Lloyd, Et Al. V. Morgan Stanley Dean Witter & Co., Et Al. 01-CV-7263

Home , Dean Witter Reynolds, Mary Meeker

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.„.reg • :4111.116. IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

NANCY LLOYD, on behalf of herself : and all others similarly situated, 0.14114_772_6 3 CLASS ACTION COMPLAINT Plaintiff, • FOR VIOLATIONS OF THE • FEDERAL SECURITIES LAWS v. • MORGAN STANLEY DEAN WITTER :O1t1 1\ & CO. and MARY MEEKER, • Defendants. • JURY TRIAL DEMANDED

Plaintiff, by her undersigned attorneys, individually and on behalf of the Class described

below, upon actual knowledge with respect to the allegations related to plaintiff's purchasd of the - common stock of America Online, Inc./AOL Time Warner, Inc. ("AOL" or the "Company"), and - upon information and belief with respect to the remaining allegations, based upon, inyr Wig, the

investigation of plaintiff's counsel, which included, among other things, a review of public

statements made by defendants and their employees, Securities and Exchange Commission

4 ("SEC") filings, and press releases and media reports, brings this Complaint (the "Complaint")

against defendants named herein, and alleges as follows:

SUMMARY OF Tin. Ac_TION

1. In October 1999, Fortune named defendant Mary Meeker ("Meeker) the third

most powerful woman in business, commenting, Ihler brave bets — AOL in '93, Netscape

'95, e-commerce in '97, business to business in '99 — have earned her eight "ten-baggers", stocks

that have risen tenfold. Morgan Stanley's "We've got Mary" pitch to clients has been key to its

prominence in Internet financing. Her power is awesome: If she ever says "Hold Amazon.com ", IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

NANCY LLOYD, on behalf of herself . 0.1 CIV • 2-6 3 and all

: CLASS ACTION COMPLAINT : FOR Plaintiff VIOLATIONS OF THE : FEDERAL SECURITIES LAWS ' v. . r

MORGAN STANLEY DEAN WITTER & CO. and MARY MEEKER, Defendants. . JURY TRIAL DEMANDED

Plaintiff, by her undersigned attorneys, individually and on behalf of the Class described below, upon actual knowledge with respect to the allegations related to plaintiff s pnrchasd of the . ~ .. common stock of America Online, Inc./AOL Time Warner, Inc. ("AOL" or the "Company"), and upon information and belief with respect to the remaining allegations, based upon, iriter aliq, the investigation of plaintiff's counsel, which included, among other things, a review of statements made by defendants and their employees, Securities and Exchange

("SEC") filings, and press releases and media reports, brings this Complaint (the "Complaint") against defendants named herein, and alleges as

SUMMARY O

1. In October 1999, Fortune named defendant Mary Meeker ("Meeker) the

most powerful woman in business, commenting, " f h]er brave bets - AOL in `93,

`95, e-commerce in `97, business to business in `99 -- have earned her eight "ten- that have risen tenfold. Morgan Stanley's "We've got Mary" pitch to clients has been key prominence in Internet financing. Her power is awesome: If she ever says "Hold Amazon.com ", • .

Internet investors will lose billions."

2. Fortune almost got it right. Investors did lose billions, but not because Meeker

said "Hold Amazon.com". Rather, investors were damaged by Meeker's false and misleading

statements encouraging investors to continue buying shares of AOL.

3. On June 14, 2001, the United States House of Representatives Subcommittee on

Capital Markets, Insurance, and Government Sponsored Enterprises (the "Subcommittee") began

holding hearings entitled "Analyzing the Analysts: Are Investors Getting Unbiased Research

From Wall Street?" In his opening remarks, Representative Paul E. ICanjorski, the ranking

Democratic member of the Subcommittee, stated:

Unlike some other sources of investment advice, the vast majority of the general public has usually considered the research prepared by Wall Street experts as reliable and valuable. With the burst of the high-tech bubble, however, came rising skepticism among investors concerning the objectivity of some analysts' overly optimistic recommendations. Many in the media have also asserted that a variety of conflicts of interest may have gradually depreciated analyst independence during the Internet craze and affected the quality of their opinions. We have debated the issues surrounding analyst independence for many years. After the deregulation of trading cortunissions in 1975, Wall Street firms began using investment banking as a means to compensate their research departments, and within the last few years the tying of analyst compensation to investment banking activities has become increasingly popular. As competition among brokerage firms for IPO's, mergers, and acquisitions grew, so did the potential for large compensation packages for sell-side analysts. These pay practices, however, may have also affected analyst independence. While some brokerage houses suggest that they have executed an impenetrable Chinese wall that divides analyst research from other firm functions like investment banking and trading, the truth, as we have learned from many recent news stories, is that they must initiate a proactive effort to rebuild their imaginary walls.

The release of some startling statistics has also called into question the actual independence of analysts. A report by First Call, for example, found that less than one percent of 28,000 recommendations issued by brokerage analysts during late 1999 and most of 2000 called for investors to sell stocks in their portfolios. Within the very same time frame, the NASDAQ composite average fell dramatically. In hindsight, these • recommendations appear dubious. Furthermore, First Call has determined that the ratio

239130 2 of buy to sell recommendations by brokerage analysts rose from 6:1 in the early 1990's to 100:1 in 2000. Many parties have consequently suggested that analysts may have -44e become merely cheerleaders for the investment banking division in their brokerage houses. I agree. To me, it appears we may have obsequious analysts instead of objective analysts.

4. The erosion of analysts' objectivity that Rep. Kanjorski discussed was particularly

manifest at Morgan Stanley Dean Winer it Co. ("MSDW"), which employed defendant Meeker,

one of the most well-known and influential analysts an Wall Street. In this regard, on December

31, 2000, the New York Tones reported:

Of all the rude awakenings that the bear market in stocks has brought to investors, perhaps the most jarring has been the realization of how woefully wrong Wall Street's research analysts have been this year on the stocks they follow. While the market sank to its worst performance in more than a decade, many of those analysts kept right on smiling and saying -buy."

llow can so many who are paid so much to scrutinize companies have blown it so spectacularly for their investor customers?

The answer lies in a subtle but significant change in the way Wall Street analysts do their work - and how they are rewarded for it. That shift, which has brought riches and stardom to many securities analysts, has cost investors billions of dollars in losses.

The fact is, although brokerage firm stock gurus are still called analysts, their day-to-day pursuits involve much less analysis and much more salesmanship than ever before.

"The competition for investing banking business is so keen that analysts' sell recommendations on stocks of banking clients or potential banking clients are very rare," said Arthur Levitt, the chairman of the Securities and Exchange Commission. "Whether this is an actual or perceived conflict, clearly, in the minds of many institutional buyers, brokerage firm analysis has diminished credibility."

No one, of course, can predict what stocks will do tomorrow, much less next year; but Wall Street's analysts are supposed to help investors judge the attractiveness of companies' shares. investors took to analysts to advise them on whether to but or sell a stock at its current price, given its near-term business prospects.

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Until the mid-1990's, that is how most analysts approached their work. Today, there is gtr virtually no such thing as a sell recommendation from Wall Street analysts. Of the 8,000 recommendations made by analysts covering the companies in the Standard Poor's 500-stock index, only 29 now are sells, according to Zacks Investment Research in Chicago. That's less than one-half of one percent. On the other hand, "strong buy" recommendations number 214.

Analysts have long been known for unrelenting optimism about the companies they cover. But many investing veterans say that the quality of Wall Street research has sunk to new lows. That decline, they say, is the result of shifting economics in the brokerage business that has pushed many researchers to put their fu-ms' relationships with the companies they follow ahead of investors.

The commissions charged by Wall Street firms to their institutional and individual customers for trading stocks are one factor. These fees were much higher in the 1970's and 1980's, perhaps 10 cents a share on trades versus a penny or less now. Because analysts' recommendations helped generate trades and commissions, research departments paid for themselves. More important, an analyst who uncovered a time bomb ticking away within a company's financial statements and who advised his customers to sell its shares made an important contribution to his firm in commissions those sales generated. In short, analysts were rewarded for doing good, hard digging.

But as commissions declined, Wall Street firms looked elsewhere for ways to cover the costs of research.

The lucrative area of invcsunent banking was an obvious choice. Analysts soon began going on sales calls for their firms, which were competing for stock underwritings, debt offering and other investment banking deals from corporations. In this world, negative research reports carried a cost, not a benefit.

The result, money managers say, is that the traditional role of analyst as adviser to investors has been severely compromised. The increasingly close relationships analysts have with corporate executives has led many of them to be gulled by management's intent on keeping up the prices of their stocks.

"Research analysts have become either touts for their firm's corporate finance departments or the distribution system for the party line of the companies they follow," said Stefan D. A-brams, chief investment officer for asset allocation at the Trust Company of the West in Manhattan. "Not only are they not doing the research, they have totally lost track of equity values. And the customer who followed the analyst's advice is paying the price."

For many investors, that price keeps going up. In the past few months, as former stock

239/30 4 ..r•morarmarpnielik ---1111.1111111111111 .

market favorites crashed to earth, many top analysts remained maddeningly upbeat all the -rxr way down.

Consider Mary Meeker, the analyst at Morgan Stanley Dean Witter who became known as the Queen of the Internet for her prognostications on e-commerce companies like Amaxon.corn and Priceline. In 1999, as Internet stocks soared and new companies were taken public in droves, Ms. Meeker made $15 million, according to news reports.

Now that Internet stocks are in pieces on the ground, she had become decidedly less vocal — hut no less optimistic. In her reports, she still rates all 11 Internet stocks she follows as "outperform" even though as a group they are down an average 83%. By comparison, the Interactive Week Internet index is down 60% from its recent peak. Of the 11 companies Ms. Meeker remains positive on, 8 had securities underwritten by Morgan Stanley.

(Emphasis added).

5. Throughout the Class Period in ratings, reports, and recommendations regarding

AOL, Meeker made materially false and misleading statements which were designed to and did

artificially inflate the price of AOL common stock. Rather than providing unbiased research and

recommendations as publicly proclaimed, defendant Meeker acted more like an investment

banker, participating in deal-making and business-generating activities, in the hopes of securing

lucrative investment banking fees for MSDW and substantial compensation for herself, which

reportedly reached $15 million in 1999.

6. Members of the Class (as defined herein) were not made aware of the conflicts of

interest that lay at the heart of MSDW's research and analysis department, with the consequence

that AOL common stock, which reflected the materially false and misleading reports and

statements by Meeker, was artificially inflated throughout the Class Period. As a result, Class

members who purchased AOL common stock believing in the integrity of the market price were - severely damaged by defendants' unlawful conduct as described herein.

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7. This securities class action is brought on behalf of those persons who purchased e; 4r. the common stock of AOL between August 6, 1998 and May 14, 2001, the day Meeker's conflicts of interest were fully disclosed in an article in Fortune magazine (the "Class Period"),

against defendants MSDW and Meeker, alleging violations of the federal securities laws.

JURISWCTI9N AIND VENUE

8. This Court has jurisdiction over the subject matter of this action pursuant to §27

of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78aa, and 28 U.S.C. §

1331.

9. Plaintiff brings this action pursuant to the Exchange Act, as amended, 15 U.S.C.

§§ 78j(b) and 78t(a) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.106-5, Venue is

proper in this District because defendants conduct business in this District and many of the

wrongful acts alleged herein took place or originated in this District.

10. In connection with the acts 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

11, Plaintiff Nancy Lloyd purchased shares of AOL during the Class Period and was

damaged thereby, as set forth in her certification attached hereto.

12. Defendant Morgan Stanley Dean Winer & Co. is a Delaware corporation with its

principal executive offices located at 1585 Broadway, New York, New York 10036. According

to its public filings, MSDW is a global financial services firm that maintains leading market

239130 6 .__ ...... , : .poopprilallimelommuimill°11111.11.111111111111111111111111111/1111111"111111111. ..., .. .

,. positions in securities, asset management, and credit services. --,., Ag 13. Defendant Mary Meeker is a securities analyst who has been employed by

MSDW at all times relevant hereto. According to published reports, Meeker received

approximately $15 million in salary and cash bonuses in 1999, the bulk of which, unbeknowst to

the investing public and in direct conflict with her title as a research analyst, was attributable to

her activities in attracting and retaining investment banking clients for MSDW and actively

participating in MSDW's investment banking business.

CLASS ACTION ALLEGATIONS

14. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (bX3) of

the Federal Rules of Civil Procedure on behalf of a class consisting of all persons and entities

who purchased the common stock of AOL on the open market during the Class Period (the

"Class"), except for those persons employed by or affiliated with defendant MSDW.

15. Members of the Class are so numerous that joinder of all members is

impracticable. As of July 20, 2001, there were approximately 4.4 billion shares of AOL common . . stock outstanding, . I .1 1 16. Piaintiff s claims are typical of the claims of the other members of the Class. 1 ,J • 1 Plaintiff and the other members of the Class, by virtue of their purchases of AOL common stock !i on the open market during the Class Period, have sustained damages as a result of defendants'

unlawful activities as alleged herein. Plaintiff has retained counsel competent and experienced in .. class and securities litigation and intends to prosecute this action vigorously. The interests of the

Class will be fairly and adequately protected by plaintiff Plaintiff has no interests which are

contrary to or in conflict with those of the Class which plaintiff seeks to represent.

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17. A class action is superior to all other available methods for the fair and efficient

7P.t adjudication of this controversy. Plaintiff knows of no difficulty to be encountered in the

management of this action that would preclude its maintenance as a class action.

18. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

a. Whether the federal securities laws were violated by defendants' acts as

alleged herein;

b. Whether defendants participated directly or indirectly in the course of

conduct complained of herein; and

c. Whether members of the Class have sustained damages as a result of

defendants' conduct, and the proper measure of such damages.

SCIENTER AND SCIIEM.CALI,EGATIONS

19. Historically, brokerage firms like MSDW that performed both investment banking

and research analysis finictions maintained a "Chinese wall" between the two functions to ensure-

that the analysts' research and recommendations remained objective and were not influenced by

the firm's interest in attracting and retaining investment banking business.

20. in recent years, however, the "Chinese wall" has apparently crumbled, with

research analysts such as defendant Meeker directly performing investment banking functions

and receiving compensation based on her contributions to generating investment banking

business, including underwriting initial public offerings ("IPO's") and secondary offerings of

equity securities, underwriting debt offerings, and performing services in merger and acquisition

239130 8 mL

transactions, without disclosing such material conflicts of interest to the investing public.

21. According to a May 14, 2001 article in Fortune magazine, Meeker's participation in MSDW's investment banking activities increased significantly in 1996 following the departure from MSDW of influential investment banker Frank Quattrone. It was important for both

MSDW and Meeker that she assume the role of the "star banker", because without such an

MSDW ran the risk of being shut out of the extremely lucrative business of providing investment banking services to the burgeoning high-technology industry. Fortune reported:

"Morgan had just lost the people who had built their tech practice," explains a friend. "Mary opted to stay, knowing Morgan needed a new star." With Quattrone gone — replaced by blander souls who lacked his stature — Mary Meeker soon became the new Quanrone.

22. On April 22, 2001, The Times of Louden reported:

Nobody had more clout in the booming world of Internet stocks than Mary Meeker.

In the late 1990's, when hundreds of net companies came to market, she gained a reputation as the best net analyst on Wall Street. Barron's, the financial weekly, dubbed her "Queen of the Net." Fortune put her on its cover. Morgan Stanley, her employer, paid her Wm (£10.4m) a year.

But the collapse of the net bubble has led to a sudden reversal of fortune. Meeker rarely appears on television or in the press these days.

Critics blame her gung-ho reports for helping to create the net bubble and losing investors billions.of dollars. She faces the threat of legal action and hefty damages.

In an apparent attempt to restore her tarnished reputation. Meeker last week launched a defiant defence of the long-term advantages of investing in technology.. ..

But Meeker's self-justifying report does not address the most controversial charge levelled by her critics, who say she was incapable of being an objective analyst because she was involved in soliciting underwriting business from the companies she was writing about. It is an open secret on Wall Street that companies will not employ investment

219130 9 1 vommommoupsummalilli0.111111111.111.0111111101i

ji°1111111 with critically independent analysts.

According to the Wall Street Journal, Meeker played an influential role in arranging the merger of Time Warner and America Online last year. She addressed the board of Time Warner, a Morgan Stanley client, and all Y i.icd it to buy AOL, one N4'r riiest net tips.

23. During the Class Period, defendant Meeker made materially false and misleading

statements designed to and successfully encouraging individual investors, including members of

the Class, to purchase securities of AOL based not on objective analyses, but rather on

defendants' desire to attract and retain AOL's investment banking business for MSDW.

Meeker's ratings, recommendations, and positive comments regarding AOL during the Class • Period were also improperly influenced by her desire to increase her undisclosed personal

compensation, which depended in large part upon the amount of investment banking business • she generated for MSDW.

24, Meeker's conflicts of interest remained undisclosed as she issued "inflated"

ratings and recommendations for AOL. Meeker knew that the financial condition and future

business prospects of AOL did not support her positive comments and recommendations, but she

nevertheless issued positive reports encouraging investors, including members of the Class, to

purchase shares of AOL. She knowingly issued inflated ratings for the purpose of improperly

benefitting herself and MSDIK

25. Moreover, even when objective analyses demonstrated that AOL was

substantially over-valued, Meeker refused to 'downgrade" AOL because that would potentially

impair MSDW's ability to generate additional investment banking business from AOL and other

companies whose securities offerings MSDW wished to underwrite. Based on her pay structure,

if MSDW earned less in investment banking revenue, Meeker's personal compensation would be

239130 10 e negatively affected, as well. Thus, Meeker continued her campaign of misinformation and non-

disclosure with respect to AOL, even in the face of legitimate research entering the marketplace.

26. Meeker's campaign had its intended effect of artificially inflating the price of

AOL common stock while simultaneously attracting and retaining AOL as a MSDW investment •

banking client. According to AOL's public filings, MSDW acted as lead underwriter for a

number of AOL securities offerings, including: (i) the 1993 offering of on million shares of

AOL common stock; (ii) the 1995 offering of 3.5 million shares of AOL common stock; (iii) the

1998 offering of 4.9 million shares of AOL common stock; and (iv) the 2000 offering of $2.2

billion of AOL Convertible Subordinated Notes. MSDW also served as a financial advisor to

Time Warner Telecom, Inc. ("Time Warner") in connection with Time Warner's merger with

AOL. MSDW earned tens of millions of dollars in fees in connection with these transactions,

and Meeker was compensated accordingly, i.e., as a star investment banker rather than as a •

research analyst.

BACKGROUND TO THE r_LAss_pERLop

27. Meeker began "covering" AOL in 1993, shortly after msnw underwrote the

offering of one million shares of AOL common stock. Meeker awarded AOL an "outperform"

rating.

28. On June 25, 1996, Meeker "upgraded" AOL from "outperform" to "strong buy".

On that day, The Associated Press reported:

Morgan Stanley analyst Mary Meeker raised her recommendation on rAOL's] stock, setting off a buying spree in America Online shares.

In the first half-hour on Nasdaq, America Online rose $2.62 to $44.75, a 6% gain.

23900 11 29. On January 13, 1997, Investor's Business Daily reported:

America Online Inc. spurted 5 V/ to 39 5/8. Morgan Stanley Group Inc. analyst Mary Meeker made bullish comments on the stock following a meeting with the firm in Phoenix. She said AOL will announce in a few weeks that it has eight million subscribers.

30. On February 7, 1997, The New York Times reported:

On Friday, Mary Meeker of Morgan Stanley & Company cut her rating on America Online from "strong buy" to "outperform."

In a research note to clients, Ms. Meeker wrote: "AOL is a company with a split personality — it always does good stuff and bad stuff." She added: "The good news: Our instincts tell us that AOL is on the cusp of breaking out with a profitable business model (after years of building) and that the stock price (after a lapse or two) should continue its recent steady climb. The bad news: The numbers tea us we are wrong."

31. On February 10, 1998, Meeker issued a Research Note on AOL which stated:

AOL Take Intelligent Steps to Leverage its Business Model — The online/Internet business is a brave new medium and AOL is its champion— it's easy to go back over the past five or so years and reconstruct online/Internet industry inflection points — and it's stunning to reflect on just how often AOL has taken the necessary bold steps and acted as the industry leader.

. . .

Maintain Outperform Rating on AOL Shares, Stock Should Continue to be One of Best Performers in Group — AOL shares are up 22% YTD including a 12% spike yesterday and following a 172% rise in 1997. As usual, we think there's more room for this horse to run. Price target? Higher. Why? The online/Internet business is big (AOL has 11MM+ annuity-like customers) and will be huge (AOL could nab 16-40MM users over the next 1-5 years) and AOL is the clear leader — no doubt, competitors like Yahoo?, Excite, and Microsoft pose threats, but for now, we arc in a rising tide. Importantly, we believe that AOL will be able to continue to augment its service revenue with revenue from advertising and transactions. So far, we are up about 1,500% in this name and we see no reason to-change our stripes now.

(Emphasis original).

Meeker's February 10, 1998 Research Note included the following disclaimers:

239 313 12 The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated ("Morgan Stanley Dean Winer"). Morgan Stanley Dean Witter does not 47,mr • undertake to advise you of changes in its opinion or information. Morgan Stanley Dean Witter and others associated with it may make markets or specialize in, have positions in and effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.

Within the last three years, Morgan Stanley & Co. Incorporated, Dean Witter Reynolds Inc. and/or their affiliates managed or co-managed a public offering of the securities of America Online.

Morgan Stanley & Co. Incorporated, Dean Winer Reynolds, Inc. and/or their affiliates or their employees have or may have a long or short position or holding in the securities, options on securities, or other related investments of issuers mentioned herein.

The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Where an investment is denominated in a currency other than the investor's currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors.

32. On February 11, 1998, Meeker issued a Research Note on AOL which stated:

Maintain Outperform Rating on AOL Shares; Stock Should Continue to be One of Best Performers in Group. And, Whoa, After Years of Waiting, It's Certainly Satisfying to See AOL Begin to Experience Financial Leverage from its Business Model

(Emphasis original).

Meeker's February 11, 1998 Research Note included the disclaimers referenced in paragraph 31

above.

33. On Feb-ruary 13, 1993, Meeker issued a Research Note on AOL which stated:

- On Thursday, February 12, AOL hosted an upbeat meeting for analysts and investors at the New York Stock Exchange.

- We maintain our Outperform rating on the shares of AOL. We have characterized

239230 13 tt AOL as a "new age blue chip." At a market value of $ 13B, the company, in our view, has solidly passed through the $108 value threshold. We think the company will keep I delivering and growing and increasingly, investors will need to raise exposure to the fastest growing new medium/technology cycle in history (related to the Internet). And in our view, AOL is a great way to play these trends — like Coca-Cola and Microsoft were in the early days of their development.

(Emphasis original).

Meeker's February 13, 1998 Research Note included the disclaimers referenced in paragraph 31 • above.

34. Meeker's foregoing comments had an immediate material effect on the price of

AOL shares, which rose more than 7% from February 10 to February 13, 1998.

35. On May 7, 1998, Meeker issued a Research Note on AOL which stated:

. . .

Maintain Outperform Rating on AOL Shares, Stock Should Continue to be One of Best Performers in Group — AOL shares are up 94% YTD, following a 172% rise in 1997. As usual, we think there's more room for this horse to run. Price target? Higher. Why? The online/Internet business is big (AOL has 12MM+ annuity-like customers) and will be huge (AOL could nab 16-40MM users over the next 1-5 years), and AOL is the clear leader — no doubt, competitors like Y:Aloo!. Excite, and Microsoft pose threats, but 4 for now, we are in a rising tide. Importantly, we believe that AOL will be able to continue to augment its service revenue with revenue from advertising and transactions. So far, we are up about 2,200% in this name and we see no reason to change horses in mid-stream....

(Emphasis original).

Meeker's May 7, 1998 Research Note included the disclaimers referenced in paragraph 31 above.

36. What the market did not know was that lvleelcer's glowing research reports on

239130 14 AOL were part of her strategy to secure lucrative investment banking business for MSDW in connection with AOL's planned offering of 4.9 million shares of common stock. Her efforts were soon to pay off for her and for MSDW, which encouraged her to assume the role of the star investment banker.

37. On July 1, 1998, MSDW entered into an Underwriting Agreement with AOL to act as co-lead underwriter for AOL' s offering of 4.9 million shares of common stock, for which

MSDW would earn millions of dollars in fees.

38. On August 5, 1998, Meeker issued a Research Note on AOL which stated:

Maintain outperform rating on AOL shares — While AOL shares have risen a hefty 120% YTD and, as evinced by recent market trends, the shares are not immune to downside, AOL remains, in our opinion, one of the best ways to play the ongoing growth in Internet/online usage.

(Emphasis original).

Meeker's August 5, 1998 Research Note included the disclaimers referenced in paragraph 31 above.

DEFENDANTS' FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

39. The statements set forth in the preceding section were all materially false and misleading when made. However, because they were made more than three years prior to the filing of this Complaint, they are inactionable under the federal securities laws. Nevertheless, those statements were still part and parcel of the total mix of information affecting AOL common stock at the beginning of the Class Period.

40. On October 23, 1998, Meeker issued a Research Note on AOL which stated:

General Thoughts — AOL reports EPS on Tuesday, October 27 at 5:00. We reiterate our

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view that we expect strong results from the company. And we look for good news flow from the company and expect estimates to rise. This note doesn't contain new news, but as the Internet leaders have released strong CQ3 results (more to come), investor sentiment has begun to turn from "trash 'ern" to -love 'em" and after all, AOL has become the conservative, Microsoft-ian, big capitalization, annuity-like holding in the group . . . and yes, this is worth noting . and if the company executes as we expect it will, the stock performance should be far from conservative.

(Emphasis original).

Meeker's October 23, 1998 Research Note included the following disclaimers:

The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated ("Morgan Stanley Dean Witter"), Morgan Stanley Dean Witter does not undertake to advise you of changes in its opinion or information. Morgan Stanley Dean Witter and others associated with it may make markets or specialize in, have positions in and effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies. • Within the last three years, Morgan Stanley & Co. Incorporated, Dean Witter Reynolds Inc. and/or their affiliates managed or co-managed a public offering of the securities of AOL.

Morgan Stanley & Co. Incorporated, Dean Witter Reynolds Inc. and/or their affiliates make a market in the securities of AOL.

Morgan Stanley & Co. Incorporated, Dean Witter Reynolds, Inc. and/or their affiliates or their employees have or may have a long or short position or holding in the securities, options on securities, or other related investments of issuers mentioned herein.

The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Where an investment is denominated in a currency other than the investor's currency, changes in rates of exchange may have an adverse effect on the value, price of or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. •

Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they tailed to disclose that:

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. . . .

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

Meeker's compensation was directly tied to the amount of investment banking business she generated for MSDW, including the performance of services in connection with APL's stock and debt offerings.

41. On October 28, 1998, Meeker issued a Research Note on AOL which stated:

Maintain outperform rating on AOL shares — While AOL shares have risen a hefty 171% YTD, AOL remains, in our opinion, one of the best ways to play the ongoing growth in Internet/online usage. in addition, we don't believe that the value of AOL's flanker branding efforts has been fully appreciated yet — these brands include: America Online, AOL.com, CompuServe, ICQ, and Instant Messenger. The value of the instant messaging effons can become especially compelling when IF telephony takes off. ...

(Emphasis original).

Meeker's October 28, 1998 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

c. Meeker's compensation was directly tied to the amount of investment banking business she generated for MSDW, including the performance of services in connection with AOL's stock and debt offerings,

42. On December 21, 1998, The Streeteorn reported:

2391.30 17 No one should really be surprised by Morgan Stanley Dean Witter analyst Mary Meeker's positive comments on Arnazon.com (AMEN: Nasdaq), Yahoo! (YI-100: Nasdaq) and others.

Regardless, Meeker's comments, combil,cd with a stron g overall market, one again sent Internet stocks flying today. Broadcast.com, eBay (EBAY: Nasdaq), Yahoo, Netscape (NSCP: Nasdaq), America Online (AOL: NYSE), Amazon.com and Verisign — all mentioned among Meeker's favorites — all hit new highs in early trading....

(Emphasis added).

43. On December 22, 1998, The News Tribune of Tacoma, Washington reported:

Sometimes one person can literally move markets.

Influential analyst Mary Meeker did just that Monday. The Morgan Stanley Dean Witter & Co. analyst, otherwise dubbed "Net Queen", sent several Internet-rela yed stocks to record highs after she told Barron's financial newspaper that she liked them.

The technology-heavy Nasdaq composite index rose 51.89 to a record 2138.03, pushing this year's gain above 36%,

Stocks receiving Meeker's blessing on Monday were Yahoo!, Amazon.com, eBay, AOL, @Home and Microsoft.

(Emphasis added).

44. On December 22, 1998, Bloomberg News reported:

America Online Inc., Arnazon.com Inc. and Onsale Inc. soared after a Morgan Stanley Dean Witter & Co. analyst made bullish comments on Internet companies.

. .

Internet stocks surged after Mary Meeker, who follows the industry for Morgan Stanley Dean Witter & Co., told Barron's that the increase of Internet users to 80 million yesterday from 5 million in 1995 makes Internet stocks such as America Online, Yahoo! Inc. and Amazon.com good bets in the stock market. AOL gained $12.25 to $116.50...

(Emphasis added).

239130 18 ipprommommom,aommoollmodlit4alli ipr 45. On February 23, 1999, AFX News reported:

Internet stocks were broadly higher after Morgan Stanley Dean Witter analyst Mary Meeker issued positive comments regarding the sector.

Netscape was up 3 1/8 at 78 3/4 and AOL was up 3 9116 at 90.

46. On March 31, 1999, Meeker issued a Research Note on AOL which stated!

• Looking at the big picture, AOL is looking real solid

. .

• We maintain our Outperform rating oo AOL. AOL will be reporting its CQ1:99 results on April 27th.

(Emphasis original).

Meeker's March 31, 1999 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking cheat in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a IvISDW banking client; and

47. On April 28, 1999, Meeker issued a Research Note on AOL which stated:

• We reiterate our Outperform rating on AOL shares. AOL is a leading multi- branded property on the Web and continues to support broad-based momentum.

(Emphasis original).

239130 19 PP" Meeker's April 28, 1999 Research Note included the disclaimers referenced in paragraph 40 • above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

a. there was no "Chinese Wall'.' at MSD W. Rather, Meeker acted as an • investment banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

48. On May 11, 1999, Meeker issued a Research Note on AOL which stated:

• Yep, we are upgrading AOL shares from Outperform to Strong Buy. Why make such a move? The cable goblins won't get chit' if you watch out. Over the past week or so, AOL's destiny seems to have, dare we say, bleakened, to a host of doubters . . but, 10H0, it just ain't so.

• AOL shares are trading 27% off the 52-week high and, as evinced by AOL's CQ1 results, AOL's fundamentals are strong . . and remain strong (see our note dated 4/28/99). And we expect that the company will be upbeat at its upcoming analyst meeting on May 19.

• To state the obvious, AOL has a very powerful line up of branded product offerings (America Online — 17MM paying subscribers; AOL.cona; and Netscape). And we continue to maintain that ICQ instant messaging (32MM+ customers) is one of AOL's best and most underutilized assets. And the revenue and profit generation from these assets is still early days. .

(Emphasis original). •

Meeker's May 11, 1999 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

239130 20 a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

c. Meeker's compensation was directly tied to the amount of investment banking business she generated for /vISDW, including the performance of services in connection with AOL's stock and debt offerings.

49. On May 11, 1999, The Street.com reported:

It's one thing for any old scluno to say something positive about an Internet stock. But when Morgan Stanley Dean Witter analyst Mary Meeker says roughly the same thing, investors take notice.

America Online (AOL: NYSE) was the beneficiary of Meeker's power today after the so- called "Queen of the internet" upped her rating on the stock to strong buy from outperform and said the broadband scare was overdone. AOL was up 10 11/16, or 8%, at 139 in early trading, giving Internet stocks a boost.

50. On May 11, 1999, The SireeLcom reported:

Calls by analysts Mary Meeker and HeA-a.--; Blodget boosted the Internet sector, and a technical guru sees the recent rough patch behind the Net stocks.

Morgan Stanley Dean Witter's Meeker upgraded America Online (AOL: NYSE) to • strong buy from outperform, while Blodget said recent weakness in Yahoo/ (YHOO: Nasdaq) presented a buying opportunity. Those comments gave the Internet sector a lift, with TheStreet.corn Internet Sector index rising 18.7, or 3%, at 654.

. .

Isn't it a little pathetic that the bellwether of the Internet bellwethers needed help from Mary Meeker, now dubbed "Big Net Mornma" by another TSC staffer. Well, Meeker upgraded AOCto strong buy and her word was enough to push it up 11 116 to 139 3/8.

(Emphasis added).

51. On May 11, 1999, CNN reported:

239130 21 1111111111111111111111111111111111111111111111111M' '

AOL's up about 9 . . . on the analyst recommendation, Mary Meeker, whose word is law on the Street.

52. On May 11, 1999, CNBC reported:

Internet stocks the biggest highlight of the day as widely followed Morgan Stanley Dean Witter analyst Mary Meeker upgraded her rating on America Online to strong buy.

The analyst noting a 27% drop in the stock despite strong fundamentals. She calls the worries over AOL being boxed out of the rush to offer high-speed access to the Internet overblown, and she cites a powerful lineup of branded products and expects an upbeat meeting with analysts on May 19th•

53. On May 11, 1999, The Associated Press reported:

America Online was up 9 at 137 13/16 in leading volume on the New York Stock Exchange. Morgan Stanley analyst Mary Meeker upgraded the stock, saying AOL should be able to stake out a leadership in the growing broadband communications arena with two existing digital subscriber line deals and others she expects to follow in the next four months.

54. On May 15, 1999, The Times of London reported:

She is called "Queen of the Net" and "the Diva of .com", and as the U.S. investment community seeks the next hot Internet ticket, Mary Meeker has arguably become one of the most powerful people in the virtual world of online stocks.

Such is the might of Ms. Meeker, the Internet community's leading investment hanker, that her advice this week to clients of Morgan Stanley to buy shares in America Online • added $10 billion to the Internet service provider's stock market value at a stroke.

55. On May 20, 1999, Meeker issued a Research NOW on AOL vhih stated:

• Yesterday, America Online (AOL, Strong Buy) hosted in Washington, D.C. its largest and most positive analyst meeting ever. ! • The outlook for the business remains strong, and we are reiterating our Strong Buy rating on AOL shares.

• Highlights from AOL management presentations are included in this note. • ,

)39i30 22 Ov. • Four takeaways: 1) the Internet/online opportunity remains enormous; 2) AOL is the company best positioned to take advantage of this opportunity; 3) AOL is firing on all cylinders with a great management team; and 4) the best may be yet to come for AOL.

Meeker's May 15, 1999 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

56. On May 20, 1999, AFX News reported:

AOL was reiterated "strong buy" by analyst Mary Meeker at Morgan Stanley Dean Witter, while Goldman, Sachs & Co.'s Michael Parekh repeated his "recommend list" rating.

Mary Meeker, Internet analyst at Morgan Stanley, said AOL held its "most positive analyst meeting ever."

In a note to investors, Meeker said the meeting highlighted AOL' s momentum and predicted "the best may be yet to come for AOL."

57. On June 17, 1999, CNBC reported:

In technology, Internets were stars again, after Morgan Stanley analyst Mary Meeker told clients yesterday's rally says the worst is over.

America Online up more than 3%, Lycos up 9%.

58. On June 18, 1999, The Buffalo News reported:

239130 23

"- - — -

Internet stocks rose after Mary Meeker at Morgan Stanley Dean Witter & Co. said in a memo to the company's sales force that Wednesday's runup seemed to be the market "telling us the worst is over."

America Online rose 4 318 to 1107/8,..

59. On June 21, 1999, Business Week reported:

Forget the whims and fancies of the rising tide of day traders. When it comes to knowing companies, Wail Street stock analysts still hold sway. To divine the best investment opportunities, we asked a top analyst in each of the eight sectors covered in our Information Technology 100 ranking what they're recommending and why. Here's what they told us:

Mary G. Meeker, Managing Director, Morgan Stanley Dean Witter

CATEGORY: Internet

STOCK PICKS: Cisco Systems (CSCO), America Online (AOL), eBay (EBAY)

. . .

AOL is another veteran, but its ace in the hole is ICQ, the instant-messaging service AOL bought in June that now has 32 million users. Meeker's praise is blunt: "I think ICQ is one of the most valuable assets on the planet." Meeker downplays concerns that AOL may have difficulty delivering broadband service. She thinks the Web won't travel over fat pipes in a big way until 2001. That will give AOL time to cra,ft a strategy.

(Emphasis added).

60. On July 22, 1999, Meeker issued a Research Note on AOL which stated:

• We reiterate our Strong Buy rating on AOL shares. AOL's line up of branded products is becoming more and more powerful (America Online – 17.6MM paying subscribers; CompuServe – 2MM paying subscribers; ICQ – 38MM registered users; AOL Instant Messenger – 25MM users; and Netscape NetCenter – 17MM users). We continue to maintain that ICQ instant messaging is one of AOL's best and most underutilized assets and, arguably, the premier international Web property. And even though AOL's revenue is up almost 50% WY and its operating margin has doubled over the last three quarters, we believe the revenue and profit generation from AOL's assets is still early days.. .

239130 24 Ipple1011100111111111111.111111111111111111111111111.111111•1111111111111111•11111111111.1 (Emphasis original).

Meeker's July 22, 1999 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

61. On August 11, 1999, Meeker issued a Research Note on AOL which stated:

We believe three exaggerated concerns have been hanging over AOL shares: 1) perceived 3 lack of AOL broadband service options; 2) potential price erosion due to the advent of "free" Internet access or bundled free PC/Internet access offerings; and 3) tied to the second concern, potentially aggressive price competition from Microsoft in the access segment. We believe AOL deftly handled all three concerns.

. .

We reiterate our Strong Buy rating on AOL shares.

Meeker's August 11, 1999 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

4 misleading when made because they failed to disclose that: 1 a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding

2393O 25 liminimurnimmiiiiiiii_ .. ,.,

-,..... lormi AOL were not based on objective analyses, but rather on her desire to .r.rl .....,P. attract and retain AOL as a MSDW banking client; and , c. Meeker's compensation was directly tied to the amount of investment banking business she genPrated for MSDW, including the performance of services in connection with AOL's stock and debt offerings.

62. On August 11, 1999, The Street corn reported:

[Mjuch hype and humidity today about Mary Meeker's lovefest with America Online (AOL: NYSE). Kind words from the Morgan Stanley Dean Witter analyst helped AOL jump 8.7% and gave the entire Net sector a lift.

63. On August II, 1999, CNBC reported:

Another big mover today, America Online, The Internet service provider ended almost 9% higher today after the 2:30 Eastern time start of an upbeat conference call with analysts that was held by well-regarded Internet analyst Mary Meeker and AOL president Bob Pittman, .

64. On October 21, 1999, Meeker issued a Research Note on AOL which stated:

. - We reiterate our Strong Buy rating on AOL shares. AOL's lineup of branded product offerings continues to become more and more powerful (America Online — 18.7MM paying subscribers; CompuServe -- 2.2Mlvf paying subscribers; ICQ — 45MM registered users; AOL Instant Messenger — 32MM registered users; and Netscape NetCenter — 20MM users) and has huge upside potential internationally. We have long maintained that ICQ is one of AOL's best and most under-utilized assets and, arguably, the premier international Web property. Well, lo' and behold, ICQ ended CQ3:99 with $80MM in revenue backlog — that's up from practically $0 at the end of CQ2:99. We think this is the start of something big. . . .

(Emphasis original).

Meeker's October 21, 1999 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and _ misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking . client in connection with AOL's stock and debt offerings;

239130 26 err b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

65. On October 27, 1999, The &teeLearn reported:

CNBC was reporting that during Morgan Stanley's sales meeting today, Meeker said that eBay, Yahoo! (YI-100: Nasdaq), America Online (AUL: NYSE) and Amazon.com (A1v12N: Nasdaq) were her favorite picks c...:Itering the holiday season.

(Emphasis added).

66. On November 9, 1999, Meeker issued a Research Note on AOL which stated:

• We reiterate our Strong Buy rating on AOL shares. AOL's lineup of branded product offerings continues to become more and more powerful (America Online — 18.7MM paying subscribers; CompuServe — 2.2MM paying subscribers; ICQ 45MM registered users; AOL Instant Messenger — 32MM registered users; and Netscape NetCenter — 20MM users) and has huge upside potential internationally. We have long maintained that ICQ is one of AOL's best and most under-utilized assets and, arguably, the premier international Web property. Well, lo' and behold, ICQ ended CQ3:99 with $80MM in revenue backlog — that's up from practically SO at the and of CQ2:99. We think this is the start of something big...

(Emphasis original).

Meeker's November 9, 1999 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investinent banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client., and

239130 27 . _ ...... oppoor---'•--.-..----...-----.%—.-uoilw'al'ouoolulliIllillIllillIlligllillIllIllIll.MIIIIIIIMIIIII.._ ..

c. tvleeker's compensation was directly tied to the amount of investment -4 banking business she generated for MSDW, including the performance of „x7 '.4.1 services in connection with AOL's stock and debt offerings. .. 67. On December 1, 1999, Iv1SDW entered into an Underwriting Agreement with

AOL to act as co-lead underwriter for AOL's offering of $2,267,533,000 of Convertible

Subordinated Notes Due December 6, 2019, for which MSDW would earn millions of dollars in

fees. 68_ . On December 20, 1999, lhe New York Times reported:

• Last month, with about six weeks left in the century, Mary Meeker, head of the Internet research team at Morgan Stanley Dean Witter, and Jeff Camp, who follows Internet data services for the firm, sat down to talk about the future. .

Following are excerpts from the coversation:

...

Q. — If you were constructing an Internet portfolio you could not trade at all for the next five years, which stocks would have to be included?

MS. MEEKER — America Online, Yahoo, Arnazon.com and Cisco Systems.

(Emphasis added).

69. On January 10, 2000, AOL announced that it had entered into an agreement to . .

merge with Time Warner. Time Warner retained MSDW to serve as its financial advisor in .

. connection with the merger_ Accordingly, Meeker refrained from issuing "ratings on AOL until

the merger closed, but nonetheless continued to issue Research Notes on AOL/Time Warner.

70. For example, on May I, 2000, Meeker issued a Research Note on AOL/Tirne

Warner which stated:

• Value of whole will he greater than sunt-of-the-parta #1 Internet: New Media & eCornmerce and Media & Entertainment stock idea.

239130 28 -- ,•---- -,.....- ..

flr .4e- I — X7: •," rez,i", ., • Combo's ability to drive multiple annuity-like revenue streams... from hundreds of millions of customers, thanks in large part to the interactive/sticky/credit card enabled Internet and online worlds, will be impressive.

• Expected high sustainable growth rates and enormous free cash flow... Most companies can only achieve one or the other — a new standard is being set.

• 23-25% estimated cash EPS growth in 2000-204)5... New business opportunities and leverage from cross-promotion drive profitability. CEPS growth rate impressive by any measure.

. . .

Investment Conclusion

We are updating our coverage on both AOL and Time Warner. The merger of AOL and Time Warner (announced on January 10, 2000) is expected to close in C(24:00. In this note we update our analysis of the two companies and detail why we think this merger makes sense strategically and financially. We arc publishing a single report regarding AOL and Time Warner for clients who are investors in either company — or both. We .... refer to the post-merger, combined company as AOL Time Warner.

Our investment thesis for the new company is simple: 1) the whole is greater than the sum of the parts; and 2) AOL Time Warner's ability to generate multiple annuity-like revenue streams from huudreds of millions of customers over many years, thanks in large part to the interactive/sticky/credit card eninied Internet and online worlds, is, well, very very impressive.

Summary

Yes, we admit, we like big ideas — like communications platforms for the world. We like simple ideas — like an easy-to-use email account for every person on the planet. Yes, we admit, in 1996 we wrote that Steve Case (of America Online) was separated at birth from Henry Luce (of Time Magazine) and Ted Turner (of Turner Broadcasting). Yes, we admit, we really like the merger of America Online and Time Warner. . . (Emphasis original).

Meeker's May 1, 2000 Research Note included the disclaimers referenced in paragraph 40 above.

Meeker's statements and the disclaimers in the Research Note were materially false and _ misleading when made because they failed to disclose that:

234130 29 ,

a. there was no -Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

71. On June 20, 2000, Meeker issued a Research Note on AOL which stated:

• AOL held a Conference Call with Investors Yesterday Pres. & COO Bob Pittman reviewed current important initiatives including wireless, AOLTV, Broadband, and International

• Tangible Progress on AOL Time Warner Merger Management continues to expect the merger to close in the Fall of 2000, and emphasized that integration is going as planned.

• Business Momentum Strong as Ever AOL-branded membership has surpassed 23MM, and the company is in beta-testing stage of AOL 6.0 software

(Emphasis original)

Meeker's June 20, 2000 Research Note included the disclaimers referenced in paragraph 40 above. Meeker's statements and the disclaimers in the Rczec.-ch Note were materially false and misleading when made because they failed to disclose that: • a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a IVISDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a. MSDW banking client; and

c. Meeker's compensation was directly tied to the amount of investment

239130 30 banking business she generated for MSDW, including the performance of d• services in connection with AOL's stock and debt offerings.

72. On August 15, 2000, Meeker issued a Research Note on AOL which stated:

• AOL Time Warner Merger Appean To Be on Track for Fall Closing The merger has been approved by AUL and l'WX shareholders, majority of Time Warner local cable TV franchisees have approved, and FCC, FTC and EC approval likely for Fall/early C Q4.

• AOL 6.0 Contains Several New, Improved Features In beta test now and on track for Fall rollout, new version should increase the "stickiness" of AOL service and increase the company's potential for advertising/eCotrunerce.

• AOL 6.0 Should Facilitate AOL Anywhere and Broadband Strategies AOL 6.0 should more easily enable users to access personalized features from a variety of platforms including DSL, cable, and satellite.

. .

With AOL's significant $313 advertising/ecornmerce backlog at the end of June, and the limited overlap among AOL and Time Warner's advertising bast — of the top 100 advertisers on each of AOL, Time Inc., and Turner Broadcasting, only 4 companies overlap the merged entity's potential for tapping into this rapidly growing revenue stream could be significant. That said, the highly competitive online market environment will continue to be a challenge.

(Emphasis original).

Meeker's August 15, 2000 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW_ Rather, Meeker acted as an investment banker in attrat.iLlg and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

239130 31

oimormimisammrpor „ .

_PPIPPrai.j‘

73. On October 19, 2000, Meeker issued a Research Note on AOL which stated: - Based on the report we issued on the c ombination of AOL and Time Warner on May 1, 2000 ("How Big is Big? Big!"), we estimate a year-end 2001 value of $90-110 per AOL share. . . .

. _

When Time Warner and AOL merge, we expect the combined company will have three primary characteristics: strong stable EBITDA growth; an opportunity to drive margins with cross-promotion; and massive free cash flow growth.

Meeker's October 19, 2000 Research Note included the disclaimers referenced in paragraph 40

above. Meeker's statements and the disclaimers in the Research Note were materially false and

misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment hanker in attracting and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

74. On January 11, 2001, the AOL/Time Warner merger closed, freeing Meeker to

resume issuing ratings on AOL shares. Thus, on January 19, 2001, Meeker issued a Research

Note on AOL which stated:

• Placing Strong Buy Rating on new shares of AOL Time Warner.

239130 32 • /11°111"111111

• AOL Time Warner is our best money-making idea. It is our top pick in both the Internet: New Media & eCornmerce and Broadband 8: Entertainment sectors.

. .

In the wake of the closing of the AOL Time Warner merger on January 11th, we are according a Strong Buy rating and $75 2001 price target on the new shares.

Our investment thesis, first laid out in our May 1, 2000 report, How Big is Big? Big!, for the new company is simple:

1) the whole is greater than the sum of the parts;

2) AOL Time Warner has the ability to generate multiple annuity-like revenue streams from hundreds of millions of customers over many years. This phenomenon is due in large part to the interactive/sticky/partially credit-card enabled communications network(s) that AOL and Time Warner have created;

3) Connectivity/communications is probably the single biggest investment theme we have ever seen. And a combined AOL Time Warner is better positioned to capitalize on this theme than any other company.

. . .

AOL Time Warner is our best money-making idea and our top stock pick, in both the Internet: New Media & eCommeree and Media & Entertainment sectors.

(Emphasis original).

Meeker's January 19, 2001 Research Note included the disclaimers referenced in paragraph 40 above. Meeker's statements and the disclaimers in the Research Note were materially false and misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attracting and retaining AOL as a MSAW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to

239130 33 _ .pr

attract and retain AOL as a MSDW banking client; and

75. On January 19, 2001, The Street.corn reported:

Mary Meeker isn't shy about AOL Time Warner (AOL: NYSE).

On Friday morning, the Morgan Stanley Dean Witter Internet analyst initiated coverage on the new media colossus with a $75 price target for the year and a strong buy rating — her firm's highest ranking and the only such rating Meeker has on the companies she follows.

AOL was trading up $2.85 to $52.62, a two-month high. Over the past 52 weeks, AOL — formed from America Online's acquisition of Time Warner earlier this month — has seen its stock price range from S31.50 to $74.63.

Meeker previously had a strong buy on America Online, but suspended that rating more than a year ago because Morgan Stanley was an adviser to Time Warner on the merger.

In her report, Meeker calls AOL Time Warner "our best money-making idea" and says it's her top pick in the interne: New Media & e-Conunerce sector as well as the Broadband & Entertainment sector.

76. On January 22, 2001, Electronic Media reported:

AOL Time Warner stock leaped almost 3 points to about $54 a share Friday on a hearty endorsement from influential Morgan Stanley Dean Witter Internet analyst Mary Meeker, who gave the company a 90% chance of hitting its ambitious financial targets_

77. On April 3, 2001, Meeker issued a Research Note on AOL which stated:

• We continue to accord AOL Time Warner a Strong Buy rating. These are clearly difficult times to own most stocks, but we continue to believe that, on a relative basis, AOL Time Warner shares are compelling. We believe that the company's business model:Assisted by potential merger synergies, is far more solid than most in this difficult period.

(Emphasis original).

Meeker's April 3, 2001 Research Note included the disclaimers referenced in paragraph 40

23913C 34

..,. .

..,-

--e' above. Meeker's statements and the disclaimers in the Research Note were materially false and ,....., misleading when made because they failed to disclose that:

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an investment banker in attractin ,;. and retaining AOL as a MSDW banking client in connection with AOL's stock and debt offerings;

b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

78, The statements of Meeker referenced in paragraphs 39-77 above were materially

false and misleading because Meeker's research reports, recommendations, and target prices

failed to disclose that

a. there was no "Chinese Wall" at MSDW. Rather, Meeker acted as an .. ..., investment banker in attracting and retaining AOL as a MSDW banking client in connection with MA's stock and debt offerings;

, b. Meeker's ratings, recommendations, and positive statements regarding AOL were not based on objective analyses, but rather on her desire to attract and retain AOL as a MSDW banking client; and

THE TRUTH BEGINS TO EMERGE

79. After the_ market for Internet and technology stocks collapsed in the first quarter of 2000, journalists, academics, and others began to expose the truth about the roles of analysts,

including Meeker, in their firms' efforts to attract and retain investment banking business,

especially underwriting of IPO's. For example, on March 29, 2000, The San Diego Union-

239,3o 35 r...

Tribune reported: r-% The best-known Internet analyst is Mary Meeker of Morgan Stanley Dean Witter. In 1999, she reportedly made about $15 million. She was paid so much in part because she helped attract so much underwriting. In 1999, Morgan ranked second in IPO underwritings at almost $14 billion, just behind Goldman Sachs ($14.5 billion), reports Thomson Financial Securities Data.

"The conflicts of interest are immense," argues Luniversity of Florida finance professor Jay] Ritter. Stock analysts are increasingly "cheerleaders", he says. Their pay depends on the firm's underwriting, which depends on enthusiastic research reports. Glum Internet analysts aren't wanted.

80. The conflicts of interest exhibited by Meeker and other Wall Street analysts also

began to draw the attention of various state and federal government authorities. For example, on

April 23, 2000, the Sunday Times of London reported:

In the fiercely competitive battle for big underwriting deals, [investment] banks are resorting to practices that are alarming regulators. They are hyping stocks, encouraging companies to use creative accounting and, if they are venture capita/ investors, dumping stocks as soon as the companies float.

Individual investors often pay for these practices. They act (often with disastrous results) on the "hot tips" of analysts appearing on 24-hour financial television channels. They are persuaded to believe commercials that tell them they can become overnight millionaires by trading stocks. And they are completely misled by the creative accounting condoned (but not revealed) in some analysts' reports.

One 30-year Wall Street veteran says: "It is the most corrupt thing I have ever seen. After the market crashes later this year or next, you are going to see congressional hearings into all the terrible things that have been going on."

Arthur Levitt, the Securities and Exchange Commission (SEC) Chairman, has repeatedly complained about the glowing reports that analysts issue on companies with which their firms hope to do business.

The "Chinese walls" that once separated researchers and bankers have all but disappeared in today's banking world and researchers have often become blatant pitchmen for bank deals. Levitt says they "act more like promoters and marketers than unbiased and dispassionate analysts ... a 'sell' recommendation from an analyst is as common as a Barbra Streisand concert."

239110 36 '

. .

Among those who have been pitching hardest for deals is Mary Meeker, Morgan Stanky Dean Witter's celebrated Internet analyst. She played a pivotal role in winning a deal for Morgan Stanley to be the lead manager of Lastminute.com's float last month. Her exuberant report on the company was supposed to encourage investors. But the shares are now trading at less than half their flotation price.

One of her former bosses at Morgan Stanley says: "She has become a combination of analyst and banker, it is a model that doesn't really work."

. . .

America's "net queen" is objective enough to point out that 70% of the net companies that have gone public will never make money and more than 90% are overvalued. Nevertheless she has had a buy rating on every one of the 15 stocks she covers.

(Emphasis added).

81. On October 9, 2000, U.S. News & World Report reported:

Why has Mary Meeker, the celebrated Internet analyst at Morgan Stanley Dean Witter, downgraded just three stocks in the past three years? And how can it be that even in this Lackluster market, "buy" ratings still outnumber "sell" ratings by a ratio of 100 to I?

Wall Street, in short, has a credibility problem. Its boosterish ways are coming under renewed attack as individual investors learn the hard way that analysts — the pundits who talk up stocks in the papers or on TV — serve many masters. And you, dear reader, are seldom one of them. Worried that self-dealing among research analysts, their investment houses, and their major clients will turn off ordinary investors, the Securities and Exchange Commission has begun taking steps to break up the clubby relationships. Among other things, the SEC is lookii fr.r ways to ensure that conflicts of interest are disclosed when analysts tout stocks on TV.

Solid as Jello-O. How did we reach this pass? Analysts' careers, once tied to the quality of their research, increasingly hinge on their ability to lure new customers. Most spend as much time talking with potential clients as they do researching companies. And as stock pickers, they alien act like marketing agents, pushing stocks in which their firms have a stake, or would like one. "People need to realize that these reports and recommendations are advertising," says Kent Womack, finance professor at Dartmouth College's Tuck School of Business. The Street once spoke of the "Chinese wall" between research and sales arms of a brokerage. But now, says Jeffrey Hooke, an investment banker and author - of Security Analysis on Wall Street, that wall "is about as solid as a bowl of Jell-O."

219130 37 111111Pir"E

Meeker, whom Barron's dubbed the Queen of the Net last year, is also unapologetic about her dual role as stock analyst and deal maker. When Morgan Stanley's bankers were working on AOL's takeover of Time Warner last January, they summoned her early on a Saturday morning to help sell the deal. Sporting a running suit, the star analyst bicycled across Central Park to attend the meeting. Ultimately, Meeker helped convince Time Warner's board of directors that selling out to AOL was the right thing to do.

82. On October 23, 2000, The New York Post reported:

The Midas touch was a myth.

But, for the last few years, you certainly couldn't blame Mary Meeker for thinking otherwise. Every tech stock this star Morgan Stanley analyst touched turned to gold. Institutional Investor called her the No. 1 Internet analyst in 1999.

But its 2000 now, and Meeker no longer tops the LI. charts. Alter a bear market run, Meeker's been caught pushing fool's gold.

The analysts and experts who talked to The Post for this article agreed that Meeker is caught in a catch-22. Internet companies are a prime target for investment business. Meeker is expected to put out good ratings to please companies, which then turn to Morgan Stanley for all their banking needs. Morgan Stanley has underwritten a number of the stocks in Meeker's portfolio, including her currently unrated America Online, which is trying to close a deal to buy Time Warner.

The pressure exerted by brokerages is unfair, analysts said, and maybe even criminal, But that's the way it is. One supporter said Meeker's clients are institutional — that she's not speaking to the average investor and never has been. Anyone who doesn't know the game rules, he said, shouldn't be pitied when they lose.

"Mary's living the high life. She hasn't been the person to do the research on those companies in quite some time. She's Morgan Stanley's frontman ... For her, it's much more important to be at a cocktail party with [Amazon CEO) Jeff Beios or [eBay CEO) Meg Whiunan. -She's at the cocktail party, she's at the ski weekend...."

Morgan Stanley Dean Witter has — or has done — business with 14 of the 18 companies on Meeker's list.

83. On January 30, 2001, 60 Minutes !faired a story focusing on Wall Street analysts'

239130 38 sg1- conflicts of interest and singled out Meeker and Merrill Lynch & Co. analyst Henry Blodget as

two examples:

SCOTT PELLEY (co-anchor): The big brokerage houses on Wall Street these days make most of their money in what's called investment banking — simply put, that's raising money for companies that need cash. For example, if Amazon.com needs money, it goes to its brokerage house, Merrill Lynch. Merrill Lynch offers Amazon stock for sale, and the higher the price of the stock, the more money Merril/ Lynch makes. Now imagine what any analyst is going to say about a stock that his own firm is offering for sale.

TOM BROWN (former analyst): They literally are cheerleaders because even if you're — this company that you're working on is not a client of the finn, every company's a potential client, so the investment banking group wants you to be wildly bullish about everybody.

PELLEY: Meaning that if there's bad news about a stock, you're not likely to hear it from the analyst. This 1999 study from Dartmouth College and Cornell University says analysts show 'significant evidence of bias' when they recommend stacks that are handled by their firm. The study points to this internal memo from brokerage house Morgan Stanley. It tells analysts, quote, "... we do not make negative or controversial comments about our clients...." Morgan has since disavowed that memo, but just look at a recent example of one of the firrn's clients, Priceline.com . Morgan made millions in tees raising money for Priceline. Morgan's analyst, Mary Meeker, seen here on CNBC, recommended buying Priceline's stock at $134 a share. When it fell to $78, she repeated her buy recommendation and she kept recommending Priceline as it fell to less than $3.

PELLEY: Investors may have lost a fortune, but last year Blodget and Meeker were reportedly paid about $15 million each. Both analysts declined requests for interviews. Merrill Lynch, Blodget's firm, did send us an e-mail saying its "analysts make independent recommendations based upon their best judgments." Mary Meeker at Morgan Stanley sent us a statement, saying in part, "We maintain a strict separation of the investment banking and research functions within the firm. Our research is objective, and has a long-term focus."

84. On Aprif20, 2001, The New York Times reported:

The nation's top securities regulator put Wall Street firms on notice yesterday, saying that the activities of their research analysts and the potential for conflict in the stock recommendations they make to investors will come under increased scrutiny.

239130 39 rimimmimiiimmoisimmilkinmimm .4 pipp Laura S. Unger, the acting chairwoman of the Securities and Exchange Commission, used PI' the issue of analyst independence as the focus of a speech yesterday before the Northwestern University School of Law. She warned brokerage firms to "reinvigorate public confidence" by resolving the "blatant conflicts" their analysts face.

"This is an area that people have been grumbling about for some time," Ms. Unger said in an interview after the speech. "Given the current market conditions, preserving the integrity of information is more important than ever."

Specific conflicts raised in Ms. Unger's speech included the widespread practice of paying analysts based upon the investment banking fees generated when their firms raise money for the companies the analysts follow. Such an arrangement encourages an analyst to be overly positive to keep investment banking fees coming in.

Another concern of Ms. Unger's are analysts who own shares in the companies they follow or who receive discounted shares in a company before the shares are offered to the public. She also criticized brokerage firms that acquire a stake in a start-up company in exchange for helping it raise money from the public. After the stock has come public, Ms. Unger said, some firms have issued favorable research reports, what she called "a booster shot", which propelled the stock price higher and allowed the firm to sell its stake into an inflated market.

While she called on Wall Street firms to resolve the conflicts themselves, Ms. Unger said that the SEC inspections of firms in coming months would focus on areas of potential conflict. One focus will be the so-called Chinese wall that is said to separate investment banking departments from their counterparts in research but the many critics suspect has been demolished.

Brokerage firm practices relating to analysts will also come under the microscope in Washington next month at hearings planned by Representative Richard H. Baker, a Republican of Louisiana. Mr. Baker, chairman of the House subcommittee on capital markets, is concerned that individual investors may not know how biased the advice coming from analysts can be.

Among the conflicts Mr. Baker plans to address at the hearings are analysts' personal ownership of stocks and the temptation to use upbeat research reports to help generate investment banking fees for their firms and for themselves.

85. On April 22, 2001, The Times of London reported:

Nobody had more clout in the booming world of Internet stocks than Mary Meeker.

In the late 1990's, when hundreds of net companies carne to market, she gained a

239130 40 pummom imisiiimilmaiiimmaniminemi7.. , jos ' -4S • - -441 reputation as the best net analyst on Wall Street Barron's, the financial weekly, dubbed her "Queen of the Net." Fortune put her on its cover. Morgan Stanley, her employer, paid her $15m (f 10.4m) a year.

But the collapse of the net bubble has led to a sudden reversal of fortune. Meeker rarely appears on television or in the press these days.

Critics blame her gung-ho reports for helping to create the net bubble and losing investors billions of dollars. She faces the threat of legal action and hefty damages.

In an apparent attempt to restore her tarnished reputation, Meeker last week. launched a defiant defence of the long-term advantages of investing in technology.. ..

According to the Wall Street Journal, Meeker played an influential role in arranging the merger of Time Warner and America Online last year. She addressed the board of Time Warner, a Morgan Stanley client, and advised it to buy AOL, one of her earliest net tips.

86. On May 7, 2001, The Investment Dealers' Digest reported:

The SEC thinks that the Chinese wall, which is supposed to keep investment bankers and their clients from influencing analysts, needs to be strengthened, and there's currently talk of beefing up the disclosure requirements on Wall Street analyst reports. But these are considered minor improvements, as few think that substantive, long-term change can occur without significantly altering the way analysts are paid at major underwriters. 'The compensation of the analyst comes out of the pocket of the investment bank. That is the biggest problem of all," says Cieorge Salem, a retired bank-stock analyst who took a lot of heat at several firms for his critical view of the industry. Salem's controversial calls date to the early 1980's, an indication of just how long the problem has been going on.

After May Day 1975, when commissions were deregulated, firms began focusing on investment banking revenue to pay the analysts' keep. The Chinese wall has been eroding ever since, pretty much crumbling over the last decade, as many firms even quit separating the two groups. Analysts have worked on M8LA deals and have become key to landing plum underwriting assignments. Bonuses have become directly tied to the deals analysts work on. And analysts' pay and prominence, boosted by their media

239130 41 jr .,••• ' _,...4= appearances on such media outlets as CNBC, have never been greater than in the last couple of years of the bull market.

"I don't see much hope for changing the problem until you change the compensation," :- says Chuck Hill, director of research at First Call/Thomson Financial. "When you've got big bucks on the line, whether you consciously go along with it or whether you try to be objective, I think subconsciously at least something creeps there."

Many in the industry think that the compensation stnicture is just plain wrong. "Research analysts should not he compensated out of an investment banking budget," says Salem. "When they are working in a research department, they are supposed to be working for the [investor]." Salem, and others, say that changing the situation would require enforcement action from the SEC. . . .

The SEC might want to take a look at Midwest Research's physical separation from investment bankers when they are trying to answer the question "How can analysts maintain their independence?" That was the topic of a recent speech by acting SEC Chairman Laura Unger at Northwestern University Law School in Evanston, Ill, last month. Unger took Wall Street firms to task for falling down on the job.

"Brokerage firms profess to rely on Chinese walls to minimize conflicts between their research, trading and underwriting departments, but these procedures may well need to either be upgraded or enforced more effectively," she said. Unger added that the necessary rules and tools are in place to cope with the conflicts, and urged firms to take the lead in addressing the issue, Whether the SEC will take more direct action is uncertain, at least until a permanent chairman is appointed by President George W_ Bush.

• • • •

Not surprisingly, retired analyst Salem also wants to see better Chinese walls. "The wall is ineffectual — it is not a wall_ The analysts run across the wall, they go on roadtrips and they promote deals," says Salem, specifying his comments didn't apply to all analysts. "These analysts are not analysts."

.. . • * For now, the industry is grappling with solutions to handling the conflict of interest that analysts face. "These conflicts of interest exist and there is no question that the managing of these conflicts needs to be improved," says Patricia Walters, senior vp, professional standards and advocacy at the Association for Investment Management and Research, an industry group of analysts, who is working on a set of objectivity standards it plans to . release shortly. The industry group's membership is primarily composed of buy-side

239130 42 '

analysts, not those working for Wall Street's investment banks.

Again, it comes down to money. "If the compensation scheme and job description relates purely to the investment process, and there is no incentive for the analyst to participate in any fashion on the corporate banking side, in terms of either new business opportunities or developing information to be used by corporate bankers, then you really have erected a true firma," says Samuel Jones, senior vp and chief investment officer at Trillium Asset Management Corp. in Boston, who is a member of the AIMR task force.

MEEKER'S TRUE ROLE IN MSDW'S INVESTMENT BANKING ACTIVITIES IS FINALLY REVEALEQ

V. On May 14, 2001, Fortune magazine, usually an enthusiastic supporter of Wall

Street, placed a photograph of Meeker on its cover with the headline "Can We Ever Trust Wall

Street Again?" In the cover story, Fortune reported extensively on Meeker's unwaveringly positive research reports and her active participation in MSDW's investment banking activities during 1999 and the first part of 2000, including her central role MSDW's participation in eBay's secondary stock offering in 1999. The Fortune article reported:

For the past year, as Internet stocks have crumbled and entire companies have vaporized, Meeker has maintained the same upbeat ratings on her companies that characterized her research reports in the glory days. For instance, of the 15 stocks Meeker currently covers, she has a strong buy or an outperform rating on all but two. Among the stocks she has never downgraded are Priceline, Amazon, Yahoo, and FreeMarkets — all of which have declined between 85% and 97% from their peak.

But Meeker's refusal to downgrade her stocks is only a small piece of a bigger story. This larger story is about how a smart, hard-working analyst became a big part of the world she covered. Meeker came to see herself not merely as an analyst but as a player — a power broker, a dealmaker, a force to be reckoned with. She was a true Internet insider — and other Internet insiders, most of whs were her friends, shared this exalted view of her. "I don't think of Mary as an analyst," says venture capitalist John Doerr. "1 think of her as a service -provider for investors, entrepreneurs, and management teams." As a result Meeker did things that utterly compromised her as a stock picker.

. .

Though it's hardly news anymore that the Chinese Wall once separating investment

239130 43 '• • e.

1:7 Though it's hardly news anymore that the Chinese Wall once separating investment .0 banking from Wall Street research has eroded, what you realize in talking to Meeker is the extent to which these two supposedly conflicting functions — keeping companies happy and giving investors honest stock advice — are now organically intertwined. She talks unashamedly, for instance, about how she has used her research to help land banking deals for Morgan Stanley. And she describes how upset she became when Morgan Stanley lost a hotly contested deal to archrival Goldman Sachs. "I had never lost an IPO mandate in my life for a company that I wanted to take public," she says, sounding like, well, an investment banker. "1 flipped into overdrive."

. .

Plenty of publications, including this one, have pointed out that analysts have become far more involved in the process of landing banking business than they once were. The modem analyst helps the banking team smoke out promising companies, sits in on strategy sessions, and promises — implicitly at least — to "support" the company once it has gone public with favorable research. That this makes tough-minded, independent stock research difficult, if not impossible, is no longer even an issue at most firms; investment banking brings in far more money than, say, brokerage commissions from grateful investors, thankful for unbiased research. Indeed, these days most analysts' pay is directly linked to the number of banking deals they're involved in.

What Meeker did once [investment banker Frank] Quattrone left [MSDW), however, went far beyond the usual analyst's accommodation. Rather than supporting Morgan's Internet banking effort, she began driving it. She became the firm's Internet rainmaker and its key dealmaker. "When I was at Deutsche Morgan Grenfeir says [Bill] Gurley, now a venture capitalist (and FORTUNE columnist), "we talked about Mary being one of the best investment bankers on the planet." She developed close ties to VC's like John Doerr, who gave her early peaks at promising companies. She visited all the top startups to decide which were Morgan Stanley material. "Mary started to be the primary relationship person," says a high-profile banker at a competing firm (who, like most people FORTUNE spoke to about Meeker, would talk only if promised anonymity). "She'd almost bring her bankers in as a sort of execution team." Replies Meeker: "Our bankers were great. I was part of a team."

There was another dynamic at play: Because the Internet was so new,investors wanted a credible source to explain it to them — and tell them which companies to invest in. And who was more credible than Meeker? She became the gold standard, the person who gave a company instant stature merely by her association with it. Thus, even as she was chasing companies for Morgan Stanley, companies were chasing her. "The bankers were superfluous," says Todd Wagner, former CEO of Broadcast.com, recalling his company's decision to go with Morgan when it went public in 1998. "Our rationale was, if we went

/39130 44 =r -

wYS.- with Morgan Stanley, we'd get Mary Meeker and we'd get a lot of attention."

•

What almost never happened was that Meeker lost an Internet deal she really wanted_ By Meeker's count, it happened only three times. As site describes the first, she starkly illustrates just how caught up she had become in the competition to win banking business. And the lengths to which she would go to win.

It was May 1998, and Morgan Stanley was in a "bake-off" to land eBay's upcoming /PO. During Morgan's presentation, Meeker and her bankers acted as if the business were already theirs, according to an eBay director. "She was on her pager a lot and getting calls from the CEO of Hewlett-Packard," he says. "The fact that she was a rock star showed itself a little at the meeting Our concern was that we might not get enough of her attention." The eBay board chose Goldman instead.

Shocked by the rejection, Meeker "flipped into overdrive," as she later put it to FORTUNE. She offered her personal apolc,gy to eBay CEO Meg Whitman for failing to convey her full appreciation of eBay's business. Then she he/clout a carrot no other firm could proffer: a Mary Meeker research report. In July she met Whitman at Boston's Logan Airport for dinner and presented her with a draft of a glowing report on the company. Whitman told Meeker that she felt honor bound to stick with Goldman. Then when eBay went public a few months later — and with the Goldman analyst forbidden front issuing any eBay research during the post-IPO quiet period — Meeker took the unprecedented step of publishing her completed eBay report on the very fust day of trading. She instantly became the most visible analyst on the stock. "eBay's market opportunity is huge," she proclaimed — and gave the stock an outperform rating. Seven months later, when [eBay] did a $1.1 billion secondary stock offering, eBay forced Goldman to split the business with [MSDWI.

Was Meeker's unwillingness to downgrade stocks a function of her desire to protect banking business? She insists that was not the case. She acknowledges, however, that she was protective of the companies she helped take public: "I am hard-pressed to downgrade a stock of a company I fundamentally believe in over the long term," she says.

But consider the case of America Online (now AOL Time Warner, the owner of FORTUNE's publisher), a company Meeker began covering way back in 1993 — shortly after Morgan Stanley did a follow-on stock offering far the company. She awarded AOL a strong buy, and has kept either that rating or an outperform on the company ever since — including the dark days of 1996, when the company was faced with huge losses, service

239130 45 111111111111.1r"Im

- screw-ups, and questionable accounting. 9!F7- Today Meeker describes her willingness to stick by AOL during the tough times as one of her best calls ever. But at least one Morgan Stanley client has a dimmer view of her stance during that period. In the fall of 1996, a Denver fund manager heard from a Morgan Stanley salesperson that Meeker had declared during the morning meeting that maintaining her strong buy on AOL was "the worst mistake of her career."

Troubled by the call, the fund manager, who held millions of dollars worth of AOL stock, spent two weeks trying to reach Meeker. When she finally called back, he recalls, "she waved me ()lithe stock. She basically said, 'Look, I don't think I would mess around with AOL here. There are too many big issues.'" He adds, "She was talking out of both sides of her mouth: 'Look, I've got a strong buy on the stock, but I don't have any conviction.' And when the stock recovered, she took a victory lap!"

88. Further information came to light on June 7, 2001, when The Wall Street Journal

reported:

The New York attorney general's office has begun an investigation into Wall Street's stock-research practices, including whether analysts are presenting unbiased information to investors.

It is the latest move by regulators to throw a focus on how Wall Street researches stocks and allocates new offerings. In the New York investigation, Wall Street strategists and analysts are quietly being interviewed about what goes on behind the scenes, especially when it comes to making recommendations about stocks, said an analyst who has been interviewed by the attorney general's office.

According to the analyst who was interviewed, the attorney general's office wanted to know if analysts really mean what they say or if they are pressured by their company's other interests. Those interests can include investment banking and some trading activities that can be pulled by a company if the analyst that follows the business is critical of operations, the analyst said.

89_ On Junel 3, 2001, the Los Angeles Times reported:

Amid searing criticism from investors large and small, leading brokerage firms Tuesday proposed guidelines aimed at giving analysts more freedom to be totally frank about the companies they cover.

23900 46

• . - -

- The guidelines precede hearings Congress will hold Thursday, focusing on several conflicts of interest that many Wall Street critics say taint analysts' stock recommendations.

Rep. Richard H. Baker (It-La.). chairman of the House Financial Services subcommittee on capital markets, said one focus of the hearings will be the apparent "grade inflation" that leads many analysts to call a stock a "hold" when they really mean "get out now."

The hearings may resonate loudest with small investors. Though institutional investors say they have long been skeptical of Wall Street research, many individuals who were new to the stock market in the late-1990's may have been far more willing to take analysts' touts at face value, experts say.

• .

At the peak of the tech boom, analysts such as Merrill Lynch's Henry B1odget and Morgan Stanley's Mary Meeker became like rock stars with their seven-figure salaries and predictions of ever-giddier highs for Internet stocks.

Today, after hundreds of billions of dollars of investors' wealth has evaporated in the dot- corn debacle, industry critics are focusing on the role analysts played in inflating the bubble — and on their seeming inability to warn that stocks might have become overvalued.

Data from First Callahoinson Financial, tracking 25,000 analyst stock recommendations, show that analysts overwhelmingly rated their stocks "strong buy" or "buy" as the tech sector soared in 1999 and early 2000. Even as the stocks plunged later in 2000 and early this year, the percentage of ratings shifted to "sell" has remained minuscule — less than 1.5% of all ratings.

Those figures have helped spur state and federal regulators to launch multiple probes into Wall Street's research and banking operations.

The New York attorney general's office confirmed last week that it has launched an investigation specifically into analyst conflicts of interest.

And the SEC is investigating several companies for violation of 8-month-old Regulation Fair Disclosure:a rule that forbids companies from releasing significant financial news to analysts before disseminating it to the public.

Baker's hearing Thursday may be the most public airing yet of the controversy over whether analysts mean what they say, and say what they mean.

239130 47 _ . . _ _ • ...,

90. The Subcommittee hearings began on June 14, 2001. Meeker was invited to

4re , address the Subcommittee, but she declined to do so.

91. One witness who did appear before the Subcommittee, portfolio manager David

W. Tice, testified that:

There is no doubt that small investors have been and will continue to be injured by Wall Street's lack of objectivity, although estimating to what degree is impossible.... Prior to the mid-1990's, individual investors had little exposure to Wall Street analyst research, including buy recommendations. Now that information is only three mouse clicks away. The majority of those who use this information are at best unsophisticated, actually believing that a buy means the stock offers compelling value at current prices. In truth, these investors have no way of knowing that in many cases the recommendation is based on little more than expectations of future investment banking business. Twenty-four hours a day, seven days a week, individual investors are bombarded with what we [institutional investors] view as little more than bullish propaganda.

92. On July 1, 2001, the Chicago Tribune reported:

Responding to complaints, the Securities and Exchange Commission has issued an alert to investors not to rely solely on stock analysts' reports when buying or selling stocks.

Laura Unger, acting chairwoman of the SEC, said that the alert was needed because investors may not fully understand the many roles that analysts can play at their firms and their inherent conflicts.

"This alert gives investors a framework for what to look for and identifies key issues that could compromise the objectivity of the research," Unger said.

The SEC's office of compliance, inspections and investigation2 will expand its scrutiny of analysts to encompass not only whether research is an independent function at brokerage fu-rns, but also whether conflicts result when analysts own stocks they write about or when they are paid by a firm's investment banking arm.

If the examinations turn up extensive problems. Unger said, the SEC could take enforcement action or create new rules.

The SEC reported a surge in letters from investors who said they had lost large sums of • money, sometimes their life savings or their children's college funds, when they based investment decisions on analysts' reports.

234130 48 1 ler 93. To date, Meeker has not downgraded her rating on AOL shares.

DEFENDANTS' UNLAWFUL CONDUCT CAUSED HARM TO Tiff CLASS

94. During the Class period, Meeker continually promoted AOL in the press, on

television, and on the Internet. This publicity campaign was intended to and did reach not only

investors who were brokerage customers of MSDW, but also individual investors, including

members of the Class, who traded with other brokers_

95. As a result of her fame and influence, Meeker's recommendations became

valuable commodities which she and MSDW used to attract investment banking clients,

including AOL.

96. Although other analysts covered AOL, many took their cues from Meeker, the

"Queen of the Internet", who was widely regarded as the most authoritative voice on all things

Internet, including AOL. Moreover, unlike most other analysts, Meeker had the power to cause

the Internet market in general, and AOL stock in particular, to move in direct response to her

comments. As alleged herein, the popular and financial press recognized Meeker's influence and

often credited her positive comments with precipitating jumps in the price of AOL shares

97. As evidenced by numerous media reports, as detailed herein, the "Chinese wall"

did not exist for Meeker. Rather, at the height of the Internet boom, Meeker was virtually

indistinguishable from an investment banker. This material fact, however, was not disclosed in

connection with her ratings, recommendations, and other statements regarf li ne AOL.

98. Unlike analysts at firms that did not do investment banking business with AOL,

Meeker maintained her high rating on AOL shares and continued to make highly complimentary

comments about the Company and its stock throughout the Class Period. Even after the price of

23913G 49 141r- AOL shares fell along with the rest of the high-technology and Internet markets in mid-2000,

Meeker was one of the few analysts who never downgraded AOL and continued to tout the

Company as "our best money-making idea and our top stock pick." Even into late 2000 and

early 2001, Meeker continued her campaign to artificially inflate the price of AOL common

stock and was successful in doing so, as detailed herein.

99. Multitudes of individual investors, including members of the Class, followed

Meeker's recommendations and purchased AOL at prices higher than they would have paid had

the defendants not engaged in the unlawful conduct described herein. As alleged herein, the

materially false and misleading positive comments by Meeker were directly responsible for

increases in the price of AOL stock, and in many cases for causing the entire market for

technology stocks to rise. During the Class Period, AOL common stock traded at prices as high

as $94 per (split-adjusted) share. When the price of AOL shares fell to lower levels in mid- to

late 2000 and early 2001, Meeker artificially kept it from falling further by continuing her

campaign of false and misleading statements.

100. The defendants' unlawful conduct allowed MSDW to gain millions of dollars in

investment banking fees during the Class Period, and Meeker received millions of dollars in

salary and cash bonuses in part due to her false and misleading ratings, recommendations, and

positive statements regarding AOL. Meanwhile, members of Class lost enormous sums of

money investing in AOL as a result of defendants' unlawful conduct.

239130 50

COUNT I

ir Against Defendants Morgan Stanley Dean Witter & Co. and Mary Meeker far_Nadalki_a_of10 1L_LakftikkLA ce n t j_k_0

101. Plaintiff repeats and realleges all preceding and subsequent paragraphs as if set

forth fully herein.

102. During the Class Period, defendants carried out a plan, scheme and course of

conduct which was intended to, and did, throughout the Class Period: (i) deceive the investing

public, including plaintiff and other Class members, as alleged herein; (ii) artificially inflate and

maintain the price of AOL common stock; and (iii) cause plaintiff and other members of the

Class to purchase AOL common stock at artificially inflated prices. In furtherance of this

unlawful scheme, plan and course of conduct, defendants took the actions set forth herein.

103. Defendants: (1) employed devices, schemes, and artifices to defraud; (ii) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (iii) engaged in acts, practices and a course of conduct which

operated as a fraud and deceit upon the purchasers of AOL common stock in an effort to

maintain artificially high market prices for AOL common stock in violation of Section 10(b) of

the Exchange Act and Rule 10b-5.

104. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts as alleged herein, the market price of AOL common stock

was artificially inflatedturing the Class Period. In ignorance of the fact that the market price of

AOL common stock was artificially inflated, and relying directly or indirectly on the false and

misleading statements made by the defendants, or upon the integrity of the market in which the

239130 51 'Id3.securities trade, and/or on the absence of material information that was known to defendants but _ not disclosed in public statements by defendants during the Class Period, plaintiff and the other

members of the Class acquired shares of AOL common stock during the Class Period at

artificially inflated prices and were damaged thereby.

105. At the rime of the misrepresentations and omissions as alleged herein, plaintiff

and the other members of the Class were ignorant of their falsity and believed them to be true.

Had plaintiff and the other members of the Class and the marketplace known the material

information omitted pursuant to defendants' fraudulent scheme, plaintiff and the other members

of the Class would not have purchased or otherwise acquired shares of AOL common stock

during the Class Period, or, if they had acquired such shares during the Class Period, they would

not have done so at the artificially inflated prices which they paid.

106. By virtue of the foregoing, defendants violated Section 10(b) of the Exchange Act

and Rule 10b-5 promulgated thereunder and are liable to plaintiff and the other members of the

Class.

107. As a direct and proximate result of defendants' unlawful conduct as alleged

herein, plaintiff and the other members of the Class suffered damages in connection with their

purchases of AOL common stock during the Class Period.

COUNT

Against Defendant Morgan Stanley Dean Witter & Co. for controilint Person Liability Pursuant to g 20(a) (bite Exchange Act

108. Plaintiff repeats and realleges all preceding and subsequent paragraphs as if set

forth fully herein.

219130 52 109. Among other things, Meeker issued numerous Research Notes in the name of 07'.7 17/ - „et MSDW and made other public statements that were materially false and misleading, as alleged

herein. With respect to Meeker's unlawful conduct as alleged herein, MSDW is a controlling

person pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), because as Meeker's

employer, MSDW controlled the dissemination of Meeker's false and misleading Research

Notes, and MSDW had and exercised the power and influence to cause Meeker to engage in the

conduct complained of herein.

110. By virtue of the foregoing, MSDW is liable to plaintiff and the other members of

the Class.

111. As a direct and proximate result of MSDW's unlawful conduct as alleged herein,

plaintiff and the other members of the Class suffered damages in connection with their purchases

of AOL common stock during the Class Period.

WHEREFORE, plaintiff, on behalf of himself and on behalf of the Class, prays for

judgment as follows:

A. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3).

of the Federal Rules of Civil Procedure and certifying plaintiff as class

representative of the Class and his counsel as class counsel;

B. Against defendants, jointly and severally, fur damages suffered as a result of

defendants' violations of the securities laws;

C. Awarding plaintiff and the other members of the Class pre-judgment and post-

judgment interest, as well as their reasonable attorneys' fees and expert witness

fees and other costs and expenses;

239130 53 ,

?.0( • D. Awarding recission or recissionary damages to members of the Class who no

longer hold AOL stock; and

E. Granting such other and further relief as the Court deems just and proper.

JURY DEMAND

Plaintiff demands a trial by jury.

DATED: August 6, 2001

WOLF HALD 'S FREE I,

By: / FreTI'aylor Isquith Gustavo Bruckner (GB 7701) 270 Madison Avenue New York, NY 10016 Telephone (212) 545-4600 Fax (212) 545-4653

SCHIFFRIN & BARROWAY, LLP Marc A. Topaz David Kessler Three Bala Plaza East, Suite 400 Bala Cynwyd, PA 19004 Telephone (610) 667-7706 Fax (610) 667-7056

CAULEY GELLER BOWMAN & COATES, LLP Paul J. Geller One Boca Place 2255 Glades Road • Suite 421A Boca Raton, FL 33431 Telephone (561) 750-3000 Fax (561) 750-3364

Attorneys for Plaintiff

239130 54 ipolitimaiiiiimigigilliall1111111111111111.1111111111111111111 :" .

.. , _ ,..i

p ' . ,

• 1.156 (FRO 8. , • a 3' 0! 15.32/S1 15.32/N0.4862477573 P 2

. ._.. CERTIFICATION OF NAMED PLAINTIFF ruRSUANT T_O_FEDISRAL _$,E QUB.ITIE,S 1.4w ki

. NANCY LLOYD ("Plaintiff') dec/ares, as to the claims asserted under the federal securities laws,

that

1. Plaintiff has reviewed the Complaint and retains Schiffrin & Barroway, LLP and such DO-

counsel it deems appropriate to associate with to pursue such action on a contingent fee basis.

2. Plaintiff did not purchase the security that is the subject of this action at the direction of

Ilaintift's counsel or in order to participate in any private action. .

3. Plaintiffis willing to serve as a representative party 011a Wulf of 1118 clan, including pivviding testimony at deposition and tzial, if necessary. 4. Plaintiffs transaction in the America Online (NYSE: AOI .) security that is the subject of

this action during the Class Period is as follows:

Mis.L.Sbard. Buy/Sell PM Price Per ahare 500 Buy 07/28/00 $55.50

5. During the three years prior to the date of this Certificatimt, Plaintiffhas sought to serve or .

. served an a representative party for a dela in the following actions filed under the federal securities laws:

N/A

6. Plaintiff will not accept any payment for serving as a representative party on behalf of the

class beyond the Plaintiff's pro rata ahare of any recovery, except such reasonable costa and expenses

(including lost wages) directly relating to the representation a fthe class as ordered or approvedby the Court. _ I declare wider penalty of pecittry that the foregoing is true and correct.

Executed this rd. day of August, 2001. . . i Ii F " '• y, Adlhoof 1 I Nan, • yd AWILICADHLIMANALYSTiLLOYD CAT i