees and recent court filings by the New York State Attorney General obtaining an order requiring immediate reforms by Merrill Lynch: NATURE OF ACTION 1. This is a securities class action on behalf of public investors who purchased the common stock of At Home Corporation, doing business as Exeite@Home ("Excite" or the "Company"), during the period from August 18, 1999 through June 20, 2001, both dates inclusive (the "Class Period"). Named as defendants are Merrill Lynch and its former star interne research analyst Henry M. Blodget ("Blodget"). These defendants are charged with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. 2. During the Class Period, defendants issued to the investing public false and misleading analyst reports and ratings about the business operations and prospects of the Company. As a result of these false and misleading statements, the market price of the Company's common stock was artificially inflated, maintained or stabilized during the Class Period to the injury of plaintiffs and the Class who purchased the stock during the Class Period relying on the integrity of the price of the stock. 3. On April 8, 2001, New York State Attorney General Eliot Spitzer issued a press release announcing that he had obtained a court order requiring Merrill Lynch to make more disclosures to investors about its relationship with investment banking clients and provide more context for its stock ratings. The court action was the result of a ten-month investigation by the Attorney General that concluded that "the firm's supposedly independent and objective investment advice was tainted and biased by the desire to aid Merrill Lynch's investment banking business." The press release continues: Spitzer cites dramatic evidence that the firm's stock ratings were biased and distorted in an attempt to secure and maintain lucrative contracts for investment banking services. As a result, the firm often disseminated misleading information that helped its corporate clients but harmed individual investors. "This was a shocking betrayal of trust by one of Wall Street's most trusted names," Spitzer said. The case must be a catalyst for reform throughout the entire industry." Spitzer's office uncovered a major breakdown in the supposed separation between the banking and research divisions at Merrill Lynch. In fact, analysts at Merrill Lynch helped recruit ne-w investment banking clients and were paid to do so. The public, however, was led to believe that research analysts were independent, and that the firm' s rating system would assist them in making critical investment decisions. 2 As part of a quid pro quo between the firm and its investment banking clients, Merrill Lynch analysts skewed stock ratings, giving favorable coverage to preferred clients, even when those stocks were dubious investments. This problem and other conflicts of interest are revealed by internal e-mail communications obtained during the investigation by the Attorney General's office. These communications show analysts privately disparaging companies while publicly recommending their stacks. For example, one analyst made highly disparaging remarks about the management of an internet company and called the company's stock "a piece of junk," yet gave the company, which was a major investment banking client, the firm's highest stock rating. The communications show analysts complaining about pressure from Merrill Lynch's investment banking division. For example, a senior analyst writes: "the whole idea that we are independent of (the) banking (division) is a big lie." A senior manager stated: "We are off bases in how we rate stocks and how much we bend over backwards to accommodate banking." But nothing was done to remedy this fundamental problem. The communications show that the problems at Merrill Lynch went far beyond a single analyst ar research unit. For example, the head of the equity division wrote to analysts: "We are once again surveying your contribution to investment banking ... please provide complete details on your involvement .. paying particular attention to the degree your research played a role in originating ....<banking business.>" And most importantly, the communications show how individual investors were harmed. A research analyst complained about giving a buy rating to a poor investment: "I don't think it is the right thing to do. John and Mary Smith are losing their retirement because we don't want a client's CEO to be mad at us." (Boldface italics added; omissions and alterations in the original.) 4. Excite is among the Internet companies Merrill Lynch publicly hyped but privately disparaged in its pursuit of lucrative banking fees to the tremendous financial detriment of public investors. 3 5. Merrill Lynch had numerous, lucrative investment banking relationships with Excite. For example, Merrill Lynch coled the Company's July 1997 initial public offering and August 1998 seconday offering. In addition, Merrill Lynch was the lead manager in the Company's December 1998 debt offering. These and other engagements earned Merrill Lynch tens of millions of dollars in fees. 6. To protect this important client and maintain and enhance its lucrative banking relationships, Merrill Lynch issued positive ratings on Excite which were materially misleading as they were inconsistent with defendants' undisclosed contemporaneous negative assessments of thc Company. For example, while consistently reiterating a short-term accumulate, long-term buy rating, Blodget internally labeled the stock "neutral," with a "flat" outlook and without any "real catalysts" for improvement and tellingly called it a "piece of crap." Even at the end of the Class Period, when defendants downwardly revised the rating to neutral, they still failed to reveal their true assessments of the Company and never rated the Company reduce or sell even as it spiraled towards bankruptcy. On September 28, 2001, the Company filed a bankruptcy petition. 7. Defendants' false and misleading reports artificially inflated, stabilized or maintained the price of Excite shares. Merrill Lynch and Blodget had tremendous influence on the market price of intemet stocks, including that of Excite. Blodget enjoyed celebrity status and the reputation as one of the most influential analysts in the technology world. For example, in October 1999, Time Magazine named Blodget one of the fifty most important people shaping technology today and "arguably the most influential voice on Internet stocks in the world." The March 5, 2001 edition of Forbes referred to Blodget as a "god in the Internet world." The October 2, 2000 edition of Fortune called BIodget "the media's favorite Internet talking head." The March 12, 2001 issue 4 of The Washington Post noted that since 1998 Blodget had been named 95 times in the Wall Street Journal, 66 times in the New York Times, 53 times in The Washington Post and 27 times in Business Week. Blodget also appeared numerous times on financial news television programs. According to the April 3, 2000 edition of Business Week, Blodget appeared or was mentioned 211 times from January 1, 1999 to March 21, 2000 on ABC News, NBC News, CNBC, CNN, CN-Nfn, and Nightly Business Report. 8. Blodget's ability to significantly affect the prices of internet stocks, including Excite, was widely recognized in the financial press. For example_ on August 19, 1999, the New York Times reported that "a recommendation of eight Internet stocks [which included Excite' by Merrill Lynch's influential analyst, Henry Blodget, helped keep the Nasdaq average in positive territory...." Also that day, the Wall Street Journal noted that "electronic-commerce stocks got a sudden boost yesterday after Merrill Lynch analyst Henry Blodget told clients in a conference call that he believed sentiment is timing back toward these issues...." JURISDICTION AND VENUE 9. The claims asserted below arise under §§ 10(h) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U. S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 pro- mulgated thereunder by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10h-5. 10. Jurisdiction is conferred upon this Court by §27 of the Exchange Act, 15 U.S.C. § 78aa and, 28 U.S.C. §§ 1331 and 1337. 11. Venue is proper in this District pursuant to § 27 of the Exchange Act and 28 U.S.C. § 1391(b) since Merrill Lynch has its principal place of business in this District, and many of the acts alleged herein, including the dissemination of the misleading statements to the investing public, occurred in substantial part in this District. 5 12. In connection with the acts, conduct and other wrongs alleged herein, defendants, directly and indirectly, used the means and instrumentalities of interstate commerce, including the United States mails, interstate telephonic communications and the facilities of the national securities exchanges. THE PARTIES Plaintiffs 13. Plaintiffs Sandra and Ronald Blair purchased shares of the Company's common stock during the Class Period as set forth in the accompanying certification and have been damaged as a result of defendants' conduct as described herein.
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