United States District Court Southern District of New York

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

A.J. and LISA ZUCARELLI, on Behalf of Civil Action No. ______Themselves and all others similarly situated, Plaintiffs, CLASS ACTION COMPLAINT v. FOR THE VIOLATION OF THE FEDERAL SECURITIES LAWS MERRILL LYNCH & CO., INC., and HENRY BLODGET, Defendants. JURY TRIAL DEMANDED

Plaintiffs A.J. and Lisa Zucarelli (“ Plaintiffs”) alleges the following based upon the investigation of counsel, which included a review of United States Securities and Exchange Commission (“SEC”) filings by LookSmart, Ltd. (“LookSmart” or the “Company”), as well as regulatory filings and reports, securities analysts’ reports and advisories about LookSmart issued by Merrill Lynch & Co. (“Merrill Lynch”), press releases and other public statements issued by Merrill Lynch, and media reports about LookSmart. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE CLAIM

1. This is a federal securities class action brought by Plaintiffs against Defendants Merrill Lynch and Henry Blodget (“Blodget”) on behalf of a class (the “Class”) consisting of all persons or entities who purchased LookSmart securities from May 25, 2000 through April 27, 2001, inclusive (the “Class Period”). Plaintiffs seek to recover damages caused to the Class by Defendants’ violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. 2. This action arises as a result of the manipulation by means of deceptive and manipulative acts, practices, devices and contrivances, of the market prices of LookSmart securities with the intent, purpose and effect of creating and maintaining artificially high market prices. Defendants accomplished the manipulation by issuing Merrill Lynch analyst reports regarding LookSmart that recommended the purchase of LookSmart common stock, and set price targets for LookSmart common stock, which were materially false and misleading, lacked any reasonable factual basis, and were contrary to the actual beliefs held by the analysts. When issuing their LookSmart analyst reports, Defendants failed to disclose significant, material conflicts of interest which resulted from their use of Blodget’s reputation and his ability to influence the actions of buyers and sellers of Internet securities by issuing favorable analyst reports, in order to curry favor with internet companies and thereby to obtain the their investment banking business for Merrill Lynch. Furthermore, in issuing their LookSmart analyst reports, in which they recommended the purchase of LookSmart stock, Defendants failed to disclose material, non-public, adverse information which they possessed about LookSmart. Defendants fraudulently recommended, in their LookSmart reports, the purchase of LookSmart common stock while at the time of the recommendations circulated contemporaneous internal e-mails stating they “should aggressively link coverage with banking” - a clear conflict of interest, and an indication that the recommendations issued lacked any reasonable factual basis. Throughout the Class Period, Defendants maintained at least a “NEUTRAL/BUY” recommendation on LookSmart in order to obtain and support lucrative financial deals for Merrill Lynch, while circulating contemporaneous internal e-mails in conflict with published information. 3. The Class Period runs from May 25, 2000 to April 27, 2001, inclusive. 4. As demonstrated herein, Blodget’s highly-publicized reputation as an analyst of Internet companies, coupled with Defendants’ positive reports and “ACCUMULATE/BUY” and “NEUTRAL/BUY” recommendations on LookSmart, significantly and artificially inflated the price of LookSmart securities throughout the Class Period. Defendants’ recommendations of

2 LookSmart and the price targets which they set for LookSmart common stock lacked a reasonable basis in fact, failed to state the true beliefs of the analysts, and were dominated and influenced by Defendants’ undisclosed material conflict of interest arising out of Merrill Lynch’s desire to act as a financial advisor to LookSmart. 5. On April 8, 2002, the Office of the Attorney General of the State of New York (the “Attorney General”) filed in the Supreme Court of the State of New York, County of New York an Application for an Order Pursuant to [New York] General Business Law Sec. 354 (the “Application”), which Application named Merrill Lynch, Blodget and other past or present officers or employees of Merrill Lynch as Respondents. In support of the Application, the Attorney General filed an Affidavit in Support of Application for an Order Pursuant to General Business Law Sec. 354. The Affidavit was sworn to by Eric Dinallo, Chief of the Investment Protection Bureau of the New York State Department of Law (the “Dinallo Affidavit” or “Dinallo Aff.”). A copy of the Dinallo Affidavit is attached hereto as Exhibit A, and it is incorporated herein, in full by reference.

JURISDICTION AND VENUE 6. This Court has jurisdiction over the subject matter of this action pursuant to Section 27 of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §78aa, and 28 U.S.C. §1331. This action arises under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §78j(b) and §78t(a), and the rules and regulations promulgated thereunder, including SEC Rule 10b-5, 17 C.F.R. 240.10b-5. 7. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. §1391(b) and (c). Substantial acts in furtherance of the alleged fraud and/or its effects have occurred within this District and Merrill Lynch maintains multiple offices in this District. 8. In connection with the facts and omissions alleged in this Complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but

3 not limited to, the mails, interstate telephone communications, and the facilities of the national securities markets.

PARTIES 9. Plaintiffs A.J. and Lisa Zucarelli purchased LookSmart securities, as set forth in the attached certification, and was damaged thereby. 10. Defendant Merrill Lynch has its headquarters located at 4 World Financial Center, 250 Vesey Street New York, New York. Defendant Merrill Lynch is the largest securities broker in the United States and maintains multiple offices in this District. Merrill Lynch claims to be one of the world’s leading financial management and advisory companies with offices in 44 countries and total client assets of about $1.6 trillion. As an investment bank, Merrill Lynch claims to be the top global underwriter and market maker of debt and equity securities and a leading strategic advisor to corporations, institutions, and individuals worldwide. 11. Defendant Blodget was at all relevant times an Internet stock analyst and First Vice President of Merrill Lynch. In the Fall of 2001, Merrill Lynch asked Blodget to resign by offering him a buy-out offer which would pay Blodget approximately $2 million. On November 14, 2001, it was announced that Blodget was resigning as an Internet analyst at Merrill Lynch.

SUBSTANTIVE ALLEGATIONS Background 12. Since 1999, the internet research analysts (the “internet group”) at Merrill Lynch have published on a regular basis ratings for internet stocks, including LookSmart, that were materially false and misleading because: (1) the ratings in many cases did not reflect the analysts’ true opinions of the companies; (2) no “reduce” or “sell” recommendations were issued as a matter of undisclosed, internal policy, thereby converting a published five-point rating scale into a de facto three-point system; and (3) Merrill Lynch failed to disclose to the public that Merrill Lynch’s ratings were tarnished by an undisclosed material conflict of interest: the research analysts were acting as quasi-investment bankers for the companies at issue, often initiating,

4 continuing, and/or manipulating research coverage for the purpose of attracting and keeping investment banking clients, thereby producing misleading ratings that were neither objective nor independent, contrary to Merrill Lynch’s representations to the public. 13. There was a serious breakdown of the separation between the Merrill Lynch banking and research departments, a separation that was critical to the integrity of the recommendations issued to the public by Merrill Lynch. Merrill Lynch’s stated policies reflect an understanding that this separation is crucial. In describing such separation breakdowns during a Congressional hearing on July 31, 2001, Chairman Richard H. Baker of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, commented: Maybe there hasn’t been a complete erosion in the Chinese walls that traditionally shield analysts from investment banking interests. But I have to say that I believe there are some folks out there manufacturing a lot of Chinese ladders for people to climb back and forth over those walls as they deem appropriate. Analyzing the Analysts: Hearings Before the Subcomm. on Capital Markets, Insurance, and Government Sponsored Enterprises of the House Comm. on Financial Services, 107th Cong. 117 (2001) (statement of Chairman Richard H. Baker). 14. The pressure put on the Merrill Lynch internet group to appease both investment bankers and potential investment banking clients led the group to ignore the bottom two categories of the five-point rating system (“reduce” and “sell”) and to use only the remaining ratings (“buy”, “accumulate” and “neutral”). The absence of clear guidance from Merrill Lynch management on how to resolve the conflicts created by these pressures led Blodget, the head of the internet group, in an internal Merrill Lynch e-mail,1 to threaten to “start calling the stocks (stocks, not companies)... like we see them, no matter what the ancillary business consequences are.”

1 References to sworn testimony and internal Merrill Lynch e-mails are based upon testimony taken and documents received by the New York State Attorney General in connection with his investigation of Merrill Lynch.

5 The Internet Group’s Stock Ratings Were Misleading 15. Merrill Lynch and Blodget rated internet stocks, including LookSmart, both for Intermediate-Term and Long-Term growth as follows: BUY/BUY (1-1), ACCUMULATE/BUY (2-1), ACCUMULATE (2-2), NEUTRAL/BUY (3-1) and NEUTRAL (3-2). Although Merrill Lynch’s published rating system provided for 4s (reduce) and 5s (sell), the internet group never used 4s or 5s. The list of covered internet stocks for the second quarter of 2000, for instance, lists 24 stocks, none of which was rated less favorably than a 2. From the spring of 1999 to the fall of 2001, Merrill Lynch never published a single reduce or sell rating on any stock covered by the internet group. In sworn testimony, both Blodget and his subordinate, Kirsten Campbell, confirmed that the group never rated a stock 4 or 5. Thus, although represented to be a five point system, it was in actuality a three-point system 16. Defendants represented that their Ratings Criteria for the combined Intermediate- Term and Long-Term ratings on all of the Internet stocks that they rated, including LookSmart, were as follows: BUY/BUY (1-1)

C Dominant leader with a clean story in a sector with strong growth prospects C Profitable or on a clear path to profitability within 2-3 quarters (in the more mature sectors) C Strong cash position: enough to reach profitability with plenty left over for discretionary investment C Valuation attractive, or at least justifiable, on a multiple of visible earnings or cash flow (“expensive” is okay, if fundamentals remain strong) C Stock that we believe has a high likelihood of appreciating more than 20% within a year C High level of conviction about sector, company, management, and stock ACCUMULATE/BUY (2-1)

C Strong company with good growth prospects in a promising sector, or dominant sector leader with issues that we expect to be resolved C Profitable or on a clear path to profitability within the next 12-18 months (again, in the more mature sectors) C Solid near-term cash position – enough to reach profitability C Valuation justifiable on a multiple of visible earnings or cash flow, or too expensive to be a 1-1

6 C Stock that we believe has a high likelihood of appreciating more than 20% in 1-2 years ACCUMULATE (2-2)

C Good growth prospects C Improving financial performance C Valuation justifiable C Some uncertainties or reservations remain NEUTRAL/BUY (3-1)

C Significant issues relating to intermediate-term outlook C A business model which we believe fundamentally “works” C Long-term should be okay NEUTRAL (3-2)

C Challenging sector, or growth rate less than sector growth rate C Not yet clear when able to turn profit C Needs additional cash to turn profitable C Significant uncertainties or reservations remain 17. Defendants maintained their policy and practice of not rating a stock a 4 or a 5 because it would have jeopardized Merrill Lynch’s efforts to obtain investment banking and underwriting engagements and fees from internet companies if Defendants had given stocks of internet companies a rating or recommendation of less than “NEUTRAL/BUY.”

The Internet Research Group and the Investment Banking Group Were Not Independent of Each Other 18. Blodget earned many millions of dollars as Merrill Lynch’s premier analyst of Internet stocks. Merrill Lynch paid him in excess of $5 million in 2000 and approximately $12 million in 2001. 19. The Internet research analysts were far from independent of their investment banking colleagues. This relationship drove both the selection of covered stocks and the ratings ultimately assigned to those stocks. 20. The compensation system for internet analysts was a significant factor contributing to the breakdown between the internet group and investment banking departments. Research analysts knew that the investment banking business they generated or participated in 7 would impact their compensation, and management encouraged them to produce investment banking business. Analysts generated goodwill with potential or actual investment banking clients by giving them special treatment. At times, officers of clients or prospective clients were allowed to redraft their own coverage, write quotations in which the analysts would tout their companies, and indicate which ratings would be acceptable to them. Indeed, research analysts at Merrill Lynch were actively involved in evaluating and effectuating investment banking transactions. Moreover, analysts’ compensation was tied to the success of these efforts. 21. The analysts in the internet group at Merrill Lynch knew that investment banking business translated into compensation for them personally and the firm generally, and that their research played an important role in attracting and keeping that investment banking business. In one revealing e-mail exchange, a Merrill Lynch analyst and investment banker discussed how best to attract investment banking business of LookSmart from Goldman Sachs. The banker proposed a formula that had apparently worked in the past with another banking client: “we should 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 GS [Goldman Sachs] and are going to be active, we can probably get by on a ‘handshake.”’ (ML 05229-30). This e-mail blatantly sets forth Merrill Lynch’s intention that the prospect of favorable research reports be used to attract investment banking clients. 22. Blodget was so highly paid by Merrill Lynch because his reputation in the investment community as one of the preeminent analysts of Internet stocks enabled Merrill Lynch to obtain investment banking engagements and the lucrative investment banking fees from those engagements. 23. One way Blodget “prioritize[d]” research coverage for stocks was whether the company had an investment banking relationship with Merrill Lynch. (Blodget Tr. at 207-08). Consistent with this agenda, Blodget, within weeks of joining Merrill Lynch as head of the internet research group, distributed a memorandum entitled, “Managing the Banking Calendar

8 for Internet Research,” which he sent to Merrill Lynch’s Co- Heads of U.S. Equity Research, and senior investment bankers. The memorandum unapologetically described Blodget’s expectation that at least 50 percent of his and his team’s time would be allocated to investment banking matters. In addition to discussing “banking transactions [] in the pipeline” and “promising deals,” the memorandum described Blodget’s work schedule for one week as being divided “85% banking, 15% research.” (ML 34660-61). 24. The research analysts’ objectivity and independence were further eroded by the fact that their compensation depended in part on their efforts on behalf of investment banking, as demonstrated by the following Fall 2000 request from respondent Deepak Raj, then Merrill Lynch’s co-head of global equity research, to all equity analysts: “We are once again surveying your contributions to investment banking during the year ....Please provide complete details on your involvement in the transaction, paying particular attention the degree that your research coverage played a role in origination, execution and follow-up. Please note, as well, your involvement in advisory work on mergers or acquisitions, especially where your coverage played a role in securing the assignment and your follow-up marketing to clients. Please indicate where your research coverage was pivotal in securing participation in high yield offering.” 25. 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 completed transactions had earned $115 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 performed for investment banking, including pitching the client, marketing the offering and, notably, initiation and follow-on research coverage. (ML 09544-51, see also ML 33856). Shortly after documenting these contributions, Blodget’s salary contract was cancelled and replaced with a substantially larger compensation package. Overall, Blodget’s annual compensation, including “guaranteed” minimum cash bonus, increased from $3 million for 1999 to $12 million for 2001. 9 26. Additionally, Merrill Lynch’s stock analysts, including Blodget, participated in a bonus pool which is funded, in part, with investment banking fees received by Merrill Lynch. 27. As attested to in the Dinallo Affidavit: Tension between the various departments in a single firm is nothing new. At a securities firm, this tension is usually addressed by the establishment of a “Chinese Wall” – an internal relationship barrier by which investment bankers are prevented from sharing with other firm employees material, non-public information received by the bankers from their publicly-traded company clients. Thus, a banker generally should be barred from discussing such inside information with a research analyst who is disseminating to the public a research report on the same company. Another form of “Chinese Wall” attempts to prevent investment bankers from influencing analysts’ ratings for the stock of existing or potential investment banking clients. The compensation structure of a securities firm can exacerbate the potential for an analyst to be conflicted. Where analysts’ compensation is affected, directly or indirectly, by the analysts’ contribution to investment banking, analysts’ objectivity and independence can be seriously eroded. (Dinallo Affidavit at 14) 28. The Dinallo Affidavit also revealed that: Merrill Lynch’s Policies and Procedures Manual for the Research Department (ML 02039, 02049) does not address the conflict raised by the compensation issue. Indeed, research analysts at Merrill Lynch were actively involved in evaluation and effectuating investment banking transactions. Moreover, analysts’ compensation was tied to the success of their efforts in this regard. (Dinallo Affidavit at 14) 29. The relationship between Defendants’ research reports on Internet companies and Merrill Lynch’s investment banking business is seen by the choices Defendants made in picking the Internet companies on which they would write analyst reports. Of the 29 Internet companies that Defendants were covering during the Class Period, Merrill Lynch or its affiliates had been a manager of the most recent offering of securities, within the last 3 years, of 19 of those companies. Those 19 companies are: eToys; EarthWeb; Excite@Home; 24/7 Media; Barnesandnoble.com; Buy.com; iVillage; Pets.com; Quokka; Safeguard Scientifics; DoubleClick; Webvan; AOL; Homestore.com; Inktomi; Internet Capital Group; Multex; and Priceline.

10 30. Plaintiffs allege, as attested to in the Dinallo Affidavit: Analysts conveyed to one another that they would “win brownie points” from investment banking if the investment bankers could assure a company that the analysts would cover its stock. (ML 99103). Implicit in this was that “coverage” would always be favorable. Bankers, in turn, attempted to use the analysts to move the price of a stock to a level where research could be initiated, and so fulfill the promise of research coverage in exchange for banking work. One banker who was frustrated by a stock’s failure to reach the requisite price level of $10 before coverage could commence, implored the internet group to let the company speak at the group’s upcoming conference that would be attended by many institutional investors – to promote Merrill Lynch’s “active banking agenda” with the company and alleviate the company’s unhappiness with the “research tie up” at Merrill Lynch. (ML 29750). (Dinallo Affidavit at 16-17). 31. Plaintiffs allege, as attested to in the Dinallo Affidavit: Investment banking also was involved in criticizing and editing the internet group’s reports for client companies, opining on whether a particular rating would be acceptable and, in at least one instance, apparently opposing a proposed rating because “[there is no] interest in seeing initiation [of research coverage] at a 3-2 [rating].” (ML 03799). Analysts openly discussed the conflict in e-mails, stating “the whole idea that we are independent from banking is a big lie – without banking this would be [rated] a 3-2.” (ML 09045). 32. Plaintiffs allege, as attested to in the Dinallo Affidavit: Merrill Lynch did not disclose to the public that the internet group shared – and at times appeared even to negotiate – proposed ratings with the bankers and companies at issue, in clear violation of Merrill Lynch policy that analysts “may not disclose proposed investment conclusion” to company management. (ML 02054). Indeed, Blodget claimed not to even know of this prohibition. (KC013). The results are intensely problematic: in one instance, a company agreed to a particular rating under the condition that its main competitor’s stock would be downgraded to that same rating. It clearly violates Merrill Lynch’s internal policies and illustrates that the subsequent ratings were biased when a company is given advance notice of its stock rating and a voice in a competitor’s downgrade. (ML 09061). In another e-mail, an analyst reported that management of a company “do[es] not feel comfortable with us launching coverage of their stock...until [we]...[can] come out w[ith] a buy rating.” (ML 63362). The internet group even contemplated giving coverage to a stock simply as an “accommodation for an important client,” but only for six months, after which coverage would be dropped. (ML 36662) (Dinallo Affidavit at 22) 33. An example of the manner in which Merrill Lynch would use Blodget to sell its investment banking and underwriting services to Internet companies and Defendants’ awareness

11 of the conflicts of interest which that created and the fact that they were not satisfactorily addressing those conflicts of interest, is reported in the April 2, 2000 Washington Post. In that article, in which the reporter followed Blodget through two workdays, the following was reported: Megan Smith, the chief executive of the gay site PlanetOut, stops by to visit Blodget. Merrill is in the running to do the underwriting for the site’s initial public offering, which makes this another conflict. If Merrill gets the job, Blodget will later be issuing reports on PlanetOut, and when was the last time an analyst was less than upbeat about a company his firm just underwrote? * * * Blodget admits that, for many analysts, “There’s certainly a tendency to give the company a benefit of the doubt.” But he argues that “the best analysts find a way of balancing the needs and wants of their constituencies. It’s like being a good politician.” David Streitfeld, Analyst with a Knack for Shaking up Net Stocks; Henry Blodget is Wall Street’s Link between Online Firms, Investors, Wash. Post, Apr. 2, 2000, at H1.

Blodget’s Reputation 34. Prior to and throughout the Class Period, Blodget was repeatedly recognized in the financial and regular media as a preeminent analyst of Internet companies. Blodget was repeatedly the subject of newspaper and magazine articles and references, and he appeared repeatedly on business-oriented television programs. As demonstrated below, Blodget assumed virtual “celebrity status” which increased the influence and impact of his analyst reports, including his analyst reports regarding LookSmart. In 1999 and 2000, Blodget appeared on television at least 77 and 46 times, respectively, often on CNBC and CNN. 35. Blodget’s fame and extraordinary influence as an analyst of Internet companies began on December 16, 1998, when, while an analyst at CIBC Oppenheimer, he set a “target” price for Amazon.com of $400 per share. The circumstances of that prediction are described in the April 2, 2000 issue of the Washington Post as follows: ...it...took his bold move with Amazon to make him a household name in the world of Internet stockholders. The retailer was at its most controversial then, full 12 of swaggering ambition and bleeding red ink. It was also a hot stock, one that had doubled and redoubled. Two months earlier Blodget had put a 12-month price target of $150 on it. The stock quickly breezed by that to close on Dec. 15 at $242. So he set an “outlandish” new target - $400. “I was trying to say, ‘Stop asking me the price target. There’s plenty of upside,’” he says. “But it was like I threw gasoline on a bonfire.” * * * A Bloomberg News reporter got a tip on Blodget’s aggressive forecast, and wrote a story about it. A couple of minutes later, CNBC picked up the story, noting Amazon stock was already up $10 in early-hours trading. A few minutes after that it hit the chatboards, provoking hundreds of messages during the course of the day. At 9:30 a.m., the market opened with Amazon at $259, up $17. It continued rising all day, the commentary making the stock climb, which in turn provoked more commentary. It was as if Blodget had been understood to say Amazon was going to go to $400 that day. The stock closed at $289, up nearly 20 percent, on quadruple its normal volume. Those who thought Amazon was worthless seemed personally insulted by the rise. Jonathan Cohen, at the time the Merrill Lynch Internet analyst, said the stock was worth less than a quarter of its current price. On Jan. 6, 1999, Amazon closed at $138. Since it had split three-for-one in the meantime, that works out to be $414. The stock had done in three weeks what Blodget had said would take a year. The next month, Blodget replaced Cohen at Merrill Lynch, for a salary he declines to discuss but is reported to be $4 million. The events still bemuse him. He quotes Jay McInerney, who explained how he abruptly became famous with his novel “Bright Lights, Big City” in 1984: “I plucked the chords of the Zeitgeist.” * * * “The reason stocks move is not because they’re cheap or expensive,” Blodget says. “It’s because there’s an imbalance of supply and demand. Stocks don’t move on valuation.” * * * “Our job is not to be stock pickers, but to be correct on trends, and help investors pick stocks,” he said. “There’s a significant difference.” Id. 36. Blodget’s celebrity status included regular appearances on television programs concerning the financial markets, programs which had great influence on the financial markets

13 and the prices of the stocks discussed on those programs. As was reported in the March 15, 1999 issue of The Wall Street Journal: The pros keep an eye not just on their banks of quote machines, but also on television screens. “In my fixed-income trading room and my stock trading room, CNBC is on all during the day,” says Henry Herrmann, chief investment officer at Overland Park, Kan., mutual fund group Waddell & Reed. He put in televisions two 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. Acampora turned bearish in August and CNBC relayed his warning of a sharp 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. E.S. Browning, 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, Wall St. J., Mar. 15, 1999, at C1. 37. The October 4, 1999 issue of Time Magazine reflected Time Magazine’s choice of its “Digital 50 – The Most Important People Shaping Technology Today.” The first three members of Time Magazine’s “Digital 50" were Jeff Bezos, the founder of Amazon.com; Steve Case, the founder of America Online and Bill Gates, the founder of Microsoft. Henry Blodget was one of Time Magazine’s “Digital 50" and Time Magazine described him as follows: Henry M. Blodget The Forecaster, Merrill Lynch Senior Internet and e-commerce analyst, Age: 32, Web: www.ml.com It takes a certain cachet to make financial-market types swoon. Henry Blodget, arguably the most influential voice on Internet stocks in the world, is so hot right now that his late arrival to a recent bigwig 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 the call that shot him into the spotlight and one of the most prestigious jobs on Wall Street. Amazon.com’s share price was hovering around $200; pundits were proclaiming that the party was over. But Blodget remained bullish on the online bookseller and said the stock would hit $400 in 12 months – and then it hit the stratosphere. By March, he was at Merrill – and he’s been getting the kind of attention shown in those old E.F. Hutton ads ever since. Maryanne Murray Buechner et al., Digital 50: The Most Important People Shaping Technology Today, Time, Oct. 4, 1999, at 25.

14 38. In its June 29, 1999 issue, The Wall Street Journal named Henry Blodget as one of three all stars in its “All-Star Analysts 1999 Survey: Internet.” 39. Blodget’s reputation as an analyst of Internet stocks in the investment community was demonstrated by his being placed on Institutional Investor’s Third Team for its 1999 All- America Research Team. This was reported in the October 1999 issue of Institutional Investor. That award was the product of a poll which Institutional Investor conducted, which it described as follows: To select the members of this year’s All-America Research Team, Institutional Investor sent questionnaires covering 90 industry groups and investment specialties to the directors of research and chief investment officers of major money management institutions. Included were those managers on our rankings of the largest institutions in the U.S. (Institutional Investor, July 1998), as well as other key U.S., European and Asian investors. Directors and industry data sources were tapped to ensure that the survey universe was complete, and many Wall Street research directors submitted a list of their key institutional clients, many of whom were also contacted. In addition, questionnaires were sent directly to analysts and portfolio managers at many top institutions. In total we mailed ballots to nearly 725 institutions. The 1999 All-America Research Team, Institutional Investor, Oct. 1999, at 109. 40. In its October 2000 issue, Institutional Investor named Blodget to the “First Team” of its 2000 All-America Research Team in two categories: New Media and E-Commerce. In that article, Institutional Investor articulated the analysts’ conflicts of interest, between objective analysis and the investment banking business of their employers: In tough times equity analysts ought to be able to add value by steering clients clear of deteriorating companies and putting them in safer stocks that will out perform. But they can’t if they are too busy serving the needs of their constituencies. For years, investors have muttered about the increasing amount of time analysts spend hustling banking business – compromising the quality of research while dramatically boosting their annual pay packages. This year, with equity markets sagging and the M&A and underwriting businesses soaring, the muttering has become an outcry. “Analysts must bring in deals, and there is an inherent conflict of interest there,” says Andrew Barth, director of U.S. research for Capital Guardian Trust Co. “Quality becomes a function of the deal calendar. It’s only natural that the credibility of sell-side research falls as banking steps up.” One veteran portfolio manager puts it more bluntly: “These guys are selling their souls for investment banking. Today I would just like to work with one intellectually honest analyst.”

15 The 2000 All-America Research Team, Institutional Investor, Oct. 2000, at 57. 41. In the spring of 2001, Merrill Lynch placed a two-page advertisement in a weekly trade publication headlined “Techtelligence.” In the advertisement, Merrill Lynch touted the capability of Merrill Lynch’s technology group, including the 100 analysts who cover 500 companies and the awards its analysts have won, including Merrill Lynch’s “Internet Guru” Henry M. Blodget. 42. The extraordinary extent of the exposure which Blodget received in the print and television media was reported in the June 5, 2000 issue of The Industry Standard, The News Magazine of the Internet Economy, in an article entitled “Holding Analysts Accountable. Investors following stock recommendations are often in the dark about Wall Street analysts’ conflicts of interest. Regulators aren’t happy.” In that article it was reported that in the preceding year Blodget had been cited in the press on 1,072 occasions which was more than any of the other listed analysts, venture capitalists and Internet chief executive officers surveyed. Blodget was cited in the media 80% more than the two next highest people surveyed – Meg Whitman, the Chief Executive Officer of eBay, and Mary Meeker, Morgan Stanley Dean Witter’s Internet analyst. 43. The extraordinary extent of the exposure which Blodget received in the print and television media was also reported in the March 12, 2001 issue of the Washington Post. The article reported as follows: Henry Blodget, Wall Street’s loudest cheerleader for Internet stocks, made it to the front page of the New York Times last week. And thereby hands a tale about the media and the bubble. The Merrill Lynch analyst rode a tidal wave of publicity as the Net stocks he was touting soared toward the stratosphere. Now that his top recommendations have plunged 79 percent – including eToys and Pets.com, both of which have shut down – the Times says Blodget and others like him go “a long way toward explaining why the market for technology stocks has since crashed.” * * * From the day he burst into the headlines in December 1998, Blodget has been mentioned 95 times in the Wall Street Journal, 66 times in the New York Times, 16 53 times in The Washington Post (which ran a 3,800 word profile of him last year) and 27 times in Business Week. Just since the beginning of last year, he has been mentioned (or interviewed) on television 816 times, a Nexis database search finds. Howard Kurtz, Who Blew the Dot-Com Bubble?; the Cautionary Tale of Henry Blodget, Wash. Post, Mar. 12, 2001, at C01.

The Substantial Impact of Blodget’s Recommendations on the Price of Internet Stocks Was Generally Recognized in the Financial Media 44. An article entitled “Stocks Slump as Investors Take Profits” in the August 19, 1999 New York Times, reported as follows: A surprisingly strong earnings report by Dell Computer and a recommendation of eight Internet stocks by Merrill Lynch’s influential analyst, Henry Blodget, helped keep the Nasdaq average in positive territory most of the day before it, too, slipped and ended down 13.49 points, or five-tenths of 1 percent, to 2,657.73. * * * Mr. Blodget, the Merrill Lynch analyst, recommended eight Internet stocks he saw as benefitting from this year’s holiday shopping season, perhaps tripling revenue from on-line sales and advertising. He predicted the shares, which “offer a sound way to play the fundamental strength and renewed investor enthusiasm” expected in coming months, would surge 50 percent to 100 percent by year-end. All his picks rose. Amazon.com jumped 3 7/8 to 113 1/8; America Online 1 11/16 to 99 3/16, and Yahoo 6 3/16 to 15 1/16. His other picks were eToys, ICG@Home, Lycos, Inktomi and Barnesandnoble.com. Robert D. Hershey Jr., The Markets: Stocks; Stocks Slump as Investors Take Profits, N.Y. Times,Aug. 19, 1999, at C1. 45. On the same day, August 19, 1999, in The Wall Street Journal’s “Heard on the Street,” it was reported as follows: ...electronic-commerce stocks got a sudden boost yesterday after Merrill Lynch analyst Henry Blodget told clients in a conference call that he believes sentiment is turning back toward those issues... “We are throwing our hat into the ring,” Mr. Blodget said. He advised buying some down-and-out Internet retailers, including Amazon.com, Barnesandnoble.com and eToys, along with service providers such as America Online and Yahoo!, on the theory that they will benefit from a strong back-to- school and holiday season. “This has been a rocky summer for this sector. But if you are committed to holding until December and you buy them until this level, you’ll probably make significant money,” Mr. Blodget said. He even put together a “holiday basket” 17 with eight Internet stocks he thinks will “benefit disproportionately from strength” in the sector later this year. His list included not only Yahoo, Amazon.com, America Online and Barnesandnoble.com, but also eToys, Lycos, ICG, Excite At Home and Inktomi. Mr. Blodget’s picks got a lift yesterday amid an overall rally in Internet stocks. Yahoo closed at 145.0625, up 6.1875; Inktomi closed at 119, up 3; Amazon.com closed at 113.125, up 3.875. Susan Pulliam & Terzah Ewig, Heard on the Street: Next Wave: Web-Gear Firms Show Signs of Inheriting that ‘Internuts’ Mania, Wall. St. J., Aug. 19, 1999, at C1. 46. In a January 12, 2000 article in The Wall Street Journal entitled “Huge Price- Target Boosts Lifted Web Stocks; Now Analysts Try Same Move in Other Sectors,” the effect of Blodget’s huge price targets on the price of the stocks he covered, and Blodget’s own view of those price targets, was described as follows: There is nothing that jump-starts an Internet stock like a big price-target boost by a Wall Street analyst... * * * There is nothing too risky about sticking an eye-popping price target on a stock anymore either. Everyone laughed last year when Merrill Lynch’s Henry Blodget nearly doubled his price target for Amazon.com, then trading at 230 a share, to 400. (The stock has since split.) The move looked pretty smart, however, within just weeks, and Mr. Blodget is now one of the highest paid Internet analysts on Wall Street. Says Mr. Blodget: “If you are looking at stocks with this kind of volatility, you need extreme returns to justify the risk.” Further, he says, “a lot of analysts are just measuring reality and giving investors a sense of where a stock might go.” * * * “The quick reaction to price targets is being driven by thinly traded stocks and an incredible amount of retail money that, when they see a new price target, they drive the stock there and past it,” he says... Susan Pulliam, Heard on the Street: Huge Price-Target Boosts Lifted Web Stocks; Now Analysts Try Same Move in Other Sectors, Wall St. J., Jan. 12, 2000, at C2. 47. An article in the May 23, 2000 Wall Street Journal, reported as follows: The biggest chuck of the recovery in the session took place in the beleaguered Internet camp. Shares of eBay (Nasdaq), weakened in intraday trading, turned around, ending the session 18 points better at 136 3/16. The reversal came after the online auction concern’s chief executive, Meg Whitman, continuing to campaign for the company’s stock, which has fallen sharply from its March highs, 18 spoke with Merrill Lynch Internet analyst Henry Blodget on an investment program Merrill conducted on the Internet. Robert O’Brian, Abreast of the Market: Technology Stocks, Led by Sun, Adobe, Recover From Day’s Lows, Wall St. J., May 23, 2000, at C2 48. On July 14, 2000, The Wall Street Journal published an article regarding the investment bankers who underwrote Internet initial public offerings, and the astonishing rise, at least temporarily, in the price of those shares: The bankers got help in feeding the furnace from a new breed of mostly young securities analysts who presented themselves as pathfinders in the uncharted terrain of the Internet. The best-known is Henry Blodget, famous for forecasting in December 1998 that Amazon.com would hit $400 a share within 12 months. At the time, Amazon.com was trading at $240; within four weeks it blew past $400 on its way to a high of more than $600. Mr. Blodget was celebrated as a seer and left his job at CIBC Oppenheimer for Merrill Lynch & Co. Amazon.com? It closed at a split-adjusted $35 yesterday, equivalent to $210 at the time of Mr. Blodget’s big call. * * * Still, to critics, Mr. Blodget epitomizes the change in the analyst’s role during the overheated market in tech stocks: more cheerleader than detached observer. And the buzz – and the career opportunities – that Mr. Blodget did draw may have encouraged other analysts to make similarly adventurous forecasts, the critics add. Despite Mr. Blodget’s 75% caveat, his recommendations on individual stocks, like those of many Internet analysts, got more bullish even as they led the Nasdaq Composite Index to ever-more-dizzying heights. Today, he rates 12 of the 27 stocks that he follows as “buy” (the rest are “accumulate”), compared with just one buy rating for the 10 stocks he followed a year ago, says Bob Kim, a former Merrill Lynch supervisory analyst whose Web site, Restex.com, monitors Merrill technology research. Consider Pets.com Inc., which Merrill took public at $11 in February. It slid to $6.125 in a month, when Mr. Blodget initiated coverage with a prediction that it would soar to $16 a share, or 160%, in 12 to 18 months. A major justification: Despite the pet supply seller’s continuing losses, he noted that it was trading at five times this year’s estimated revenue, a discount to Amazon.com at eight times revenue. Since Mr. Blodget’s prediction, Pets.com has been a dog, falling 70% to $1.8125. Greg Ip et al., The Color Green: the Internet Bubble Broke Records, Rules and Bank Accounts; Wall Street and Allies Built $1.4 Trillion Monument to Fast-Money Madness; Waiting for the ‘Big Kahuna’, Wall St. J., July 14, 2000, at A1.

19 Defendants Had a Policy and Practice of Never Giving the Stock of an Internet Company a Rating or Recommendation Other Than “BUY/BUY” or “ACCUMULATE/BUY” 49. From the time that Blodget began his employ at Merrill Lynch, as an Internet analyst, in February 1999, through the end of the Class Period, Blodget and Merrill had the policy and pursued the practice of never giving the stock of an Internet company a rating or recommendation less than “NEUTRAL/BUY.” 50. Defendants maintained that policy and practice because it would have jeopardized Merrill’s efforts to obtain investment banking and underwriting engagements and fees from Internet companies if Defendants had given stocks of such companies a rating or recommendation of less than “NEUTRAL/BUY.” 51. The lack of candor with which Defendants wrote and issued their reports on Internet companies, and particularly Defendants’ uniform practice prior to and during the Class Period, of never publishing a rating or recommendation for an Internet stock less than “NEUTRAL/BUY,” is demonstrated by the way in which Defendants ceased coverage of an Internet company. Specifically, when Defendants made the decision to cease issuing analyst reports regarding a particular Internet company, which could have been because they no longer saw any potential to obtain investment banking or underwriting fees as a result of that coverage, Defendants did not advise the investing public of that decision. Despite the fact that they had previously been recommending the purchase of a company’s stock, Defendants would provide no guidance as to what investors should do with their stock holdings; rather, Defendants, without notice or explanation, would no longer issue reports regarding that stock. Defendants’ conduct is illustrated by the following examples.

52. iXL Enterprises Inc. Merrill was the underwriter of this company’s IPO on June 2, 1999. Defendants initiated coverage on June 28, 1999 with a report in which they gave the stock a rating of “ACCUMULATE/BUY.” Defendants reiterated this recommendation in a July 16, 1999 report and, on July 28, 1999 issued a report which raised the rating to “BUY/BUY.” This “BUY/BUY” rating was reiterated in Defendants’ September 20, 1999, October 5, 1999, 20 and November 22, 1999 reports. Thereafter, no more reports were issued by Defendants without notice or explanation.

53. Telebanc Coverage was initiated by Defendants on April 19, 1999 with a report which provides Defendants’ “ACCUMULATE/BUY” rating. Merrill had managed this company’s most recent public offering. Defendants issued another report with the same rating on May 4, 1999. On May 24, 1999 Defendants issued a report in which they increased their rating of Telebanc stock to “BUY/BUY.” Thereafter, no more reports were issued by Defendants without notice or explanation. 54. Interliant, Inc. Merrill managed Interliant, Inc.’s IPO on July 13, 1999. Defendants initiated coverage on August 4, 1999 with a report that rated the company’s stock “ACCUMULATE/BUY.” Defendants issued two more reports regarding Interliant, dated August 12, 1999 and February 18, 2000, in which they reiterated the “ACCUMULATE/BUY” rating. Thereafter, no more reports were issued by Defendants, without notice or explanation. 55. According to the Dinallo Affidavit, the New York Attorney General’s investigation revealed that: Although Merrill Lynch’s published rating system provided for 4s (reduce) and 5s (sell), the internet group never used 4s or 5s. The list of covered internet stocks for the second quarter of 2000, for instance, lists 24 stocks, none of which is was rated less 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 Blodget and his subordinate, respondent Kirsten Campbell, confirmed that the group never rated a stock a 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 no longer favored, the internet group instead merely quietly stopped covering the stock, without any announcement or meaningful explanation to the retail public. (ML 87610). Thus, as previously covered stocks such as Pets.com, Mypoints.com, Quokka Sports, Webvan, iVillage, Buy.com, 24/7 Media, E-Toys, Internet Capital Group, and InfoSpace plummeted, sometimes all the way to zero, retail customers and the investing public were never advised to sell. (ML 51690, ML 51833, ML 51997, ML 52195, ML 52516, ML 53160, ML 53161, ML 53162, ML 53181, ML 5350, ML 53612 and ML 53760; see also ML 87610). (Dinallo Affidavit at 9)

21 56. The Dinallo Affidavit 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 quasi-investment bankers for the companies at issue, often initiating, continuing, and/or manipulating research coverage for the purposes of attracting and keeping investment banking clients, thereby producing misleading ratings that were neither objective nor independent, as they purported to be. (Id. at 10)

Defendants’ False And Misleading Statements Concerning LookSmart 57. Defendants initiated their analyst coverage of LookSmart with a report released to the public on May 25, 2000. The report recommended LookSmart common stock as “ACCUMULATE” and classified it as a “Long Term BUY.” 58. On June 29, 2000, Defendants issued another analyst report relating to LookSmart entitled “LOOK Should Meet Expectations in Spite of a Soft Advertising Market.” It reflected “Reason for Report: Earnings Preview - 2Q00.” The report continued to recommend LookSmart common stock as “ACCUMULATE” and classified it as a “Long Term BUY.” 59. On July 27, 2000, Defendants issued another analyst report relating to LookSmart entitled “Core Ad Business Very Strong as LOOK Lays Foundation for New Listings Business.” It reflected “Reason for Report: 2Q00 Earnings Highlights.” In the report, Defendants continued to recommend LookSmart common stock as “ACCUMULATE” and continued to classify it as a “Long Term BUY.” 60. On July 28, 2000, Defendants issued another analyst report relating to LookSmart entitled “Detailed Review of 2Q00: Very Strong Core Advertising Business; Progress in Listings.” It reflected “Reason for Report: Detailed Review of 2Q00.” In the report, Defendants continued to recommend LookSmart common stock as “ACCUMULATE” and continued to classify it as a “Long Term BUY.” 61. On September 21, 2000, Defendants issued another analyst report relating to LookSmart entitled “Expect 3Q Revenues to Be in Line and EPS to Exceed Estimates.” It

22 reflected “Reason for Report: 3Q00 Earnings Preview.” The report continued to recommend LookSmart common stock as “ACCUMULATE” and classified it as a “Long Term BUY.” 62. On November 2, 2000, Defendants issued another analyst report relating to LookSmart entitled “Solid Quarter (Especially in Key Listings Business). Lowering Revenue Estimates.” It reflected “Reason for Report: 3Q00 Earnings Report.” In the report, Defendants continued to recommend LookSmart common stock as “ACCUMULATE” and continued to classify it as a “Long Term BUY.” 63. On November 17, 2000, Defendants issued another analyst report relating to LookSmart entitled “Impact of GoTo Agreement With Alta Vista.” It reflected “Reason for Report: Company Update.” In the report, Defendants continued to recommend LookSmart common stock as “ACCUMULATE” and continued to classify it as a “Long Term BUY.” 64. On November 28, 2000, Defendants issued another analyst report relating to LookSmart entitled “Announces First Distribution Partnership with a Wireless ISP - Genie.” It reflected “Reason for Report: Company Update.” In the report, Defendants continued to recommend LookSmart common stock as “ACCUMULATE” and continued to classify it as a “Long Term BUY.” 65. On December 12, 2000, Defendants issued another analyst report relating to LookSmart. In the report, Defendants continued to recommend LookSmart common stock as “ACCUMULATE” and continued to classify it as a “Long Term BUY.” 66. On January 11, 2001, Defendants issued another analyst report relating to LookSmart. In the report, Defendants recommended LookSmart common stock as “NEUTRAL,” but continued to classify it as a “Long Term BUY.” Despite the change in rating, the new rating was still materially false and misleading, lacked any reasonable factual basis, and were contrary to the actual beliefs held by the analysts. 67. On January 26, 2001, Defendants issued another analyst report relating to LookSmart entitled “Listings Continue to Gain Traction.” It reflected “Reason for Report: 4Q00

23 Earnings Report.” In the report, Defendants continued to recommend LookSmart common stock as “NEUTRAL” and continued to classify it as a “Long Term BUY.” 68. On April 27, 2001, Defendants issued another analyst report relating to LookSmart entitled “Decent Q in Tough Market; Cash Burn Slows; Q4 Breakeven Target Maintained.” In the report, Defendants continued to recommend LookSmart common stock as “NEUTRAL” and continued to classify it as a “Long Term BUY.”

The Material Omissions From And Misrepresentations In The LookSmart Analyst Reports 69. All of the LookSmart analyst reports which were issued by Defendants from May 25, 2000 through April 27, 2001, which are discussed herein, are collectively referred to herein as the “LookSmart Analyst Reports.” 70. Defendants fraudulently recommended, in their LookSmart reports, the purchase of LookSmart common stock while, at the time of the recommendations, circulating contemporaneous internal e-mails stating they “should aggressively link coverage with banking” - a clear conflict of interest, and an indication that the recommendations issued lacked any reasonable factual basis. As of the issuance of the LookSmart Analyst Reports, Defendants possessed material, adverse, non-public information, which reasonable investors deciding whether to invest would want to know in making their investment decision. 71. Defendants, when they issued the LookSmart Analyst Reports, knew that their issuance would, as had the past Analyst Reports issued by Defendants regarding other Internet companies, serve to increase or inflate the price that LookSmart stock traded at, compared to the price it would have traded at had the LookSmart Analyst Reports not been issued. Defendants issued the LookSmart Analyst Reports with the express intention of increasing and inflating the price at which LookSmart stock would trade. 72. Defendants issued the LookSmart Analyst Reports as part of Merrill Lynch’s effort to obtain or maintain substantial investment banking and advisor fees, which it would

24 obtain as the financial advisor to LookSmart in connection with potential IPOs, secondary offerings, acquisitions or mergers. 73. As detailed above, in each of the LookSmart Analyst Reports, Defendants set forth a “Reason for Report.” The “Reason for Report” set forth in each of the LookSmart Analyst Reports was false and misleading because, in fact, the reason that Defendants had issued each of the LookSmart Analyst Reports was to assist Merrill Lynch in its efforts to obtain or maintain investment banking fees and to artificially inflate the price of LookSmart common stock. 74. The LookSmart Analyst Reports were deceptive and misleading because Defendants failed to disclose in those Reports that Defendants had based their decisions as to which companies to cover in their analyst reports and as to what they would say in those reports regarding those companies, on the impact which those actions would have on Merrill Lynch’s ability to obtain underwriting and investment banking engagements from those companies or others. 75. The LookSmart Analyst Reports, and particularly, Defendants’ “ACCUMULATE/BUY” and “NEUTRAL/BUY” recommendations of LookSmart stock in those reports, were deceptive and misleading because they failed to disclose that Merrill Lynch and Blodget had a policy and practice prior to and throughout the Class Period of never issuing an analyst report on an Internet company in which their rating or recommendation with respect to the stock of that company was less than a “NEUTRAL/BUY.” Defendants maintained that policy and practice, regardless of whether there was any rational economic basis for those recommendations that the applicable company’s stock be acquired, because if Defendants had assigned an Internet company a rating of less than “NEUTRAL/BUY” it would jeopardize Merrill Lynch’s ability to obtain underwriting or investment advisory engagements from that company or others. The LookSmart Analyst Reports were deceptive and misleading because

25 Defendants did not disclose in those Reports the existence of, and Defendants’ reason for, the above-described rating policy and practice. 76. The LookSmart Analyst Reports were deceptive and materially misleading because they failed to disclose Defendants’ “ACCUMULATE/BUY” and “NEUTRAL/BUY” recommendations of LookSmart lacked a reasonable basis in fact and were, in actuality, nothing more than undisclosed “momentum” plays – i.e. the stock should be bought because its price will rise, even though there are no rational economic reasons why the stock should trade at its current price and no rational economic reasons why the stock’s price should continue to rise.

CLASS ACTION ALLEGATIONS 77. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class consisting of all persons or entities who purchased LookSmart securities from May 25, 2000 through April 27, 2001 and who were damaged thereby. 78. Excluded from the Class are Defendants; members of the individual defendant’s immediate family; any director, officer, subsidiary, or affiliate of Merrill Lynch; any entity in which any excluded person has a controlling interest; and their legal representatives, heirs, successors and assigns. 79. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs believe that there are thousands of members of the Class located throughout the United States. Throughout the Class Period, LookSmart securities were actively traded in an efficient market on the NASDAQ National Market. 80. Plaintiff’s claims are typical of the claims of other members of the Class as all members of the Class were similarly affected by Defendants’ wrongful conduct in violation of federal law that is complained of herein.

26 81. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation. 82. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are: a. Whether the federal securities laws were violated by Defendants’ acts and omissions as alleged herein; b. Whether Defendants participated in and pursued the illegal course of conduct complained of herein; c. Whether statements disseminated to the investing public during the Class Period made misrepresentations or omissions of material information as alleged herein; d. Whether the market price of LookSmart securities during the Class Period was artificially inflated due to the material misrepresentations and omissions complained of herein; e. To what extent the members of the Class have sustained damages and the proper measure of damages. 83. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. As the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually seek redress for the wrongs done to them. There will be no difficulty in the management of this suit as a class action.

COUNT I AGAINST ALL DEFENDANTS FOR VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5 PROMULGATED THEREUNDER 84. Plaintiffs repeat and reallege each and every allegation set forth above, as if set forth fully herein. 27 85. During the Class Period, Defendants, and each of them, carried out a plan, scheme and course of conduct of market manipulation that was intended to and did: (i) deceive the investing public, including Plaintiffs and other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of LookSmart securities; and (iii) cause Plaintiffs and other members of the Class to purchase LookSmart securities at artificially inflated prices. In furtherance of this unlawful scheme, plan, and course of conduct, Defendants, and each of them, took the actions set forth herein. 86. These Defendants: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices and a course of business which operated as a fraud and deceit upon the purchasers of LookSmart securities in order to achieve and maintain artificially high market prices for LookSmart securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. 87. Defendants’ material misrepresentations and/or omissions, and other deceptive devices and contrivances, were done knowingly or recklessly and for the purpose and effect of manipulating the price of LookSmart securities. Defendants had no reasonable basis in fact for their “ACCUMULATE/BUY” and “NEUTRAL/BUY” recommendations for, and their target prices for, LookSmart common stock; Defendants fraudulently recommended, in their LookSmart reports, the purchase of LookSmart common stock while at the time of the recommendations circulated contemporaneous internal e-mails stating they “should aggressively link coverage with banking” - a clear conflict of interest, and an indication that the recommendations issued lacked any reasonable factual basis. 88. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of LookSmart securities was artificially inflated during the Class Period. In ignorance of the fact that the market price of LookSmart securities was artificially inflated, and relying directly or indirectly on the false and

28 misleading statements made by Defendants, or upon the integrity of the market in which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by Defendants but not disclosed in public statements by Defendants during the Class Period, Plaintiffs and the other members of the Class acquired LookSmart securities during the Class Period at artificially inflated prices and were damaged thereby. 89. At the time of said misrepresentations and omissions, Plaintiffs and the other members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs and the other members of the Class known of the omitted material facts, Plaintiffs and the other members of the Class would not have purchased or otherwise acquired their LookSmart securities during the Class Period, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid. 90. Plaintiffs and the other members of the Class were injured because the risks that materialized were risks of which they were unaware as a result of Defendants’ misrepresentations, omissions and other fraudulent conduct alleged herein. Absent Defendants’ wrongful conduct, Plaintiffs and the members of the Class would not have been injured. 91. By virtue of the foregoing, Defendants each violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. 92. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiffs and the other members of the Class suffered damages in connection with their purchases of LookSmart securities during the Class Period.

COUNT II AGAINST DEFENDANT MERRILL LYNCH PURSUANT TO SECTION 20(A) OF THE EXCHANGE ACT 93. Plaintiffs repeat and reallege each and every allegation set forth above. 94. This claim is asserted against Defendant Merrill Lynch for violations of Section 20(a) of the Exchange Act, 15 U.S.C. §78t(a), on behalf of all Class members who purchased, or otherwise acquired, LookSmart securities during the Class Period, and were damaged thereby. 29 95. As set forth above, during the entire Class Period, Defendant Merrill Lynch was a “controlling person” of Defendant Blodget, within the meaning of Section 20(a) of the Exchange Act. 96. Merrill Lynch was a “controlling person” of Blodget because it had the influence and power over Blodget to cause, and did cause, Blodget to engage in the wrongful conduct complained of herein, and because it had the power to have prevented Blodget from engaging in the unlawful conduct alleged herein, but purposely and intentionally did not use that power to do so. 97. As set forth in Count I, Blodget violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by his acts and omissions as alleged in this Complaint. By virtue of its status as a “controlling person” of Blodget, Merrill Lynch is liable, to the same extent as Blodget, for Blodget’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, pursuant to Section 20(a) of the Exchange Act.

PRAYER FOR RELIEF WHEREFORE, Plaintiffs, on behalf of themselves and the Class, prays for judgment as follows: A. declaring this action to be a class action properly maintained pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure; B. finding that Defendants violated Section 10(b) of the Exchange Act and Rule 10b- 5 promulgated thereunder by their acts and omissions as alleged in this Complaint; C. awarding Plaintiffs and the other members of the Class damages, together with interest thereon; D. awarding Plaintiffs and the other members of the Class their costs and expenses of this litigation, including reasonable attorneys’ fees and experts’ fees and other costs and disbursements; and

30 E. awarding Plaintiffs and the other members of the Class such other and further relief as may be just and proper under the circumstances.

JURY TRIAL DEMAND Plaintiffs demand a trial by jury. Dated: September 26, 2002 By the attorneys for the plaintiff and the Class

COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C.

Linda P. Nussbaum (LN 9336) Susan R. Schwaiger (SR 8653) 825 Third Avenue, 30th Floor New York, NY 10022 (212) 838-7797 Steven J. Toll Joshua Devore COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, DC 20005 (202) 408-4600 Of Counsel: Burton H. Finkelstein, Esq. Conor R. Crowley, Esq. Adam T. Savett, Esq. FINKELSTEIN, THOMPSON & LOUGHRAN 1050 30th Street, NW Washington, DC 20007 (202) 337-8000 Edward F. Haber (EH-1248) SHAPIRO HABER &URMY LLP 75 State Street Boston, MA 02109 (617) 439-3939