Lloyd, Et Al. V. Morgan Stanley Dean Witter & Co., Et Al. 01-CV-7263
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44"41;•: :• .„.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. 239130 3 ••• IL 1 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.