IN THE UNITED STATES DISTRICTCOURT FOR THE SOUTHERN DISTRICT OF NEW YORK

IN RE MERRILL LYNCH & CO., INC. >laster File So.: 02 >lDL 1484 RESEARCH REPORTS SECURITIES LITIGATION Civil Action No. 02-CV-4242 (MP)

COSSOLIDATED ARIESDED This document This relates to: COhlPLAIXT IN RE MERRILLLYS’CH & CO., INC. *,,/ *,,/ INTERNETINFRASTRUCTURE HOLDRs .JURY TRIAL DEAlASDED SECURITIES LITIGATION

Plaintiffs allege the followingupon personal knowledge as to themselves andtheir acts

and, as to all other matters, upon information and belief based upon,iuter afiu,the investigation

made by and through their attorneys, including a review of the public filings of Defendants

Merri11 Lynch Pierce Fenner & Smith (“MLPFS”, and together with Menill Lynch &: Co.. Inc..

“Merrill Lynch”), Merrill Lynch & Co., Inc., and Merrill Lynch Internet Infrastructure

Holdrs/SM Trust (“IIH” or the “Trust”) with the Securities and Exchange Commission (“SEC“).

public filings of the New York State Attorney General concerning Merrill Lynch, pleadinss.

news articles, and other papers:

NATURE OF THE ACTION

1. This is a securities class action brought on behalf of Plaintiffs and all other

persons or entities, except for Defendants, who purchased Internet Infrastructure HOLDRSSM

depository receipts (“Internet Infrastructure HOLDRS”) during the period February 24, 2000

through April 8, 2002, inclusive (the “Class”and the “Class Period”). 2. This action, which asserts liability under $1 1 of the Securities Act of 1933

(“Securities Act”), arises out of a series of false and misleading statements, and omissions of material fact, within a Registration Statement and Prospectus (together, the “Prospectus”) filed with the SEC on February 24, 2000, for the issuance and initial public offering (the “Offering”) of one billion Internet Infrastructure HOLDRS.

3. Beginning in 1999,Merrill Lynch created multiple trusts that werecomposed of underlying securities of companiesin the technology sector. The Internet Infrastructure

HOLDRS are “basket securities.”Each Internet Infrastructure HOLDRS represents an undivided beneficial ownership in 20 specific companies in the Internet infrastructure sector of the technology industry (the “underlying securities”). The price of the Internet Infrastructure

HOLDRS was directly related to, and shifted with, the price of the underlying securities. A

Merrill Lynch corporate entity was both the issuerand underwriter of the Internet Infrastructure

HOLDRS.

4. Throughoutthe Class Period, Merrill Lynch issued amendments to theProspectus

January 26, 2001 and March 12, 2002 (the “Amendments”). The Prospectusand the

Amendments are referred to herein as the “Prospectuses.”

5. TheProspectuses were materially false and misleading because, irlter- alicl, Merrill

Lynch made material misrepresentationsand omissions regarding the IIH Trust, the underlqing securities and the risks associated with an investment in the IIH Trust and failed to disclose inter- alia that there were material systemic conflicts of interest which pervaded the research department at Merrill Lynch.

2 JURISDICTION AND VENUE

6. This action arises under sections 1 I, 12(a)(2),and 15 of the Securities Act, 15

U.S.C. $5 77k, 771(a)(2), and 770.

7. The jurisdiction of this Court is based on section 22 of the Securities Act, 15

U.S.C. fj 77v; and on sections 1331 and 1337(a) of the Judicial Code, 28 U.S.C. $5 1331,

1337(a). Venue is proper in this District under section 27 of the Securities Act, 15 U.S.C. 6

78(aa), and section 1391 (b) of the Judicial Code,28 U.S.C. $ 139l(b). Theprincipal offices of

Defendants Merrill Lynch & Co., Inc. and MLPFS are located in this District; a significant amount of the conduct and transactions givingrise to the claims alleged herein; and the preparation and disseminationto the investing public of this false information, occurredin this

District.

8. In connectionwith the acts and conductalleged herein, Defendants directly and indirectly used the means and instrumentalities of interstate commerce, including thefacilities of the national securities exchangesand United States mails.

THE PARTIES

9. As set forthon the attached certification, Lead Plaintiff Quentin Kapke purchased

Internet Infrastructure HOLDRS and was damaged thereby.

10. As set forth on the attached certification, Plaintiff Leonard E. Jacobs purchased

Internet Infrastructure HOLDRS and was damaged thereby.

11. Defendant Merrill Lynch & Co., Inc., a Delaware corporation, is a holding company that, through its subsidiaries andaffiliates, engages in retail and institutional sales to its customers, provides investment-banking servicesto businesses, and publishes research reports and ratings on stocks. Defendant MerrillLynch & Co.’s principal place of businessis located at

3 250 Vesey Street, New York, New York 10281. Defendant Merrill Lynch & Co. was the

underwriter of Internet Infrastructure HOLDRS.

12. DefendantMerrill Lynch, Pierce, Fenner & SmithIncorporated (“MLPFS”), a

wholly owned subsidiary of MerrillLynch & Co., Inc., is a licensed brokerldealer in the United

States, does business worldwide, andis controlled by Merrill Lynch & Co., Inc. through contracts, stock ownership, and related officersand directors. MLPFS, a Delaware corporation, has its principal place of business in New York, New York. MLPFS engages in retail and

institutional sales to its customers, provides investment-banking servicesto businesses, and

publishes research reports and ratingson stocks. Defendant MLPFS \vas the registrant of IIH, the

issuer of Internet Infrastructure HOLDRSand an underwriter of the Offering.

13. Defendant IIH is a trust fornled by Defendant Merrill Lynch & Co. under a depository trust agreement dated as of February18, 2000. The Trust, along with Defendant

MLPFS issued the Internet Infrastructure HOLDRS, which trades under the symbol “IIH”on the

American Stock Exchange (“AMEX”). The Trust’s stated purpose was to pernit shareholders

“to diversify [their] investment in the Internet infrastructure segment of theInternet industry

through a single, exchange-listed instrument representing [their] undivided beneficial onmership

of the underlying securities.”

14. Defendant John L. Steffens was, at all times relevant hereto, Vice Chairman of the

Board of Directors of Merrill Lynch; and Chief Executive Officer, Chairman ofBoard the and

President of MLPFS. Defendant Steffens signed the Prospectus.

15. Defendant E. Stanley O’Neal was, at all times relevant hereto, Executive Vice

President and Director of MLPFS. Defendant O’Neal signed the Prospectus.

4 16. Defendant George A. Schieren was, at all times relevant hereto, General Counsel,

Senior Vice President, and a Director of MLPFS. Defendant Schieren signed the Prospectus.

17. Defendant Ahmass L. Fakahany was, at all times relevant hereto, Senior Vice

President, Chief Financial Officerand Controller of MLPFS. Defendant Fakahany signed the

Prospectus.

18. Defendant Henry Blodget (“Blodget”) was, at all relevant times, a First Vice

President of Merrill Lynch and was Merrill Lynch’s primary analystfor companies in the

Internet sector. As discussed below, Blodget was retained by Merrill Lynch to bring investment banking business to Merrill Lynch, and earned many millions of dollars as Merrill Lynch’s premier analyst of Internet stocks, the majorityof which was based on the amountof investment banking business that he generated. Merrill Lynch reportedly paid him in excess of S5 million in

2000 and approximately $12 million in 2001 -- with some estimates as high as S20 million per year -- in addition to a $2 million buy-out when Blodget left Merrill Lynch in November 2001.

Blodget issued analyst reports relatingto companies in IIH, including, Infospace, Openwnve,

Inktomi, Exvdus and Real Networks.

19. The individuals named as defendants in paragraphs 14- 17 are collectively referred to herein as the “Director Defendants.”

CLASS ACTION ALLEGATIONS

20. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of the Class, consistingof all persons who purchased or otherwise acquired Internet Infrastructure HOLDRS from February 24, 2000, throughApril 8,

2002, inclusive (the “Class” and the “Class Period”). Excluded from the Class are Defendants; members of the immediate families of the Director Defendants; any entityin which any

5 Defendant has or hada controlling interest; and legal representatives, heirs, successors, or assigns of any Defendant.

2 1. As of March 6, 2002, there were 6.548 million outstanding Internet Infrastructure

HOLDRS. The Internet Infrastructure HOLDRS are traded on theAMEX under the symbol

“IIH.” The members of the Class areso numerous that joinder of all members is impracticable.

While the exact number of Class membersis unknown to Plaintiffs, and can only be ascertained through appropriate discovery, Plaintiffs believe that there are thousands of Class members.

Record owners and members of the Class may be identifiedfrom records maintained by IIH or its transfer agent, and may be notified of the pendency of this action by mail,using the form of notice similar to that generally used in securities class actions.

22. Plaintiffs’ claim are typical of the claims of the members of the Class in that

Plaintiffs and each Class member purchased Internet Infrastructure HOLDRS duringthe Class

Period and suffered injury as a result.

23. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competentand experienced in securities and class action litigation.

24. A class action is superior to other available methods for the fair and efficient adjudication of this controversy, since joinder ofall Class members is impracticable.

Furthermore, as the damages suffered by individual Class members may be relatively small.the burden and expense of individual litigation makeit virtually impossible for Class members to seek redress individually for the wrongs doneto them. There will beno difficulty in the management of this action asa class action.

6 25. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting individual members of the Class. Among the questions of law and fact common to the Class are:

i. WhetherDefendant violated the federal securitieslaws;

.. 11. Whether the Prospectus omitted and/or misrepresented material facts about the initial offering of Internet Infrastructure HOLDRS;

... 111. Whether Defendants participated in the course of conduct complained of herein;and

iv. Whether Plaintiffs and the other members of the class sustained damages and the appropriate measure of damages.

BACKGROUND

Internet Infrastructure HOLDRS/SM Trust

26. As of February 18, 2000, the IIH was formed under a depository trust agreement among Merrill Lynch, the Bankof New York, other depositors,and the owners ofthe Internet

Infrastructure HOLDRS. MLPFS and MerrillLynch were the underwriters and MLPFS was the initial trust depositor and the issuerin the offering.

27. On February 24, 2000, the Defendants caused IIH to initiate the Offering of one billion Internet Infrastructure HOLDRS, in round lots of 100, pursuant to the Prospectus. The

Internet Infrastructure HOLDRS are “basket securities”, representingan undivided interest in the

U.S.-traded common stock of a group of20 specific Internet infrastructure companies that, among other things, purport to provide software and related services which allowInternet companies to improve online communications and better manage their Web sites.

28. Through the Offering, Defendants raised over $500 million. As a result of the successful Offering, MLPFS earned over S15.5 million in underwriting fees. Henry Blodget, then head of Memll Lynch Internet group,took credit for generating the S15.5 million in

7 underwriting fees received by Merrill Lynch as a result of theIIH offering. This was the highest fee obtained by Merrill Lynchin the year 2000 as the result of research Internet analyst Henry

Blodget.

29. Investing in the IIH was almost like directly investing in the stocks of the underlying securities themselves. As describedin the Prospectus, the Trust issuedInternet

Infrastructure HOLDRS that represented IIH investors’ respective “undivided beneficial ownership interest in the shares of common stockheld by the [Tlrust on [their] behalf.”

30. At page 9 of the Prospectus, Defendants touted the flexible nature of the Internet

Infrastructure HOLDRS, under the heading “Purpose ofInternet Infrastructure HOLDRS”.

Internet Infrastructure HOLDRS are designedto achieve the following:

Diversification.Internet Infrastructure HOLDRS are designed to allow you to diversify your investment in the Internet infrastructure segment of theInternet industry through single,a exchange-listed instrument representingyour undivided beneficial ownership of the underlying securities.

Flexibility.The beneficial owners of Internet Infrastructure HOLDRS have undivided beneficial ownership interests in each of the underlying securitiesrepresented by the Internet Infrastructure HOLDRS, andcan canceltheir Internet Infrastructure HOLDRS to receilre eachof the underlying securities represented by the Internet Infrastructure HOLDRS.

Transactioncosts. The expenses associated with trading Internet Infrastructure HOLDRS are expected to be less than trading each of the underlying securities separately.

The Prospectus also stressed that investors saved moneyin transaction costs by investing in the

IIH, rather than purchasing shares of each of the underlying securities outright.

3 1. The Prospectus, at page 1 1, presented the following chart that listed the initial group of the underlying securities and provided the names of20 the underlying securities, their ticker symbol, and the principal market on which such companies’ shares were traded; indicative

8 weightings as of (February 7, 2000); and indicative share amounts represented bya round-lot of

100 Internet Infrastructure HOLDRS (as of February 7, 2000). By selecting these underlying securities as part of the IIH trust, Defendants were recommending that investors purchase and were offering to sell the underlying securities to Plaintiffs and the Class:

Indicative Primary Ticker Share Indicative Trading Name of Company Amounts Weightings Market ...... _--__------EXODUS COMMUNICATIONS INC. EXDS 8 1 1.20% NASDAQ AKAMAI TECHNOLOGIES INC AKAM 4 10.35% NASDAQ VERISIGN INC. VRSN 5 10.33% NASDAQ

1nfospace.COM INC. INSP 4 7.12% NASDAQ

BROADVISION INC. BVSN 4 6.76% NASDAQ

VIGNETTE CORP. V IGN 3 6.73% NASDAQ

INKTOMI COW. INKT 5 6.67% NASDAQ BEA SYSTEMS INC. BEAS 5 5.56% NASDAQ REALNETWORKS INC. RNWK 6 5.41% NASDAQ

PORTAL SOFTWARE INC. PRSF 7 4.46oio NASDAQ

VITRIA TECHNOLOGY VITR 3 3.86% NASDAQ

INTERNAP NETWORK SVCS COW. NAP 6 3.80% NASDAQ DIGITAL ISLAND INC. ISLD 3 3.07% NASDAQ

NETWORK SOLUTIONS INC. NSOL 1 2.82% NASDAQ KANA COMMUNICATIONS, INC . KANA 1 2.72% NASDAQ ALTEON WEBSYSTEMS INC. ATON 2 2.15% NASDAQ USINTERNETWORKING INC. USE 3 1.81% NASDAQ E.PIPHANY INC. EPNY 1 1.74% NASDAQ

9 NAVISITE INC. NAV I 1 1.68% NASDAQ

SOFTWARE.COM INC. SWCM 13 1.65% NASDAQ

Merrill Lvnch’s Analvst Coverage of the Underlving Securities

32. As of the date of the Offering, Merrill Lynch provided analyst coverage for seven

(35%) of the 20 underlying securities, with a combined weighting of 27.31 %. During the Class

Period, this number grew to 15 (75%) of the 20 underlying securities, with a combined n.eighting of 82.5 1 YO.Blodget, Merrill Lynch’s star analyst, personally covered fiveof the twenty underlying securities, including, Infospace, Openwat,e, Exodus, Inktomi and Real Network, which had a combined weighting of over 20%. Analyst cok’erage included issuing analyst reports concerning the business of the company and its stock \value compared to its market price and stock purchase recommendations. The following chart details each underlying Security covered by Merrill Lynchand the approximate period of such coverage:

Name of Companv Coverage Period Exodus Communications Inc. 3/01 - 9/26/01

AL~*-?]ai Technologies Inc. 9/00 - 7/23/01

Verisign Inc. 4/00 - 519102 Infospace.com Inc. 12/99 - 10/3/01 Inktomi Corp. 3/00 - 3/5/02

Bea Systems Inc. 5/00 - 5/8/02 Realnetworks Inc. 12/99 - 411 7/02

Portal Software Inc. 11/99 - 11/21/01

Vitria Technology 10199 - 5/2/02

Internap Network Svcs Cop. 7/00 - 7/26/01 Digital Island Inc. 2/00 - 7/23/01 Usinternetworking Inc. 3/00 - 7/25/01 E.piphany Inc. 10199 - 4/ 12/02 Navisite Inc. 7/00 - 4/01

10 Software.ComInc. 7/99 - 1 1/00

33. For the entire period of the coverage, none of the above-listed stocks received a recommendation that fell below “ACCUMULATE”.

34. On April 8, 2002, the Office of the Attorney General of the State of New York

(the “Attorney General”), in an Application for an Order Pursuant to [New York] General

Business Law Sec. 354 (the “Application”) whichit filed in the Supreme Court of the Stateof

New York, County of New York, revealedits findings regarding Merrill Lynch’s conflicts of interest and misleading stock rating system. The Application named as Respondents Merrill

Lynch & Co., Blodget and other past or present officers or employees ofMerrill Lynch. In support of the Application, the Attorney Generalfiled an Affidavit in Support thereof sworn to by Eric Dinallo, Chief of the Investment Protection Bureau of the NewYork State Department of

Law (the “Dinallo Affidavit” or “Dinallo Aff.”).I

35. As described in the Dinallo Affidavit, the Office of the Attorney General conducted an investigation of “...all stocks covered by Internet research analystsat Merrill

Lynch ...” including, to date, examination of closeto hventy witnesses under oath, including

Blodget, and review of “...over 30,000 documents, comprising over100,000 pages, including thousands of e-mails.’’ (Dinallo Aff. at 2).

36. As alleged by the Attorney General and as attested to in the Dinallo Affidavit,

Menill Lynch analyst reports and recommendations ofall Internet companies coveredby the

1 In support of the Dinallo Affidavit, the Attorney General references numerous documents and depositions transcripts. As of the date of filing of this Amended Consolidated Complaint, Plaintiffs have not yet had an opportunityto review the documents producedto the Attorney General in full. The Attorney General has stated publicly, however, that the documents \\.ill be made available as soon as possible. By referringto the Dinallo Affidavit, Plaintiffs donot incorporate the entire Dinallo Affidavit orall of its allegations.

11 Internet group were the product ofa compromised and misleading “research” system that routinely violated its own rating criteria and its analysts received inflated bonuses which were directly linked to Merrill Lynch’s investment banking success. Indeed, the Dinallo Affidavit highlights specific examples of individual Internet company stocks that Defendants recommended to investors even though, internally, Merrill Lynch and its analysts actually had negative opinions of those stocks.

37.Pursuant to thefalse and misleading Prospectus, Defendants successfully issued one billion Internet Infrastructure HOLDRS, of which it sold on the Offering 4.9 million Internet

Infrastructure HOLDRS at an Offering price of S96.67 per Internet Infrastructure HOLDRS, for total initial proceeds of more than $473,683,000 million. Additionally, Defendantsreceived underwriting fees of $15.5 million. Thereafter, during the Class Period, Defendants issued an additional 1,648,200 Internet Infrastructure HOLDRS. Thus as a result of the false and misleading Prospectuses, Defendants garnered morethan $500 million dollars from the unsuspecting public. The purchase ofthe underlying securities in the Internet Infrastructure

HOLDRS was beneficial to the companies in the Trust, many of\vhich were Merrill Llnch investment banking clients.

38. Within one year of the Offering, the IIH lost almost 84% of its original value, plummeting from the Offering priceof $96.67 per Internet Infrastructure HOLDRS to S13.5625 per Internet Infrastructure HOLDRS on February 23, 2001. The closing price for the Internet

Infrastructure HOLDRS on June 4, 2002 was $2.88.

Blodpet’s Relationship With Merrill Lvnch

39. In February 1999, Merrill Lynch hired Henry Blodget to lead its Internet group.

12 Internet group were the product ofa compromised and misleading “research” system that routinely violated its own rating criteria and its analysts received inflated bonuses which were directly linked to Merrill Lynch’s investment banking success. Indeed, the Dinallo Affidavit highlights specific examples of individual Internet company stocks that Defendants recommended to investors even though, internally, Merrill Lynch and its analysts actually had negative opinions of those stocks.

37.Pursuant to thefalse and misleading Prospectus, Defendants successfully issued one billion Internet Infrastructure HOLDRS, of which it sold on the Offering 4.9 million Internet

Infrastructure HOLDRS at an Offering price of S96.67 per Internet Infrastructure HOLDRS, for total initial proceeds of more than $473,683,000 million. Additionally, Defendantsreceived underwriting fees of $15.5 million. Thereafter, during the Class Period, Defendants issued an additional 1,648,200 Internet Infrastructure HOLDRS. Thus as a result of the false and misleading Prospectuses, Defendants garnered morethan $500 million dollars from the unsuspecting public. The purchase ofthe underlying securities in the Internet Infrastructure

HOLDRS was beneficial to the companies in the Trust, many ofIvhich were Merrill Llnch investment banking clients.

38. Within one year of the Offering, the IIH lost almost 84% of its original value, plummeting from the Offering price of $96.67per Internet Infrastructure HOLDRS to S13.5625 per Internet Infrastructure HOLDRS on February 23, 2001. The closing price for the Internet

Infrastructure HOLDRS on June 4, 2002 was $2.88.

Blodpet’s Relationship With Merrill Lvnch

39. In February 1999, Merrill Lynch hired Henry Blodget to lead its Internet group.

12 40. Upon Blodget’s arrival, Merrill Lynch had in place a structure in which the

Internet group’s analysts would play an important role in investment banking matters by requiring that each analyst devoteat least 50 percent of their timeto investment banking.

41.Under Blodget Merrill Lynch “prioritize[d]” its researchcoverage for stocks according to whether the company had an investment banking relationship with Merrill Lynch.

Within weeks ofjoining Merrill Lynch as head of the Internet group, Blodget distributedto the

Co-Heads of U.S. Equity Research and senior investment bankers a memorandum entitled,

“Managing the Banking Calendarfor Internet Research.” The memorandum unapologetically

described Blodget’s expectation that at least 50 percent of his and his team’s time Lvould be allocated to in\,estment banking matters. In addition to discussing “banking transactions[I in the pipeline” and “promising deals,’’ the memorandum described Blodget’s work schedule as being divided “85% banking, 15% research.”

Blodget’s Reputation As An Analvst Of Internet Companies

42. Blodget’s ascension to the upper echelon of Internet analysts began when he was

an analyst at CIBC Oppenheimer. In October 1998, Blodget put a 12-month, $1 50 per share price target on Amazon.com stock. But by mid-December, Amazon.com was trading at S242 per

share. So, on December 16, 1998, Blodget set an “outlandish” target price for Amazon.com

stock of $400 per share.

43. Once word of Blodget’s target reached the market, Amazon.com stock

immediately traded higher, closingup nearly 20% for the day. Three weeks later, on January 6,

1999, the stock closed higher than Blodget’s “outlandish” $400 per sharetarget. (One month

later, Blodget replaced Jonathan Cohen as Merrill Lynch’s head Internet analyst.)

44. Blodget frequently appeared on television business news reports, where he would

13 set forth his bullish opinions and predictions regarding the stocks of variousInternet companies.

Blodget’s celebrity status also included regular appearances on television programs concerning the financial markets. In 1999 and 2000, Blodget appeared on television at least 77 and 46 times, respectively, often on CNBC and CNN. These programs had great influence on the financial markets in general, and on the prices of the stocks discussedon the programs. This influence was illustrated in a March 15, 1999 article in The Wull Street Jour.rld entitled “Abreast of the Market: What Moves Markets: New Forces Are Now Powering Surging Stocks: Ordinary

Joes Move Market Toward Dow 10,000 Mark With Aid From TV, Internet:”

The pros keep an eye not just on their banks ofquote machines, but also on television screens. “In my fixed-income trading room and mystock trading room, CNBC is on allduring the day,” says Henry Henmann, chief investment officer at Overland Park, Kan., mutual-fundgroup Waddell & Reed.He put in televisionstwo years ago, when he was upgrading the bond trading room. “It is just another tool but it is a tool,” he says. When Prudential’s Mr. Acamporaturned bearish in Augustand CNBC relayed his warningof asharp market drop,the prediction proved self- fulfilling and helped push stocks down. The experience indicated that, at the right time, television appearances by any of a variety of market players can hit the market just as hard as a warning from the Fed’s Mr. Greenspan. And television can turn once-unknown analysts, such as Merrill’s Mr. Blodget, into instant celebrities.

45. Blodget’s reputation as an Internet analyst was cemented by his selection as one of three all stars in the Internet category of The Wdl Street Jolrrrlnl’s “All-star Analysts 1999

Survey,” as reported in the publication’s June 29, 1999 edition.

46. In an October 4, 1999 article entitled “Digital 50 The Most Important People

Shaping Technology Today,’’ Time Magazirle confirmed Blodget’s extraordinary power and influence over the technology industry. Although Blodget was a securities analyst covering

Internet companies, Time identified Blodget as one of the most important people shaping technology. Included with such technology luminaries as Bill Gates, the founder of Microsoft,

14 Steve Case, the founder of America On-Line,and Jeff Bezos, the founder of Amazon.com,Time virtually gushed about Blodget:

HenryBlodget, arguably the most influential voice on Internet stocks in the world, is so hot right now that his late arrival to a recentbigwig luncheon prompted this announcement: “Elvis has entered the building.” The 1989 Yale grad was a managing director and senior Internet analyst at CIBC Oppenheimer when he made thecall that shot himinto the spotlight and one of themost prestigious jobson Wall Street.Amazon.com’s share price was hovering around $200; pundits were proclaiming that the party \vas over. But Blodget remained bullish on the online bookseller and saidthe stock would hit S400 in 12 months--and then it hit the stratosphere. By March, he was at Merrill--and he’s been getting the kind of attention shownin those old E.F. Hutton ads ever since.

47. Blodget also had a strong reputation as an Internet stock analyst nith the institutional investment community. In its October 1999 issue, Itzstitzrtiorlal Imjestor placed

Blodget on its Third Team for its 1999 All-America Research Team. In its October 2000 issue,

Itzstitutiortal Itnvstor named Blodget to the “First Team” ofits 2000 All-America Research Team in two categories, E-Commerce and New Media.

Merrill I_\.nch’s Compensation Structure Rewarded Blodget And The Other AnalystsIn Its Internct Group For The Investment Banking Fees They Generated

48. Blodget earned millions of dollars as Merrill Lynch’s head Internet analyst.

Merrill Lynch paid him more than $5 million in 2000 and approximately 5 12 million in 2001.

49. Blodget’s compensation, as well as the compensation of the other Merrill Lynch

Internet analysts, was directly relatedto the investment-banking fees MerrillLynch obtained because of the Internet analyst reports Blodget and his Internet group issued.

50. Merrill Lynch’s stock analysts, including Blodget, participated in a bonus pool that was funded in part from investment-banking fees Merrill Lynch received. Indeed, Merrill

Lynch’s analysts receiveda large portion of their compensationin the form ofyear-end bonuses, which were primarily funded by apool of money derived from investment-bankingfees. Indeed,

Blodget’s base salary in 2001 was $200,000, small in comparison to his total compensation of

$12 million. An analyst’s year-end bonus reflected the employee’s contributionin obtaining its investment-banking fees.

5 1. Blodget was highly paid by Merrill Lynch because his reputation in the investment community as a top Internet analyst ~vhoLvould always issue favorable research coverage and enabled Merrill Lynch to obtain numerous investment banking engagements, along with the lucrative investment banking fees from those engagements.

52. Proof that the compensation of Blodget and the other Internet analysts in his group was directly relatedto the investment banking fees they helped Merrill Lynch obtain is highlighted in the Dinallo Affidavit:

The research analysts’ objectivity and independence was further eroded by the fact that their compensation depended in part ontheir efforts on behalf of investment banking, as demonstrated bythefollowing Fall 2000 requestfrom respondent Deepak Raj, then co-head of global equity research, to all equity analysts:

We are once again surveying your contributions to investmentbanking during the year .... Please provide complete details on your involvementin the transaction,paying particular attention the degree thatyour research coverage played a role in origination,execution and follow-up. Please note, aswell, your involvement in advisorywork on mergersoracquisitions, especially where your coverage played a role in securing the assignment andyour follow-up marketing to clients.Please indicate where your research coverage was pivotal in securing participation in high yield offering,

(Dinallo Aff. at 20 - 21) (underline emphasis in original).

53. Moreover, the Dinallo Affidavit highlights that Blodget and the other Merrill

16 Lynch Internet research analysts fully understood that their compensation wastied to the investment banking dollars they helped generate for Merrill Lynch:

On November 2, 2000, Blodget and the Internet research group responded to the above request. In a detailed memorandum with schedules,entitled "IBK Contributions: Internet Team." Blodget stated that: (a) his group had been involved in over 52 completed or potential investment banking transactions; (b) the completedtransactions had earnedS115 million for the firm; and (c) more transactions would have been completed had not the"market window for most Internet companies closed in June."He also identified the services his analysts typically performedfor investment banking, including pitching the client,marketing the offering and, notably, initiation and follow-onresearch coverage. (ML 09544-5 1; see also ML 33856).Shortly after documenting these contributions, Blodget'ssalary contract -- whichcontained guaranteeda minimum -- wascancelled and replaced with a substantially larger compensation package. Overall, Blodget's agreed annual compensation,including "guaranteed" minimum cash bonus, increased from $3 million for 1999 to $12 million for 2001.

(Dinallo Aff. at 21).

The Conflict Of Interest And Merrill Lynch's Compensation Structure Destroved The Independence Of Its Analvsts

54. During the Class Period, Merrill Lynch's stated policy on the objectivit], of its research analyst opinions was clear:

Objectivity of Opinions

Opinions expressed by Analysts must be objective. Any indication that a Research opinion is less than totally objective, or that it may have been influenced by a business relationship of the Firm, could seriously damage the Firm's reputation and lead to potential legal liability. Consequently,although IBK orother personnel may discussthe basis and rationale of Researcha opinion with Analysts, attempts to directly or indirectly influence an opinion are prohibited and must be reported immediately to Compliance.

(Merrill Lynch's Policy and Procedures Manual)

17 55. Typically, to achieve the type of objectivity that Merrill Lynch promised, securities firms establish Chinese Walls between the investment banking and research groups:

Tensionbetween the various departments in asingle firm is nothingnew. At asecurities firm, this tension is usually addressed by the establishment of a "Chinese Wall" .... [One] form of "Chinese Wall" attempts to prevent investment bankers from influencing analysts' ratings for the stock of existing or potential investment banking clients.

(Dinallo Aff. 14)

56. The Chinese Wall tends to break down, as it did at Merrill Lynch, when analysts' compensation is affected by his or her impact upon investment banking:

The compensation structure of a securities firm can exacerbate thepotential for an analyst to be conflicted.Where analysts' compensation is affected, directly or indirectly, by the analysts' contribution to investmentbanking, analysts' objectivity and independence can be seriously eroded.

(Dinallo Aff. at 14).

57. Moreover, Merrill Lynch's internal policies and procedures failed to deal Ivith the conflict caused by its compensation scheme:

MerrillLynch's Policies and Procedures Manual for the Research Department (ML 02039, 02049) does not address the conflictraised by the compensation issue. Indeed, research analysts at Merrill Lynch were actively involved in evaluating andeffectuating investment banking transactions. Moreover, analysts'compensation was tied to thesuccess of their efforts in this regard.

(Dinallo Aff. at 14) (emphasis added).

58. One of the conflicts of interest of Merrill Lynch's analysts was in the choices the analysts made regarding which companies Merrill Lynch covered. In particular, of the approximately 29 Internet companiesthat the Internet group, Merrill Lynch or its affiliates had been a manager of the mostrecent offering of securities of 18 of them: eToys; Earthweb;

18 Excite@Home; 24/7 Media; Buy.com; iVillage; Barnesandnob1e.com; Pets.com; Quokka;

Safeguard Scientifics; Doubleclick; Webvan; AOL; Homestore.com; Inktomi; Internet Capital

Group; Multex; and Priceline.

59. The conflict caused the analysts to do more than just make their coverage choices based on investment banking concerns. The conflict also affected the substance of the opinions and recommendations issued. Indeed, throughout the relevant time period, the Internet group linked (favorable) coverage with investment banking business:

The analysts in the Internet group at Merrill Lynch knew very wellthatinvestment banking business translated into compensation for them personally and the firm generally, and that their research played a role in attracting and keeping that investment banking business. (ML29830, ML03806, ML09544- 51). In onerevealing e-mail exchange, ananalyst and investment banker discussed how to attract investment banking business of a company from a competitor. The banker proposed a formula that had apparently worked in the past with another bankingclient: "weshould aggressively link coverage with banking - that is what we did with Go2Net (Henry [Blodget] was involved) .... [I]f you are very bullish (b/c they will love you), they are not happy with [Goldman Sachs] and are going to be active, we can probably get by on a 'handshake."' (ML 05229-30). This e-mail lays bare the understanding that Merrill Lynch intended the prospect of affirnlati\,e research to attract investment banking clients.

(Dinallo Aff. at 15) (emphasis added).

60. Blodget furthered this linkage by prioritizing the Internet group's coverage to those firms with which Merrill Lynchhad an investment banking relationship:

One way Blodget "prioritize[d] " research coverage for stocks waswhether thecompany hadaninvestment banking relationshipwith Memll Lynch.(Blodget, Tr. at 207-08). Consistent with this agenda, Blodget, within weeks of joining MerrillLynch as head of theInternet research group, distributed a memorandum entitled, "Managing the Banking Calendar for Internet Research,'' which he sent to the Co-Heads of U.S. Equity Research, and senior investment bankers. The

19 memorandumunapologetically described Blodget's expectationthat at least 50 percentof his and his team's time would be allocated to investment banking matters. In additionto discussing "banking transactions [ ] in the pipeline"and"promising deals," thememorandum describedBlodget's work schedule for one week as being divided "85% banking, 15% research." (ML34660-61). Blodget'sown time allocation reveals that Merrill Lynch viewed research as a sales tool for investment banking.

(Dinallo Aff. at 15) (emphasis added).

61. The prioritization led to an erosion of objectivity when it came time for Blodget and the Internet group to issue reports:

Thee\.idence examined to dateconfirms that theanalysts' decisions about whether a stock should get coverage and \\,hat typeofcoverage it shouldreceive were made neither objectively nor independent of the investment banking group. In one instance, an analyst stated that "part of the reason we didn't highlight [a risk] is because we wanted to protect ICG's [InternetCapital Group's] banking business." (ML 60807). In another communication, an analyst worried about the impact of a particular rating on the relationship with investment banking or its venture capitalists. (ML 60725). So pervasive was the tie between investment banking and research coverage, that when a competitor unexpectedly initiated coverage on the stock of a potentialinvestment banking client, it promptedone Merrill Lynchanalyst to respond,"they are angling for the M&A business too!" (ML 09032).

62. In short, and as attested to in detail in the Dinallo Affidavit, Blodget and the rest of the analystsin the Internet group were far from independent of their investment banking colleagues, and their tortured relationship helped drive both the selection of covered stocksand the ratings ultimately assigned.

63. As a result, the integrity, credibility and reliability of Merrill Lynch's Internet group was compromised, a fact never disclosed to investors throughout the Class Period. Had investors known of the lack of integrity, credibility and reliability of Memll Lynch'sInternet

20 group, they would not have purchased stocks based on anyof the Internet group’s opinions and recommendations.

Defendants’ False And Misleading Ratings Definitions Used In Defendants’ Analvst Reports

64. During the Class Period, Merrill Lynch had a published uniform, company-\\,ide rating system to be used by its analysts, including Blodget. Each analyst report \\.as to set forth the analyst’s “Opinion of Potential for Intermediate-Term Appreciation (0-12 Months)” and the analyst’s “Opinion of Potential for Long-Tern1 Appreciation (More Than One Year).” The recommendations or ratingsfor each of those time periods purportedly was one ofthe follon.ing:

. 1 - BUY (20% or more price growth expected); . 2 - ACCUMULATE (1 0% to20% price growth expected); . 3 - NEUTRAL (1 0% price growth to 10% price drop expected of price); . 4 - REDUCE (10% to 20% price drop expected); or . 5 - SELL (20% or more price drop expected). 65. The Defendants often described their ratings of a company by stating the

Intermediate-Term rating, followed by a slash, followed by their Long-Term rating. For example, the ratings of a companythat the Defendants rated an Intermediate-Tern1

ACCUMULATE and a Long-Term BUY,would be denoted “ACCUMULATE/BUY.”

66. The Defendants also described their ratings using the numerical values assigned to each rating, as set forth above, by stating the number for the Intermediate- Term rating, followed by a dash and then stating the numberfor their Long-Term Rating. For example, the ratings of a company that the Defendantsrated an Intermediate-Term ACCUMULATE and a

Long-Term BUY, would be denoted “(2-l).”

67. Unbeknownst to investors, from the time that Blodget began his employment at

Merrill Lynch in February 1999 through April 8, 2002, the Internet group had the policy and

21 pursued the practice of virtually never giving an Internet stock rating or recommendation other

than “BUY” or “ACCUMULATE.” Throughout that entire period of time, even as a numberof

stocks he covered declined substantially, including stocksin IIH, Blodget never issued a single

report in which he gave the company a “REDUCE” or “SELL” recommendation or rating.

68. Because Defendants avoided the bottom two tiers of its rating system - REDUCE

and SELL - Merrill Lynch’s five-point system was ade facto three-point system:

Although Merrill Lynch’s published rating system provided for 4s (reduce) and 5s (sell), the Internet group never used 4s or 5s. The list of covered Internet stocks for the second quarter of 2000, for instance, lists 24 stocks, none of Xvhich was ratedless favorably than a 2. (ML 03747). From the spring of 1999 to the fall of 2001, Merrill Lynch never published a single reduce or sell rating on any stock covered by the Internet group. In their sworn testimony, both Blodgetand his subordinate, respondent Kirsten Campbell, confirmed that the group never rated a stock 4 or 5. (Blodget Tr. at 115-19; Campbell Tr. at 36). Thus, although represented to be a five-point system, internally it became a three-point system. In lieu of assigning reduce or sell recommendations to stocks they nolonger favored, the Internet group instead merely quietly stoppedcovering the stock, without any announcement or meaningful explanation to the retail public. (ML87610).

Thus,previouslyas covered stocks such as Pets.com, Mypoints.com, Quokka Sports, Webvan, ivillage, Buy.com, 2417 Media,E-Toys, Internet Capital Group, and Infospace plummeted,sometimes all theway to zero, retail customers and the investing public were never advised to sell. (ML 5 1690, ML51833, ML 51997, ML 52195, ML 52516, ML 53160, ML 53161,ML 53162, ML 53181, ML 53507, ML 53612 and ML 53760; =also ML 87610).

(Dinallo Aff. at 9) (emphasis added).

69. The Attorney General’s office concluded that the reason for this failure to disclose was, at least in part, “the substantial unrevealed conflict of interest” involving Merrill Lynch’s

research analysts acting as investment bankers for the companies at issue, often initiating,

continuing, and/or manipulating research coveragefor the purposes of attracting and keeping

22 investment banking clients, thereby producing misleading ratingsthat were neither objective, independent credible or reliable, as they purportedto be. (Dinallo Aff. at 10.)

Blodget’s Resimation as a Merrill Lvnch Internet Analyst

70. On November 14,2001, it was announced that Blodget, who accepted Merrill

Lynch’s offerto buy him out for approximately S2 million, was resigning from Merrill Lynch.

71. Post mortems on Blodget’s resignation recounted that Merrill Lynch hired

Blodget because his high profile, bullish reports on Internet stocks would help Merrill Lynch obtain investment banking and underwriting businessin the Internet sector:

Jonathan Cohen, the man he replaced at Merrill Lynch, ended up being right.Henry ended up being Lvrong. Merrill had alwaysbeen looking for real strength in technologybanking especially, where they had a weakness to a certain extent. They felt that by hiring Blodget, such a cheerleader for the Internet sector,they would position themselves well withmany companies. They did get some underwriting business out of it. Unfortunately,many of those issues did not domuch of anything.

(November 15, 2001, the CNBC television program “Squawk Box”).

Merrill Lvnch’s Settlement With The New York State Attornev General

72. On April 18, 2002, Merrill Lynch entered into a SlOO million agreement \vith the

New York State Attorney Generalto settle claims concerning research analysts’ conflict of interest and the firm’s publication of inflated stock ratingsin analyst reports. As part of the settlement Merrill Lynch agreedto increase its disclosures regarding its research reports as follows: . ByApril 24, 2002, Memll Lynch will implementa websitethat will disclose, for companiescovered in research reports, those companies which have engaged in publicly announced equity underwritings and merger and acquisitiontransactions over the prior 12 months, for whichMerrill Lynch has received, or is entitled to

23 receive, compensation. Language directing readers to the website will be included in research reports. . ByJune 3, 2002, MerrillLynch will replace its website disclosure by stating in equity research reports whether it hasreceived, or is entitledto receive from the covered company, compensation from publicly announced equity underwritingand merger and acquisition transactions over the prior 12 months. . By June 3, 2002,Merrill Lynch will include language on the first pageof equity research reports stating that investors should assume that Merrill Lynch is seeking, or will seek investment banking and other business from the covered company.

. By June 3, 2002,Merrill L,vnch \vi11 include in equity researchreports specific disclosure, on a percentage basis,for the intenediate-term “strongbuy,” “buy,” “neutral,”and “reduce/sell” ratings for stocks in the following categories:

1. All stocks in thesector industry or group applicable to the covered company.

2. All stocks in theapplicable sector orindustry group from which Merrill Lynch has received or is entitledto receive compensation for publicly announcedequity underwriting and merger and acquisition transactions over the prior 12 months.

3. All stockscovered Merrillby Lynch Global Equity Research.

4. All stockscovered Merrillby Lynch Global EquityResearch from which Merrill Lynch has received or is entitled to receive compensation for publiclyannounced equity underwriting and merger and acquisition transactions over the prior 12 months.

(Memll Lynch April 18, 2002 Press Release).

73. On April 26, 2002, David Komansky, Chairman and Chief Executive Officer of

Memll Lynch, publicly “apologized” for the Defendants’ conduct described herein. Komansky,

24 on behalf of Merrill Lynch, acknowledged that the Defendants’ conduct failed to meet professional standards. He said:

The e-mails that have come to light are very distressing and disappointing to us, .... They fall far short of ourprofessional standards and some are inconsistent with our policies.

74. In his April 26, 2002 statement Komansky also admitted that Merrill Lynch’s purported policies had not been enforced by Merrill Lynch, stating that Merrill Lynch was

“redoubling” its efforts to enforce its existing policies.

75. On May 21, 2002, Merrill Lynch reached a final settlement with the New York

State Attorney General in connection Lvith the Attorney General’s Section 354 proceedings against Merrill Lynch.

76. Pursuant to that settlement, Merrill Lynch agreed to pay a fine of $100 million and agreed to the following changes in its research analyst operations: . Severthe linkbetween compensation for analysts and investmentbanking. The agreement requires Memll Lynch to separatecompletely theevaluation and determinationcompensationof forequity research analystsfrom Merrill Lynch’s investment banking business. . Prohibitinvestment banking input intoanalysts’ compensation. Merrill Lynch is forbidden from soliciting or considering any information concerning the amount of investmentbanking revenue received from clients coveredby the research analysts andprohibiting the analysts from being evaluated by investment bankers. . Createa new investment review committee responsible forapproving all researchrecommendations with strict standards and independence from investment banking and the analysts themselves. . Establish a monitor to ensurecompliance withthis agreement. The appointment of the monitor is subject to the approval of the Attorney General.

25 Require that upon discontinuation of research coverage of a company, Merrill Lynch will issue a report disclosing thetermination of coverage and the rationale for such termination, and will notify investors that the last rating should no longer be relied upon.

. Disclose in MerrillLynch’s research reports whether it hasreceived or is entitled to receiveany compensation from a covered company over the past12 months. . Issueastatement of contrition on the part of Merrill Lynch for failing to address conflicts of interest.

77. Pursuant to thesettlement, Merrill Lynchissued the following statement:

MerrillLynch would like to take this opportunity, as part of the agreementreached with New York StateAttorney General Eliot Spitzerand other states, to publiclyapologize to ourclients, shareholders and employees for the inappropriate communications brought to lightby the New York State Attorney General’s investigation.We sincerely regret that therewere instances in whichcertain of ourInternet sector research analysts expressed views that at certain points may have appeared inconsistent with Merrill Lynch’s published recommendations.

We view this situation as a very serious matter and have informed ourresearch department personnel that suchcommunications, some of which violated internal policies, failed to meet the high standards that are our traditionand will not be tolerated.

As a result we have taken steps to guard against such instances in thefuture. In addition,we are taking steps to reinforcethe firewallsthat separate our research department from investment banking. The agreement we have reached ivith the State Attorney General is designed to accomplish these objectives....

26 THE FALSE AND MISLEADING STATEMENTS CONTAINED IN THE PROSPECTUS AND POST-EFFECTIVE AMENDMENTS IN VIOLATIONOF THE SECURITIES ACT

78. On or about February 24, 2000, the Director Defendants and Memll Lynch caused IIH to file the materially false and misleading Prospectus with the SEC.

79. The Prospectus contained several materially false and misleading statements and failed to disclose numerous material factsthat were required to be disclosed, in order to render the statements made thereinnot materially misleading at the time it was declared effecti\.e. In particular, the sections of the Prospectus entitled:(i) “Description of the Underlying Securities;”

(ii) “Risk Factors;” and (iii) “Annex A,” each omitted and/or distorted material facts concerning the IIH.

The Material Omissions andlor Misrepresentations In the “Description of the Underlving Securities’’ Section Of The Prospectus

80. Under the “Description of the Underlying Securities’’ heading, the Prospectus stated, in relevant part:

Selection criteria. The underlying securities are the common stocks of a group of 20specified companies involved in varioussegments of the Internetinfrastructure segment ofthe Internet industry and whose common stock is registered under Section 12 of the Exchange Act. The issuers of the underlying securities are considered to be 20 of the largest capitalized, most liquid companies in the Internet infrastructure segment as measured by market capitalization and trading volume. The following criteriawere used in selectingthe underlying securities on February 7, 2000: (a)Market capitalization equal to orgreater than $3 billion; (b) Average daily trading volume of at least 240,000 shares over the 60 trading days before February 7, 2000; (c)Average daily dollar volume (that is,the average dailytrading volume multiplied by the average closingprice over the 60 dayperiod prior to February 7, 2000) of at least $16 million over the 60 trading days before February 7,2000; and (d) A trading history of at least 90 calendar days.

27 The market capitalization of a company is determined by multiplying the price of its common stock by the number of shares of its common stock that are held by stockholders. In determining whether a company was to consideredbe for inclusion in theInternet Infrastructure HOLDRS, Merrill Lynch, Pierce, Fenner & SmithIncorporated examined available public informationabout the company, including analysts’ reports and otherindependent market sources. The ultimatedetermination of the inclusion of the 20 specified companies, however, rested solely within the discretionof Merrill Lynch, Pierce, Fenner & Smith Incorporated.

8 1. The statements set forth in the foregoing paragraph were materially false and misleading at the times they \yere made because:

(a)The Prospectus failed to disclose that substantial andsystemic conflicts of interests existed within Merrill Lynch such that there wasvirtually no separation between research and investment banking at MerrillLynch which led to theissuance of research reports cvhich were false and misleading;

(b)The Prospectus failed to disclosethat the systemic conflicts of interest were due to the fact that the compensation of MerrillLynch research analysts was calculated and influenced in a material way bythe success ofthe research analysts in obtainingand participating in investment banking transactions;

(c) The Prospectus failed to disclose that Merrill Lynch, Blodget and the Internet group published “BUY” or “ACCUMULATE” ratings on Internet stocks in order to secure investment banking business, including,but not limited to Infospace,Openwave, Exodus, Inktomi and Real Network;

(d) The Prospectus failed to disclose that the trading price of certain of the underlying securities companies, including, but not limited to, Infospace,Openwave, Exodus, Inktomi andReal Network, was artificiallyinflated due to theissuance of false and misleading analyst reports by Blodget and the Internet group in an effort to obtainand/or maintain investment banking clients for Merrill Lynch;

28 The Prospectus failed to disclose that research analysts, including Blodget, in Merrill Lynch’s Internet group had extremely negative opinionson many Internet stocks, including, but not limited to, Infospace, Openwave, Inktomi, Exodus, Real Network, 2417 Real Media,Aether Systems, ExciteaHome, GoTo.com, Internet CapitalGroup, Lifeminders and Looksmart, which could have serious detrimental effects on the companies which comprised the IIH Trust because the failure of these Internet companies would haveanegative impact on the Internet sector generally and therefore, on the companiesin the IIH Trust;

TheProspectus failed to disclosehow Merrill Lynch, by issuing falseand misleading analyst reports, influenced certain of the underlying securities’, market capitalization, average daily trading, anddollar volume, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network; and

The Prospectus failed to disclose that the analyst reports issued by Merrill Lynch were false and misleading in that the analyst rating system used was not thepublic five-tier rating system, but a de fncto three-tier one that never rated a company below a3.

TheMaterial Omissions and/or Misrepresentations In The “Risk Factors” Section Of The Prospectus

82. Under the “General Risk Factors” subheading, the Prospectus stated in relevant part:

Lossof investment. Because the value of Internet Infrastructure HOLDRS directly relates to the value of the underlying securities, you may lose all or a substantial portion of your investment in the InternetInfrastructure HOLDRS if theunderlying securities decline in value. ****

0 No investigation of underlying securities. The underlying securities included in the Internet Infrastructure HOLDRS were selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated based on the marketcapitalization of issuers and the market liquidity of commonstocks in theInternet infrastructure segment of the Internet industry, without regard for the value, price performance, volatilityorinvestment merit ofthe underlying securities. Consequently,the Internet Infrastructure HOLDRS trust,the trustee, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and their affiliates, have not performed any investigation or review of

29 theselected companies, including the public filings bythe companies.

0 Investors andmarket participants should not conclude that the inclusion of a company is any form of investment recommendation bythe trust, the trustee, Merrill Lynch,Pierce, Fenner &: Smith Incorporated, or theiraffiliates.

83. The “General Risk Factors” subheading further provided in rele\.ant part:

Possibleconflicts of interest.Merrill Lynch, Pierce, Fenner &( Smith Incorporated, as initial depositor, has selected the underlying securities and may face possible conflicts of interest in connection with its activities. For example, Merrill Lynch,Pierce, Fenner &: SmithIncorporated and its affiliates, collectivelyreferred to as MerrillLynch, may engage in investmentbanking and other activities,may provide services to issuersof the underlying securities in connection with its business, or may tradein the underlying securities for its own account. All of these activities mayresult in conflictsof interest with respect to thefinancial interest of Merrill Lynch, on the one hand, and, on the other hand, the initial selectionof the underlying securities included in the InternetInfrastructure HOLDRS, the selection of the Internet infrastructuresegment of the Internet industry, Merrill Lynch’s activity in the secondary market in the underlying securities, and thecreation and cancellationof Internet Infrastructure HOLDRS by Merrill Lynch.

84 , Under the “Risk Factors Specific to the Internet Infrastructure Segment of the

Internet Industry” subheading, the Prospectus stated in relevant part:

Internetinfrastructure company stock prices have beenand will likely continue to be extremely volatile, which will directly affect the price volatility of the Internet Infrastructure HOLDRS,and you could lose all or part of your imrestment. The trading prices of the common stocks of Internet infrastructure companies have beenand arelikely to beextremely volatile. Internet infrastructure companies’stock prices could be subject to widefluctuations in response to a variety of factors, including the following:

o actualoranticipated variations in companies’ quarterly operating results;

o announcements of technological innovations or new services by Internet companies or their competitors;

30 changes in financialestimates securitiesby analysts;

conditionsortrends in Internet onlineservice companies;

conditions or trendsin online securities trading;

changes in the market valuations of the Internet or online service companies;

developments in Internet regulations;

announcementsInternetinfrastructure by companiesortheir competitors ofsignificant acquisitions, strategic partnerships, joint\ventures or capital commitments;

unscheduled system downtime;

additions or departures of key personnel;and

sales of Internet infrastructure companies’ common stock or other securitiesin the open market.

In addition, the trading prices of Internet infrastructure stocks in general have experienced extreme price and volume fluctuations in recentmonths. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. Thevaluations manyof Internet infrastructure stocks are extraordinarilyhigh when measured by conventional valuation standards such as price to earnings and price to sales ratios. Some of the companies do not or in the future might not have earnings. As a result, these trading prices may decline substantially. These tradingprices and valuations may not besustained. Also, any negativechange in thepublic’s perception of the prospects of Internet or ecommerce companies could depress the stock prices of anInternet infrastructure company regardless of its operating results. Other broad market and industry factors may also decrease the stock price of Internet infrastructure stocks, regardless of their operating results. Market fluctuations, as well as general political andeconomic conditions, such as recession or interest rate or currency rate fluctuations, also may decrease the market price of Internet infrastructure stocks.

31 85. Moreover, the risk factors section of the Prospectus purported to state various factors which “could” lead to price volatility with respect to the “Internet Infrastructure segment of the industry.” Defendantslist was boiler plate and included many general factorsthat could affect the price of any security including:

0 Actual or anticipated variations in companies quarterly operating results;

0 Announcements of technical innovations or new service by internet company

0 Development of internet regulations; and

0 Additions or departure of key personnel.

86. As set forth above, the Prospectus contained boilerplate “risk factors” which purported to describe risks faced by imrestors in IIH. Ho\ve\.er, the risk factors set forth by

Defendants nere themsel\,es materially false and misleading because:

(a) The Prospectus failed to disclose that while Defendants purported to warn of the possible “loss of investment” or “possible conflicts of interest”due to the fact that MerrillLynch Pierce Fenner & Smith, Inc. “mayengage in investmentbanking and other activities” and “may provide services to issuers of the underlying securities” in fact, there were systemic and egregious conflicts of interest which existed at Merrill Lynch;

(b) The Prospectus failed to disclose that while Defendants purported to warn that an investor in IIH “may” lose his or her investment or there“may” by possible conflicts of interest when in fact such conflictswere deeply embedded in thestructure of the research department at MerrillLynch and existed at thetime of the Offering;

(c)The Prospectus failed to disclosethat the representation that Menill Lynch made “no investigation of the underlying securities” is false and misleading in that Blodget and Merrill Lynch provided analystcoverage and recommended that investors purchase the securities of up to 75% of the underlying securities in IIH and in fact haddone considerable investigation of and research with respect to theseissuers, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network;

(d)The Prospectus failed to disclose that therepresentation that investors should not conclude that inclusion of a company in IIH in anyform is an investmentrecommendation by Merrill Lynch is

32 also false and misleading in that Defendants failed to disclose in theProspectus that MerrillLynch issued analyst reports with respect to atleast 75% ofthe underlying securities in IIH, including, but not limited to, Infospace,Openwave, Exodus, Inktomi and Real Network, which its analysts’ reports were falsely recommending the purchase of the securities of these issuers;

(e)The Prospectus failed to disclosethat the false and misleading “BUY”recommendations and other positive analyst reports artificially inflated the price of many of the underlying securitiesin IIH, including, but not limited to,Infospace, Openwave, Exodus, Inktomi and Real Network;

(0 TheProspectus failed to disclosethat Merrill Lynchresearch analysts’,including Blodget and otherresearch analysts for the companiescovered by Merrill Lynch in the IIH Trust,were not objective and independent because their compensation depended in material part on their investment banking efforts and/or the support ofexisting or potential investment banking clients by issuing favorable analyst opinions in connection with investment banking transactions. In fact, senior research management at Merrill Lynch in “surveying”research analysts’ “contributions to investment banking during the year” required all equity research analysts to provide “complete details on your involvement in the transactions, payingparticular attention [sic] the degree that yourresearch played a role in origination, execution, and follow-up”;

(9) The Prospectus failed to disclose that research analysts, including Blodget, in Merrill Lynch’s Internet group had extremely negative opinionson many Internet stocks, including, but not limited to, Infospace, Openwave, Inktomi, Exodus, Real Network, 24/7 Real Media,Aether Systems, Excite@Home, GoTo.com, Internet CapitalGroup, Lifeminders and Looksmart, which could have serious detrimental effects on the companies which comprised the IIH Trust because the failure of these Internet companies would haveanegative impact on the Internet sector generally and therefore, on the companiesin the IIH Trust;

(h) The Prospectus failed to disclose that, as set forth above, at least as earlyas 1999, therewere systemic conflicts of interest that pervaded all of Merrill Lynch’s research analysts, including, but not limited to, theconflict that Merrill Lynch equity research analysts were compensated in substantialpart on their efforts to attract and maintain investment banking business; and

33 (i) The Prospectus failed to disclose that although the IIH Prospectus stated that theIIH Trust was the issuer of the Internet Infrastructure HOLDRs, in fact, MLPFS, as initial depositor, was the issuer of theInternet Infrastructure HOLDRs therefore rendering this statement in the materially false and misleading as to the source of the Internet Infrastructure HOLDRs.

The Material Omissions and/or Misrepresentations In “Annex A” To The Prospectus

87, In “Annex A” the Prospectus provided a narrative of each of the business of the issuers of the underlying securities, including,but not limited to, Infospace, Openwave. Exodus,

Inktomi and Real Network, and set forth the split-adjusted closing market prices, as reported on the rele\.ant primary trading market, of each of the underlying securitiesin each month during

1995, 1996, 1997, 1998, 1999 and 2000 through January 2000.

88. The inclusion in Annex A of the Prospectus of historical pricing information for certain of the underlying securities, including,but not limited to, Infospace, Openwave, Exodus,

Inktomi and Real Network, was materially false and deceptive because Annex A:

(a)failed to disclose that by at leastFebruary 1999 and continuing throughoutthe Class Period the trading price of certain of the underlyingsecurities, including, but not limitedto, Infospace, Openwave,Exodus, Inktomi andReal Neikvork, were artificially inflated due to the issuance of false and misleading analyst reports byBlodget and the Internet group in an effort to obtainand/or maintain investment banking clientsfor Merrill Lynch;

(b)failed to disclose that by at least February1999 and continuing throughoutthe Class Period Merrill Lynch, by issuing false and misleadinganalyst reports, influenced certain of the underlying securities’, market capitalization, average daily trading, and dollar volumeincluding, but not limitedto, Infospace, Openwave, Exodus, Inktomi and Real Network;

(c) failedto disclose that by at leastFebruary 1999 and continuing throughoutthe Class Period those prices replicated the market response to theInternet group’s published strong investment ratings on such underlying securities, including, but not limited to, Infospace,Openwave, Exodus, Inktomi and Real Network, that

34 were contradicted by negative opinions on those same stocks held by Merrill Lynch analysts, including Blodget; and

failed to disclose that by at least February 1999 and continuing throughoutthe Class Period those prices, as a result of Merrill Lynch’s false and deceptive analyst reports and recommendations issuedconcerning certain underlying securities were artificially inflated and did not reflect a true market valuefor such companies.

The Material Omissions and/or Misrepresentations In The Post-Effective Amendments To The Prospectus

89. On January 26, 2001, the Director Defendants and Merrill Lynch caused IIH to file the materially false and misleadingSEC a Post-Effective AmendmentNo. 2 to Form S-1

Registration Statement (“Amendment No. 2”) with the SEC.

90. Amendment No. 2 contained several materially false and misleading statements and failed to disclose numerous material factsthat were required to be disclosed, in order to render the statements made thereinnot materially misleading at the time it was declared effective. In particular, the sections of the AmendmentNo. 2 entitled: (i) “Description of the

Underlying Securities;” and (ii) “Risk Factors,” each omitted and/or distorted materialfacts concerning the IIH.

91. Under the “General Risk Factors” subheading, Amendment No. 2 stated in relevant part:

0 Lossof investment. Because the value of Internet Infrastructure HOLDRS directly relates to the value of the underlying securities, you may lose all or a substantial portion of your investment in the InternetInfrastructure HOLDRS if theunderlying securities decline in value. **** No investigation of underlying securities. The underlying securities initiallyincluded in theInternet Infrastructure HOLDRS were selectedby Merrill Lynch, Pierce, Fenner & SmithIncorporated basedon the market capitalization of issuers and the market liquidity of common stocks in the Internet infrastructure segment ofthe Internet industry, without regard for thevalue, price

35 performance,volatility or investment merit ofthe underlyng securities. The Internet Infrastructure HOLDRS trust, thetrustee, MerrillLynch, Pierce, Fenner & SmithIncorporated, and their affiliates, have not performed any investigation or review of the selected companies, including the public filings by the companies. Investorsand market participants should not concludethat the inclusion of a company is anyform of investment recommendation bythe trust, thetrustee, Merrill Lynch, Pierce, Fenner & Smith Incorporated, or theiraffiliates.

92. The “General Risk Factors” subheading further provided in relevant part:

Possibleconflicts of interest. Merrill Lynch,Pierce, Fenner & Smith Incorporated, as initial depositor, has selected the underlying securitiesthatwere originally included in the Internet Infrastructure HOLDRS and may face possible conflicts of interest asMerrill Lynch, may engage in investmentbanking or may provide other servicesfor issuers of the underlying securities.

93. Under the “Risk Factors Specific to the Internet Infrastructure Segment of the

Internet Industry” subheading, Amendment No. 2 stated in relevant part:

Thestock prices ofthe companies involved in the Internet Infrastructure Segment of the internet industry have been and will likely continue to be extremely volatile, which will directly affect the price volatility of the Internet Infrastructure HOLDRS,and you could lose a substaintial part of your investment. The trading prices ofthe stocks of Internet infrastructure companies have been extremelyvolatile. These stock prices could be subject to wide fluctuations in response to a varietyof factors, including the following:

o Generalmarket fluctuations;

o actualoranticipated variations in companies’ quarterly operating results;

o announcementsoftechnological innovations by competitors of thecompanies included in the Internet Infrastructure HOLDRS;

o changes in financialestimates securitiesby analysts;

36 o changes in themarket valuations of the Internet infrastructure companies;

o legal regulatoryor developments affecting companiesincluded in theInternet Infrastructure HOLDRS or in the Internet infrastructure segment of the Internet industry;

o announcementsInternetinfrastructure by companiesortheir competitors ofsignificant acquisitions, strategic partnerships, joint ventures or capital commitments;

o additions or departures of key personnel; and

o sales of Internet infrastructurecompanies’ common stock or other securities in the open market.

In addition, the trading prices of Internet infrastructure stocks in general have experienced extreme price and volume fluctuations in recentmonths. These fluctuations often have beenunrelated or disproportionate to the operating performance of these companies. Thevaluations of many Internet infrastructure stocks are high when measured by conventional valuation standards such as price to earnings and price to sales ratios. Some of the companies donot or in the future might not have earnings. As a result, these trading pricesmay decline substantially andvaluations may not be sustained.Any negative change in thepublic’s perception of the . prospectsof Internet infrastructure companies, generally, could depressthe stock prices of an Internetinfrastructure company regardlessof Internet infrastructure results. The sharp decline in themarket of many Internet-related companies in 2000 is an exampleof this effect. Other broad market and industry factors maydecrease the stock price of Internet infrastructure stocks, regardless of their operating results. Market fluctuations, as well as generalpolitical and economic conditions, such as recession or interestrate or currency rate fluctuations, also may decrease the market price of Internet infrastructure stocks.

94. As set forth above, Amendment 2 contained boilerplate “risk factors” which purported to describe risks faced by investorsin IIH. However, the risk factors set forth by

Defendants were themselves materially falseand misleading because:

37 (a) Amendment 2 failed to disclose that while Defendants purported to warn of the possible “loss of investment” or “possible conflicts of interest” due to the fact that Merrill Lynch Pierce Fenner & Smith, Inc.“may engage in investmentbanking and other activities” and “may provide services to issuers of the underlying securities” in fact, there were systemic and egregious conflicts of interest which existed at Merrill Lynch;

(b) Amendment 2 failed to disclose that while Defendants purported to warn that an investor in IIH “may” lose his or her investment or there “may” by possible conflicts of interest when in fact such conflicts were deeply embedded in the structure of the research department at Merrill Lynch and existed at the time of the Offering;

(c) Amendment 2 failed to disclose that therepresentation that Merrill Lynch made “no investigation of the underlying securities” is false andmisleading in that Blodgetand Merrill Lynch provided analyst coverage of up to 75% of the underlying securities in IIH and in fact had done considerable investigation of and research with respect to theseissuers, including, but not limited to, Infospace,Openwave, Exodus, Inktomi and Real Network;

(d) Amendment 2 failed to disclose that the representation that investors should not conclude that inclusion of a companyin IIH in any form is an investmentrecommendation by Merrill Lynch is alsofalse and misleading in that Defendants failed to disclose in Amendment 2 that Merrill Lynch issued analyst reports with respect to at least 75% of theunderlying securities in IIH,including, but not limitedto, Infospace, Openwave, Exodus, Inktomi and Real Network, which its analysts’reports were falsely recommending the purchase of the securities of these issuers;

(e) Amendment 2 failed to disclose that the false and misleading “BUY” recommendationsand other positive analyst reports artificially inflated the price of many of the underlying securities in the IIH, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network;

(f) Amendment 2 failed to disclose that Merrill Lynch research analysts’, includingBlodget and otherresearch analysts for the companies covered by Memll Lynch in the IIH Trust, were not objective and independent because their compensation dependedin material part on theirinvestment banking efforts and/or the support of existing or potentialinvestment banking clients by issuing favorable analyst opinions in connection with investment banking transactions. In fact, senior research management at Merrill Lynch in “surveying” research

38 analysts’“contributions to investmentbanking during the year” required all equity research analysts to provide “complete details on your involvement in the transactions, paying particular attention [sic] the degree that your research played a role in origination, execution, and follow-up”;

(g) Amendment 2 failed to disclose that, as set forth above, at least as early as 1999, there were systemic conflicts of interest that pervaded all of Merrill Lynch’s research analysts, including but not limited to theconflict that Merrill Lynch equity research analysts were compensated in substantial part on their efforts to attract and maintain investment banking business;

(h)Amendment 2 failed to disclosethat research analysts, including Blodget, in MerrillLynch’s Internet group had extremely negative opinionson many Internet stocks, including, but not limited to, Infospace,Openwave, Inktomi, Exodus, Real Network, 24/7 Real Media, Aether Systems, ExciteaHome, GoTo.com, Internet Capital Group,Lifeminders and Looksmart, which could have serious detrimental effects on the companies which comprised the IIH Trust because the failure of these Internet companies would have a negative impacton the Internet sector generally and therefore, on the companies in the IIH Trust; and

(i)Amendment 2 failed to disclosethat although Amendment 2 stated thatthe IIH Trustwas the issuer of the Internet Infrastructure HOLDRs, in fact, MLPFS, as initial depositor, was the issuer of the Internet Infrastructure HOLDRs therefore rendering this statement in the materially false and misleading as to the’ source of the Internet Infrastructure HOLDRs.

95. Under the “Description of the Underlying Securities,” Amendment 2 stated, in relevant part:

Selection criteria. The underlying securities are the common stocks of a group of specified companies that, at the time of selection, were involved in various segments of the Internet infrastructure segment of the Internet industry and whose common stock is registered under Section 12 of the ExchangeAct. The issuers of theunderlying securities were, as of February 7, 2000,among the largest capitalized and most liquid companies in the Internet infrastructure segment as measured by market capitalization and trading volume.

39 96. The statements set forth in the foregoing paragraph were materially false and misleading at the times they were made because:

(a) Amendment 2 failed to disclose that substantial and systemic conflicts of interests existed within Merrill Lynch such that there was virtually noseparation between research and investment banking at Merrill Lynch which led to the issuance of research reports which were false and misleading;

(b) Amendment 2 failed to disclose that the systemic conflicts of interest were due to the fact that the compensation of Merrill Lynch research analystswas calculated andinfluenced in amaterial way by the successof the research analysts in obtainingand participating in investment banking transactions;

(c) Amendment 2 failed to disclose that Merrill Lynch, Blodget and the Internetgroup published “BUY” or “ACCUMULATE” ratings on Internetstocks in order to secureinvestment banking business, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network;

(d) Amendment 2 failed to disclose that the trading price of certain of the underlyingsecurities companies, including, but not limited to, Infospace,Openwave, Exodus, Inktomi and Real Network, was artificially inflated due to the issuance of false and misleading analyst reports by Blodget and the Internet group in an effort to obtain and/or Tnaintain investment banking clients for Merrill Lynch;

(e) Amendment 2 failed to disclose how Merrill Lynch, by issuing false andmisleading analyst reports, influenced certain of the underlying securities’,market capitalization, average daily trading, and dollar volume, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network; and

(0 Amendment2 failed to disclose that theanalyst reports issued by MerrillLynch were false and misleading in thatthe analyst rating system used was not the public five-tier rating system, but a de facto three-tier one that never rated a company below3. a

97. On March 12, 2002, the Director Defendants and Merrill Lynch caused IIH to file the materially false and misleadingSEC a Post-Effective AmendmentNo. 3 to Form S-1

Registration Statement (“Amendment No. 3”) with the SEC.

40 98. Amendment No. 3 contained several materially false and misleading statements and failed to disclose numerous material factsthat were required to be disclosed, in order to render the statements made thereinnot materially misleading at the time it was declared effective. In particular, the sections of the AmendmentNo. 3 entitled: (i) “Description of the

Underlying Securities;’’ and (ii) “Risk Factors,” each omitted and/or distortedmaterial facts concerning the IIH.

99. Under the “General Risk Factors” subheading, Amendment No. 3 stated in relevant part:

0 Loss ofinvestment. Because the value of Internet Infrastructure HOLDRS directly relates to the value of the underlying securities, you may lose all or a substantial portion of your investment in the InternetInfrastructure HOLDRS if theunderlying securities decline in value. ****

0 No investigation of underlying securities. The underlying securities initiallyincluded in theInternet Infrastructure HOLDRS were selectedby Merrill Lynch, Pierce, Fenner & SmithIncorporated basedon the market capitalization of issuersand the market liquidity of common stocks in the Internet infrastructure segment ofthe Internet industry, without regard for thevalue, price performance,volatility or investment merit of the underlying securities. The Internet Infrastructure HOLDRS trust,the trustee, MerrillLynch, Pierce, Fenner & SmithIncorporated, andtheir affiliates, have not performed any investigation or review of the selected companies, including the public filings by the companies. Investorsand market participants should not conclude that the inclusion of a companyis any form of investment recommendation bythe trust, thetrustee, Merrill Lynch, Pierce, Fenner & Smith Incorporated, or theiraffiliates.

100. The “General Risk Factors” subheading further provided in relevant part:

Possibleconflicts of interest.Merrill Lynch,Pierce, Fenner & Smith Incorporated, as initial depositor, has selected the underlying securitiesthatwere originally included in Internetthe Infrastructure HOLDRS and may face possible conflicts of interest asMerrill Lynch, may engage in investmentbanking or may provide other services for issuers of the underlying securities.

41 101. Under the “Risk Factors Specific to the Internet Infrastructure Segment of the

Internet Industry” subheading, Amendment No. 3 stated in relevant part:

Thestock prices ofthe companies involved in the Internet Infrastructure Segment of the internet industry have been and will likely continue to be extremely volatile, which will directly affect the price volatility of the Internet Infrastructure HOLDRS, andyou could lose a substaintialpart of your investment. The trading prices ofthe stocks of Internet infrastructure companies have been extremelyvolatile. These stock prices could besubject to wide fluctuations in response to avariety of factors, including the following:

o Generalmarket fluctuations:

o actualanticipatedor \,ariations in companies’ quarterly operating results;

o announcementsoftechnological innovations by competitorsofthe companies included in the Internet Infrastructure HOLDRS;

o changes in financialestimates securitiesby analysts;

o changes in themarket valuations of the Internet infrastructure companies;

o regulatorylegalor developments affecting companiesincluded in theInternet Infrastructure HOLDRS or in the Internet infrastructure segment of the Internet industry;

o announcementsInternetinfrastructure by companiesortheir competitors ofsignificant acquisitions, strategic partnerships, joint ventures or capital commitments;

o additions or departures of key personnel; and

o sales of Internet infrastructure companies’ common stock or other securitiesin the open market.

42 In addition, the trading prices of Internet infrastructure stocks in general have experienced extreme price and volume fluctuationsin recentmonths. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. Thevaluations of many Internet infrastructure stocks are high when measured by conventional valuation standards such as price to earnings and price to sales ratios. Some of the companies do not or in the future might not have earnings. As a result, these trading pricesmay decline substantially and valuations may not be sustained. Any negative change in the public’s perception of the prospectsof Internet infrastructure companies, generally, could depressthe stock prices of an Internetinfrastructure company regardlessof Internet infrastructure results. Thesharp decline in themarket of many Internet-related companies in 2000 is an exampleof this effect. Other broad market andindustry factors maydecrease the stock price of Internet infrastructure stocks, regardless of their operatingresults. Market fluctuations, as well as generalpolitical and economic conditions, such as recession or interestrate or currency rate fluctuations, also may decrease the market price of Internet infrastructure stocks.

102. As set forth above, Amendment 3 contained boilerplate “risk factors’’ which purported to describe risks faced by investorsin IIH. However, the risk factors set forth by

Defendants were themselves materially false and tnisleading because:

(a) Amendment 3 failed to disclose that while Defendants purported to warn of the possible “loss of investment” or “possible conflicts of interest” due to the fact that Merrill Lynch Pierce Fenner & Smith, Inc.“may engage in investmentbanking and other activities” and “may provide services to issuers of the underlyng securities” in fact, there were systemic and egregious conflicts of interest which existed at Merrill Lynch;

(b) Amendment 3 failed to disclose that while Defendants purported to warn that an investor in IIH “may” lose his or her investment or there “may” by possible conflicts of interest when in fact such conflicts were deeply embedded in the structure of the research department at Merrill Lynch and existed at the time of the Offering;

(c) Amendment 3 failed to disclose that the representation that Menill Lynch made “no investigation of the underlying securities” is false and misleading in that Blodget and Merrill Lynch provided analyst coverage of up to 75% of the underlying securities in IIH and in fact had done considerable investigation of and research with respect to

43 theseissuers, including, but not limited to, Infospace,Openwave, Exodus, Inktomi and Real Network;

(d) Amendment 3 failed to disclose that the representation that investors should not conclude that inclusion of a companyin IIH in any fom is aninvestment recommendation by Merrill Lynch is also false and misleading in that Defendants failed to disclose in Amendment 3 that Merrill Lynch issued analyst reports with respect to at least 75% of theunderlying securities in IIH, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network, which its analysts’reports were falsely recommending the purchase of the securities of these issuers;

(e) Amendment 3 failed to disclose that the false and misleading “BUY” recommendationsand other positive analyst reports artificially inflatedthe price of many of the underlying securities in the IIH, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network;

(f) Amendment 3 failed to disclose that Merrill Lynch research analysts’, includingBlodget and otherresearch analysts for the companies covered by Merrill Lynch in the IIH Trust, were not objective and independent because their compensation dependedin material part on theirinvestment banking efforts and/or the support of existing or potentialinvestment banking clients by issuing favorable analyst opinions in connection with investment banking transactions. In fact, senior research management at Merrill Lynch in “surveying” research analysts’“contributions to investmentbanking during the year” required all equity research analysts to provide “complete details on your involvement in the transactions, paying particular attention [sic] the degree that your research played a role in origination, execution, and follow-up”;

(8) Amendment 3 failed to disclose that, as set forth above, at least as early as 1999, there were systemic conflicts of interest that pervaded all of Merrill Lynch’s research analysts, including but not limited to theconflict that Merrill Lynch equityresearch analysts were compensated in substantial part on their effortsto attract and maintain investment banking business;

(h)Amendment 3 failed to disclosethat research analysts, including Blodget, in MerrillLynch’s Internet group had extremely negative opinionson many Internet stocks, including, but not limitedto, Infospace,Openwave, Inktomi, Exodus, Real Network, 24/7 Real Media, Aether Systems, Excite@Home, GoTo.com, Internet Capital Group,Lifeminders and Looksmart, which could have serious

44 detrimental effects on the companies which comprised the IIH Trust because the failure of these Internet companies would have a negative impacton the Internet sector generally andtherefore, on the companies in the IIH Trust;

(i)Amendment 3 failed to disclose that MerrillLynch was under investigation by the New York Attorney General regarding conflicts of interest relatingto its research analysts; and

(‘j) Amendment 3 failed to disclose that althoughAmendment 2 stated thatthe IIH Trust was the issuer of theInternet Infrastructure HOLDRs, in fact, MLPFS, as initial depositor, was the issuer of the Internet Infrastructure HOLDRs therefore rendering this statement in the materially false and misleading as to the source of the Internet Infrastructure HOLDRs.

103. Under the “Description of the Underlying Securities,” Amendment 3 stated, in relevant part:

Selection criteria. The underlying securities are the common stocks of a group of specified companiesthat, at the time of selection, were involved in various segments of the Internet infrastructure segment of the Internet industry and whose common stock is registered under Section 12 of the ExchangeAct. The issuers of the underlying securities were, as of February 7, 2000, amongthe largest capitalized and most liquid companies in the Internet infrastructure segment as measured by market cavitalization and trading volume.

104. The statements set forth in the foregoing paragraph \\‘ere materially false and misleading at the times they were made because:

(a) Amendment 3 failed to disclose that substantial and systemic conflicts of interests existed within Merrill Lynch such that there was virtually noseparation between research and investment banking atMerrill Lynch which led to the issuance of research reports which were false and misleading.

(b) Amendment 3 failed to disclose that the systemic conflicts of interest were due to the fact that the compensation of Merrill Lynch research analystswas calculated and influenced in amaterial way by the successof the research analysts in obtainingand participating in investment banking transactions.

45 (c) Amendment 3 failed to disclose that Merrill Lynch, Blodget and the Internetgroup published “BUY” or “ACCUMULATE” ratings on Internetstocks in order to secureinvestment banking business, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network.

(d) Amendment 3 failed to disclose that the trading price of certain ofthe underlyingsecurities companies, including, but not limited to, Infospace,Openwave, Exodus, Inktomi andReal Network,was artificially inflated due to the issuance of false and misleading analyst reports by Blodget and the Internet group in an effort to obtain and/or maintain investment banking clients for Merrill Lynch;

(e) Amendment 3 failed to disclose how Merrill Lynch, by issuing false and misleading analyst reports, influenced certain of the underlying securities’,market capitalization, average daily trading, and dollar L.olume, including, but not limited to, Infospace, Openwave, Exodus, Inktomi and Real Network,;

(f) Amendment 3 failed to disclosethat the analyst reports issued by MerrillLynch were false and misleading in thatthe analyst rating system used was not the public five-tier rating system, but a de facto three-tier one that never rated a company below a3.

COUNT I

Against All Defendants (except Defendant Blodget) for Violation Of Section 11 of the Securities Act

105. Plaintiffs repeat and reallege each and every allegation contained in the abo\.e paragraphs, as if fully set forth herein.

106. This first claim for relief is brought by Plaintiffs pursuant to Section 11 of the

Securities Act, 15 U.S.C. 9 77k, on behalf of Plaintiffs and the other Class members againstall

Defendants.

107. The Registration Statement, of which the Prospectus was a part and which became effective on or about February24, 2000, was materially false and misleading, contained false statements of materialfacts, omitted to state other facts necessaryto make the statements

46 therein not misleading, and failedto reveal material facts concerning the assets of the Trust, including the selection criteria of the underlying securities, set as forth above.

108. The untrue and misleading statements in the Prospectus were repeated in the

Amendments filed on January 26, 2001 Prospectus whichupdated the Prospectus; and March 12,

2002.

109. Plaintiffs purchased Internet Infrastructure HOLDRS on or traceable to the

Offering and issued pursuantto the Registration Statement.

110. Plaintiffs and the other members of the Class \\rho acquired Internet Infrastructure

HOLDRS issued pursuant or traceableto the Registration Statement did not know of the material omissions or deceptive statementsin the Registration Statement, as set forth in the above paragraphs, when such Internet Infrastructure HOLDRS was acquired.

11 1. MLPFS is the registrant for the Offering and with the Trust issued and/or caused to be issued and/or participated in the issuance of materiallyfalse and misleading statements to the investing public which were containedin the Registration Statement, of which the Prospectus was a part. As issuers of the Internet Infrastructure HOLDRSsold in the Offering, theTrust and

MLPFS are strictly liableto Plaintiffs and the other members of the Class for thosematerial distortions and omissions.

112. The Director Defendants endorsed the Registration Statement, either personally or through an attorney-in-fact.

113. MLPFS, the underwriter with respect to the Internet Infrastructure HOLDRS sold in the Offering, is an underwriter within the meaning of the Securities Act. Defendant Merrill

Lynch & Co. also was the underwriter of Internet Infrastructure HOLDRS.

47 114. By reason of the foregoing, pursuant to Section 11 of the Securities Act, each

Defendant is liable to Plaintiffs and the other members of the Classfor the difference between the price paid for the Internet Infrastructure HOLDRS bought and either the current value of such Internet Infrastructure HOLDRS, if currently held by Plaintiffs or the other Class members, or the priceat which such Internet Infrastructure HOLDRS were disposed ofin the market, if disposed of before the initiation of this action.

115. This action is being brought mithin one year after the discovery of the actsthat give rise to liability as alleged herein under Section 11 of the SecuritiesAct and within three years after the Internet Infrastructure HOLDRS were offeredto the public.

COUNT I1 Against Merrill Lvnch & Co., Inc., Merrill Lvnch Pierce Fenner & Smith, Inc. and Henrv Blodget for Violation of Section 12(a) (2) of the Securities Act

116. Plaintiffs repeat and reallege each and every allegation contained in the above paragraphs, as if fully set forth herein. This second claim for relief is asserted against Defendants

Merrill Lynch & Co., Inc., Merrill Lynch Pierce Fenner & Smith, Inc. and Henry Blodget pursuant to 4 12(a)(2) of the Securities Act,15 U.S.C. 4 771(2), on behalf of plaintiffsand the other Class members.

1 17. By means of the Prospectus, including subsequent Amendments,and sales campaigns Defendants were each ableto, and did, sell, offer, and/orsolicit the sale of, or were a substantial factor in the ability to sell, the Internet Infrastructure HOLDRSto Plaintiffs and the other Class members. Merrill Lynch and theTrust, who devised and controlled the sale and distribution process, provided necessary expertise prestige and marketing and distribution networks, without which the aforesaid shares couldnot have been sold. Each Defendant was motivated, at least in part, by a desireto serve their own financial interests and/or thefinancial

48 interests of each of the other Defendants. MerrillLynch and the Trust received at least S 15

million from the sale of the Internet Infrastructure HOLDRS.

1 18. The actions taken by Defendants in the solicitation of such sales included

participation in the preparation and dissemination of thefalse Prospectuses issued in connection

with the Offering, which contained untrue statements of material facts and/orfailed to state other

facts necessary to make the statements made correct and/orLvhich failed to disclose material

facts.

119. Defendants solicited and/or played a significant role in the Offering as referred to

ab0L-e. But for the participation by Defendants, including the solicitation as set forth herein, the

Offering could not (and would not) have been achieved. Defendants did the following actsin

furtherance of the sale of the Internet Infrastructure HOLDRS:

(a)They actively designed, revised, andapproved the Prospectuses andother written selling materials by which the Offering was made;

(b) Theyfinalized the Prospectuses and caused them to become operational.,But for Defendants having designed, filed,signed and/orauthorized the signing of the Prospectuses, the Offering could not have been accomplished; and,

(c)They devised and planned the Offering andorchestrated all activities necessary to effect the sale of the Internet Infrastructure HOLDRS,byissuing theInternet Infrastructure HOLDRS, promoting the Internet Infrastructure HOLDRS, supervising their distribution andultimately selling the Internet Infrastructure HOLDRS.

120. Defendants were obligated to make a reasonable and thorough investigation of the written and oral statements madein the Prospectuses relatedto the matters referenced herein,to

insure that such statements were trueand that there was no failureto state a material fact required to be stated in order to make the statements contained therein correct.

49 12 1. Plaintiffs and the other Class members purchased or otherwise acquired the

Internet Infrastructure HOLDRS pursuantto the false and misleading Prospectuses referenced herein. Plaintiffs and the other Class members didnot know, or through reasonable diligence could not have known, of the untruths and omissions containedin the Prospectuses.

122. Plaintiffs, individually and representatively, hereby submits to Defendants those securities which Plaintiffsand the Class members continue to own, in return for the consideration paid for those securities together with interest thereon.

123. By reason of the conduct alleged herein, Defendants violated, and/or controlled a person who violated, section 12(a)(2) of the Securities Act, 15 U.S.C. 771(a)(2). As a direct and proximate result of these violations, Plaintiffsand the other Class members sustained significant damage in connection with their purchase and/or acquisition of Internet Infrastructure HOLDRS.

Plaintiffs and the other Class members who purchased or otherwise acquired theirInternet

Infrastructure HOLDRS pursuant or traceable to the false and misleading Prospectuses referenced herein, but who still hold their Internet Infrastructure HOLDRS, have the right to withdraw and to tender their securitiesto Defendants and herebyresene that right.

124. Less than one year has elapsed from the time when Plaintiffs and the other Class members discovered or reasonably could have discovered the factsupon which this claim is based to the time of the filing of this class action. Less than three years has elapsedfrom the sale to the public of the securities upon which this claimis based to the time that Plaintiffs filed this action.

50 COUNT 111 Against all Defendants For Violation of Section 15 of the Securities Act

125. Plaintiffs repeat and reallege each and every allegation contained in the above

paragraphs, as if fully set forth herein.

126. This third claim for relief is brought by Plaintiffs pursuant to Section 15 of the

Securities Act, 15 U.S.C. 9 770, on behalf of Plaintiffs and the other members ofthe Class

against the Director Defendants and Defendants Merrill Lynch &: Co. Inc. and MLPFS.

127. The untrue and misleading statements in the Prospectus were repeated in the

Amendments dated January 26, 2001 and March 13, 2002.

128. The Director Defendants and Defendants Merrill Lynch & Co. Inc. and MLPFS acted as controlling persons of the Trust within the meaning of Section15 of the Securities Act

as alleged herein. The Director Defendants, as directors and/or officers of the MerrillLqnch and as signatories of the Prospectus, and Defendants MerrillLynch & Co. Inc. and MLPFS had the power to influence and control and did influenceand control, directly or indirectly, the decision- making of the Trust, including the contentand dissemination of the ProspectusesLvhich Plaintiffs contend are untrue and misleading.

129. Pursuant to Section 15 of the Securities Act, by virtue of their statusas controlling persons, the Director Defendants and Defendants MerrillLynch & Co. Inc. and MLPFS are

liable jointly and severally with andto the same extent as the Trustfor the Trust’s aforesaid

liability under Section 11of the Securities Act.

51 DEMAND FOR A JURY TRIAL

Plaintiffs hereby demands atrial by jury.

Dated: March 13, 2003 By: GdTricS. F& (FF 9102) Donald R. Hall (DH0273) Jason A. Zweig (JZ 8107) Kaplan, Fox, & Kilsheimer, LLP 805 Third Avenue New York, NY 10022 (2 12) 687-1 980 (212) 687-7714 fax

Lead Counsel For Plaintiffs And The Class

Marc A. Wites Wites & Kapetan, P.A. 1701 West Hillsboro Boulevard Suite 305 Deerfield Beach, FL 33442 (954) 570-8989 (954) 428-3929 fax

Counsel For Plaintiffs And The Class

52 4. Thc following includcs all of Plaintivs transactions during thc Class Period spcci fied in the amplnint for thc common slccli/.cccuritics that are thc subjcct of this action:

Kaplan Fox & Kilsheimer LLP

CERTIFICATION OF NAMED PLAlNTIFF PURSUANT TO FEDERAL SECURITiES LAWS

I, Leonard E. Jacobs, hereby certify and swear as follows:

1. I have reviewed a Complaint against M. Lynch re: Internet infrastructure Hldrs/SM Tr., allegng violations of thc securities laws and authorize its filing;

2. I am willing to serve as a representative party on behalf of a class, or 10 be a member of a group representing a class, including providing testimony at deposition and trial, if necessary;

3. I have not within the 3-year period preceding the date hereofsought to serve, or served, as a representative party on behalf of a class in an action brought under the federal securities laws, unless noted hereafter: None.

4. The following is a description of my transactions during the class period specified in the Complaint in the common stock of Internet Infrastructure Roldrs/SM Trust:

Security Transaction Trade Date Price Per Share

Internet Infrastructure Bought -.- shares y/& s 57& 6 7 HnlddSM Trust. Bought shares 5

Sold shares $

5. I did not purchase sharesof Internet Infrastructure Holdrs/SM Trust at the direction of my counsel or in order to participate in any private action under the federal securities laws;

6. I will not accept any payment for serving as a representative party on behalf of a class beyond my pro rata share of any recovery, except as ordered or approved by the Court.

I declare under penaltyof perjury that the foregoingis true and correct.

Date: