268789
IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
______JON M. ROSENBAUM, on behalf of : No. ______himself and all others similarly situated, : : CLASS ACTION COMPLAINT Plaintiff, : FOR VIOLATIONS OF THE : FEDERAL SECURITIES LAWS v. : : MERRILL LYNCH & CO., INC., : HENRY BLODGET, JUSTIN BALDAUF, : KIRSTEN CAMPBELL, VIRGINIA : JURY TRIAL DEMANDED SYER GENEREUX, SOFIA GHACHEM, : THOMÁS MAZZUCCO, EDWARD : MCCABE and DEEPAK RAJ, : : Defendants. : ______:
Plaintiff, by his undersigned attorneys, individually and on behalf of the Class described below, upon actual knowledge with respect to the allegations related to Plaintiff=s purchase of the common stock of Excite@Home Corporation (AExcite@Home@ or the ACompany@), and upon information and belief with respect to the remaining allegations, based upon, inter alia, the investigation of Plaintiff=s counsel, which included, among other things, a review of public statements made by defendants and their employees, Securities and Exchange Commission (ASEC@) filings, and press releases and media reports, brings this Complaint (the AComplaint@) against defendants named herein, and alleges as follows: 268789
NATURE OF THE ACTION
1. This is a federal securities class action brought by the Plaintiff against defendants
Merrill Lynch & Company (“Merrill Lynch”), Henry Blodget (“Blodget”), Justin Baldauf (“Baudauf”),
Kirsten Campbell (“Campbell”), Virginia Syer Genereux, (“Genereux”), Sofia Ghachem
(“Ghachem”), Thomas Mazzucco (“Mazzucco”), Edward McCabe (“McCabe”), and Deepak Raj
(“Raj”) (together, the “Defendants”, without Merrill Lynch, the “Individual Defendants”) on behalf of a
class (the “Class”) consisting of clients of Merrill Lynch who purchased the common stock of
Excite@Home between August 30, 1999 and November 8, 2000 inclusive (the “Class Period”), as
well as persons who were not clients of Merrill Lynch who also purchased the Common Stock of
Excite@Home during the Class Period. Plaintiff seeks to recover damages caused to the Class by
defendants’ violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”)
and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act.
2. Defendant Merrill Lynch is the largest securities broker in the United States. 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.
-2-
268789
3. Defendant Blodget was, at all relevant times, a First Vice President of Merrill Lynch
and was Merrill Lynch’s analyst for Internet companies. The other Individual Defendants all reported
to Blodget
4. This action arises as a result of the issuance by the Defendants of analyst reports
regarding Excite@Home, which recommended the purchase of Excite@Home common stock and
which set price targets for Excite@Home common stock, without any reasonable factual basis.
Furthermore, when issuing their Excite@Home reports, the Defendants failed to disclose significant,
material conflicts of interest which they had, in light of their use of Blodget’s reputation and his
Excite@Home analyst reports, to obtain investment banking business for Merrill Lynch. Furthermore,
in issuing their Excite@Home reports, in which they were recommending the purchase of
Excite@Home stock, the Defendants failed to disclose material, non- public, adverse information
which they possessed about Excite@Home as well as their true opinion about Excite@Home.
5. Throughout the Class Period, defendant Blodget maintained an
ACCUMULATE/BUY” or a “ACCUMULATE/ACCUMULATE” recommendation on
Excite@Home in order to obtain and support lucrative financial deals for Merrill Lynch. Unbeknownst
to the investing public, Merrill Lynch was seeking to be retained as a financial adviser for other
Internet companies. Such investment banking engagements were worth millions of dollars in fees to
Merrill Lynch.
-3-
268789
6. The Class Period begins on May 5, 1999, three years prior to the filing of this
Complaint. Defendants initiated their coverage of Excite@Home on September 10, 1997, but,
because of the statute of limitation in the PSLRA, plaintiff and the Class are limited in their claims for
damages to the three-year period prior to the filing of this Complaint. Nonetheless, Defendants’ fraud
began earlier than the beginning of the Class Period and continued until exposed by the filing of an
affidavit by the New York State Attorney General, as discussed below, which disclosed the extent to
which Defendants misrepresented their true valuation of Excite@Home and numerous other Internet
stocks. The Class Period ends on April 8, 2002, the date on which the Attorney General’s affidavit
was filed.
7. As underwriters for Excite@Home common stock and, therefore, as agents of
Excite@Home, and/or as brokers for Plaintiff and certain members of the Class, Merrill Lynch and
the Individual Defendants, had a duty to Plaintiff and the Class to provide information which was
truthful and was not false or misleading; and to disclose information which was material to Plaintiff and
the Class in their decisions to purchase or sell Excite@Home common stock. In particular,
Defendants had a duty to disclose that there was no “Chinese Wall” between the investment bankers
at Merrill Lynch and the Individual Defendants and that, in fact, the Individual Defendants were
nothing other than pitchmen for the investment bankers, touting Excite@Home common stock even
though they knew that their positive recommendations had no basis in fact and that, as a result,
Plaintiff and the Class would, and did, suffer serious monetary damage.
-4-
268789
8. As demonstrated herein, as a result of Blodget’s highly publicized reputation as an
analyst of Internet companies, the Defendants’ positive reports on, and their “ACCUMULATE/
BUY” or “ACCUMULATE/ACCUMULATE” recommendations on, Excite@Home significantly
increased and inflated the price of Excite@Home stock throughout the Class Period.
9. The Defendants’ recommendations in their analyst reports on Excite@Home that the
stock should be bought were, in fact, 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. This approach to buying stocks has often been called the “greater fool
theory,” reflecting the observation regarding an overpriced security that, while only a fool would pay
that much for the stock, one should buy it anyway because one would be able to sell it later to an even
“greater fool.”
10. As demonstrated in detail herein, Defendants’ “ACCUMULATE/ BUY” or
“ACCUMULATE/ACCUMULATE” recommendations of Excite@Home and the price targets
which they set for Excite@Home stock lacked a reasonable basis in fact and were dominated and
influenced by the Defendants’ undisclosed serious conflict of interest arising out of Merrill Lynch’s
effort to be appointed as financial advisor to other Internet companies.
-5-
268789
JURISDICTION AND VENUE
11. This Court has jurisdiction over the subject matter of this action pursuant to ' 27 of
the Securities Exchange Act of 1934 (the AExchange Act@), 15 U.S.C. ' 78aa, and 28 U.S.C. '
1331.
12. Plaintiff brings this action pursuant to the Exchange Act, as amended, 15 U.S.C. ''
78j(b) and 78t(a) and Rule 10b-5 promulgated thereunder, 17 C.F.R. ' 240.10b-5. Venue is proper
in this District because Defendants conduct business in this District and many of the wrongful acts
alleged herein took place or originated in this District. In addition, Merrill Lynch has its headquarters
in this District at 4 World Financial Center, 250 Vesey Street, New York, New York.
13. In connection with the acts alleged in this Complaint, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,
the mails, interstate telephone communications and the facilities of the national securities markets.
PARTIES
14. Plaintiff Jon M. Rosenbaum, a client of Merrill Lynch, purchased shares of
Excite@Home during the Class Period and was damaged thereby as set forth in his certification
attached hereto.
15. Defendant Merrill Lynch & Co Inc. is an international investment firm that provides
investment banking services to businesses, engages in retail and institutional sales to its customers, and
-6-
268789
publishes research reports and ratings on stocks. Merrill Lynch’s corporate headquarters are located
in New York City.
16. Defendant Henry Blodget was, until his departure from Merrill Lynch in December
2001, a managing director and head of the Internet Research group in New York City. Mr. Blodget
reported to defendant Deepak Raj and Andrew Melnick.
17. Defendant Justin Baldauf is an analyst in the Internet Research group at Merrill Lynch
in New York City. Mr. Baldauf reported to defendant Blodget, and became head of the Internet
Research group upon Mr. Blodget’s departure from Merrill Lynch.
18. Defendant Kirsten Campbell was, until her departure from Merrill Lynch in April
2001, a vice- president and analyst in the Internet Research group in New York City. Ms. Campbell
reported to defendant Blodget.
19. Defendant Virginia Syer Genereux is a research analyst at Merrill Lynch in New York
City. Ms. Syer reported to defendant Blodget.
20. Defendant Sofia Ghachem was an analyst in the Internet Research group at Merrill
Lynch in New York City. Ms. Ghachem reported to defendant Blodget.
21. Defendant Thomas Mazzucco is a managing director of Merrill Lynch’s Investment
Banking Technology group in Palo Alto, California.
-7-
268789
22. Defendant Edward McCabe was, until his departure from Merrill Lynch in December
2001, a first vice president and a senior analyst in the Internet Research group in New York City. Mr.
McCabe reported to defendant Blodget.
23. Defendant Deepak Raj is head of Global Equity Research at Merrill Lynch in New
York City.
CLASS ACTION ALLEGATIONS
24. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of the
Federal Rules of Civil Procedure on behalf of a class consisting of all persons and entities who
purchased the common stock of Excite@Home on the open market during the Class Period, except
for those persons employed by or affiliated with defendant Merrill Lynch.
25. Members of the Class are so numerous that joinder of all members is impracticable.
While the exact number of Class members is unknown to Plaintiff at this time and can only be
ascertained through appropriate discovery, Plaintiff believes that there are thousands of members of
the Class located throughout the United States. Throughout the Class Period, Excite@Home
common stock was actively traded in an efficient market on the NASDAQ National Market System.
Record owners and other members of the Class may be identified from records maintained by
Excite@Home and/ or its transfer agent and may be notified of the pendency of this action by mail
and publication, using forms of notice similar to those customarily used in securities class actions.
-8-
268789
26. Plaintiff=s claims are typical of the claims of the other members of the Class. Plaintiff
and the other members of the Class, by virtue of their purchases of Excite@Home common stock on
the open market during the Class Period, have sustained damages as a result of Defendants= unlawful
activities as alleged herein. Plaintiff has retained counsel competent and experienced in class and
securities litigation and intends to prosecute this action vigorously. The interests of the Class will be
fairly and adequately protected by Plaintiff. Plaintiff has no interests which are contrary to or in
conflict with those of the Class which Plaintiff seeks to represent.
27. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy. Plaintiff knows of no difficulty to be encountered in the management
of this action that would preclude its maintenance as a class action.
28. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
a. Whether the federal securities laws were violated by Defendants= acts as alleged
herein;
b. Whether Defendants participated directly or indirectly in the course of conduct
complained of herein; and
c. Whether members of the Class have sustained damages as a result of
Defendants= conduct, and the proper measure of such damages.
-9-
268789
BACKGROUND OF THE ACTION
29. In 1999, Merrill Lynch was the largest securities firm in the world as measured by
profits, revenue and headcount. However, it lagged behind as an underwriter of technology
companies, a deficiency that hurt Merrill Lynch’s overall position as an equity underwriter. Though
Merrill Lynch was the leading underwriter of debt in the world in 1999, according to its 2000 annual
report, it was third in equity underwriting.
30. These circumstances were recognized by the Wall Street community and the media.
Bloomberg reported in an article dated January 7, 2000, that in 1999, Merrill Lynch was fourth in
technology underwriting, behind Morgan Stanley, Goldman Sachs and CSFB. Merrill Lynch had a
technology team less than half the size of CSFB’s 192-person force.
31. Merrill Lynch’s share of the highest-margin investment banking business, mergers and
acquisitions, also lagged as the technology sector dominated investment banking. Merrill Lynch was
fourth among M&A advisors in 1999.
32. In 1999, Merrill Lynch, in an attempt to close the gap between it and the leaders in
technology IPOs, embarked on a program to expand its technology banking force from 90 to 120
people, including 5-10 of what Merrill Lynch spokesman Mark Shafir told Bloomberg would be
“very senior bankers.”
33. According to the same Bloomberg article, Merrill Lynch also devoted institutional
salespeople exclusively to technology stock and tech mutual funds. Three senior Merrill Lynch
-10-
268789
executives – John Steffens, head of retail brokerage, Jerome Kenney, who directed corporate
strategy, and John McKinley, chief technology officer – helped to make pitches.
34. Merrill Lynch’s strategy seems to have worked: in 1999, Merrill Lynch reported
equity underwriting revenues of $1.256 billion. In 2000, Merrill Lynch reported this figure as $1.630
billion. M&A business increased as well: Merrill Lynch reported “strategic advisory services”
revenue of $1.359 billion in 2000, up from $1.259 billion the year before. These gains pushed Merrill
Lynch’s market share from third to second for equity underwriting, and from fourth to third in M&A,
from 1999 to 2000.
35. According to Merrill Lynch’s 2000 Annual Report, its institutional clients made a
record $1.9 trillion in trades through Merrill Lynch in 2000. U.S. acquisitions were up 16% in 2000,
to $1.8 trillion. Despite the collapse of the Nasdaq National Market in 2000, Merrill Lynch did
record amounts in mergers and acquisitions business.
Merrill Lynch Recruited Henry Blodget to Attract Technology Companies as Investment Banking Clients
36. Merrill Lynch lagged behind Morgan Stanley and Goldman Sachs as technology
underwriters in the mid-1990’s, in part, because “it had an Internet analyst who was bearish on the
industry,” according to a May 10, 2000 Bloomberg article. In December 1998, that Merrill Lynch
analyst, Jonathan Cohen, issued a “sell” recommendation on Amazon.com, saying that at $240 per
share, it was overvalued.
-11-
268789
37. About the same time, Henry Blodget, working for CIBC, made the bullish prediction
that Amazon.com would go to $400 per share within one year. The stock immediately rose $46 per
share in a single day, and actually met Blodget’s mark within a month.
38. In February 1999, Merrill Lynch hired Blodget from CIBC and Cohen left. Blodget
assumed coverage of Cohen’s eight-stock portfolio, including Amazon.com.
39. Blodget was on occasion credited with single-handedly moving the market. For
example, the Boston Globe on May 10, 2000, said:
By the end of the week, CMGI shares had appreciated by about 25 percent and would continue to move smartly higher until mid- December, when influential Internet analyst Henry Blodget of Merrill Lynch initiated coverage of CMGI. That day, CMGI shares surged 21 percent to a split-adjusted $135.125.
40. USA Today similarly credited Blodget with causing a rally, in an article dated
February 24, 2000:
Comments from Henry Blodget, an influential analyst with Merrill Lynch, ignited the tech rally. Blodget called leading Internet firms America Online and eBay bargains, and predicted sharp gains in both stocks. He said shares of AOL could be trading at $90 in 12 to 18 months. AOL shares closed 7 7/6 higher at $573/16. Blodget called for eBay shares to reach $175 in 12 to 18 months – sending the company’s shares up 20 7/16 to $154 15/16.
41. In February, 2000, Blodget upgraded Amazon.com from near term “accumulate” to
near-term “buy,” following Amazon.com’s worst-ever quarter as a public company. The result was a
$14 ¾ rise in Amazon’s stock price to $84 3/16.
-12-
268789
New York State Attorney General Charges That Merrill Lynch Used its Analysts to Misrepresent Vital Information to Members of the Class
42. On April 8, 2002, following a ten-month investigation, New York State Attorney
General Eliot Spitzer filed a General Business Law Article 23-A action against Merrill Lynch detailing,
in an extensive affidavit by Eric R. Dinallo, Chief of the Investment Protection Bureau of the New
York State Department of Law, and of counsel to Attorney General Spitzer (the “Dinallo Affidavit”),
the material misrepresentations and omissions of Merrill Lynch and the Individual Defendants herein,
beginning in late 1999, in connection with Merrill Lynch’s investment banking relationship with certain
Internet companies, including Excite@Home, and the Individual Defendants’ false and misleading
analyses of those Internet companies.
43. The Attorney General charged that:
Since late 1999, the internet research analysts (the “internet group”) at Merrill Lynch have published on a regular basis ratings for internet stocks that were misleading because: (1) the ratings in many cases did not reflect the analyst’s true opinions of the companies; (2) as a matter of undisclosed, internal policy, no “reduce” or “sell” recommendations were issued, 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 conflict of interest: the research analysts were acting as quasi-investment bankers for the companies at issue, often initiating, 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, as they purported to be. (Emphasis added).
-13-
268789
44. In connection with its GBL 23-A claim, Attorney General Spitzer filed an application
for an order pursuant to GBL Section 354 granting injunctive relief which prohibited Merrill Lynch
from:
(a) engaging or attempting to engage in any and all acts that violate General Business Law, Article 23-A;
(b) issuing or participating in the preparation of any public research report or rating regarding the equity securities of a company (the “Subject Company”) unless such report or rating includes specific disclosure of (i) any investment baking relationship between the entity issuing the report or rating the (“Rating Entity”) and the Subject Company that existed any time during the three-year period preceding the issuance of the report or rating, and (ii) whether the Rating Equity currently has or is attempting to obtain any investment banking relationship with the Subject Company when the report or rating is issued;
(c) Issuing or publishing any such report or rating unless said report or rating includes specific disclosures on a percentage basis, of the aggregate distribution, across the various rating categories used by the Rating Equity, for all stocks in the section or industry group applicable to the Subject Company; and due deliberation having been had.
45. USA Today reported on April 15, 2002 that the New York Attorney General has not
ruled out criminal charges against Merrill Lynch. New York Attorney General Eliott Spitzer,
commenting on the aforementioned Blodget threat stated:
Basically, [Blodget is] saying, ‘Hey, I’m going to threaten you with the truth,’ Spitzer remarks. “The brazenness of that, and the insight into what was going on was so overwhelming it speaks to the generic nature of what was going on. It was commonplace that the research was being tainted by the investment banking desires of the firm and there was a
-14-
268789
complete absence of compliance or intervention. It was the Wild West.”
46. USA Today reported on April 17, 2002 that the SEC has confirmed that it is considering a role in the New York Attorney General’s investigation into Merrill Lynch and other investment banking firms for their practices concerning analysts. SEC officials have begun meeting with attorneys in the Attorney General’s office.
47. Merrill Lynch analysts’ conflicts of interest and the influence upon those analysts from
potential investment banking business are revealed in Merrill Lynch’s own e-mails, documents and
employee testimony obtained by Attorney General Spitzer as a result of a year-long discovery of
documents and individuals at Merrill Lynch. Blodget, who was considered Merrill’s “star analyst”,
went from earning $3 million in 1999 to $12 million in 2001 when he abruptly resigned at the end of
2001. While at Merrill Lynch, Blodget was well aware of the fact that any negative research by an
analyst covering a stock would hurt or eliminate entirely the chances of winning future corporate
finance work. Blodget continued to recommend stocks which he believed should no longer be treated
as a positive recommendation. Many of the stocks Merrill Lynch continued to recommend are the
subject of this litigation.
48. E-mails written by Merrill Lynch analysts and produced by Merrill Lynch in the New
York Attorney General’s investigation show that Merrill Lynch analysts including Blodget repeatedly
had doubts about certain stock for which Merrill continued recommending to small investors such as
Class members. As New York Attorney General Eliot Spitzer has said:
-15-
268789
This is a fundamental deception of the public to place buy recommendations on stock that the firm knew weren’t good investments that were triggered by an ulterior motive of helping the company get banking clients.
49. The New York Attorney General’s office has further stated that Blodget “prioritized”
research coverage for stock according to whether the company had an investment-banking
relationship with Merrill Lynch. For months, a spokesman for Merrill Lynch said Blodget’s
compensation “was unrelated to investment-banking deals that his research may or may not have
helped generate.” Merrill’s internal documents demonstrate the contrary.
50. As explained by defendant Campbell, an analyst at Merrill Lynch, Merrill Lynch had a
published stock-rating scheme of 1 through 5 with 1 as the strongest rating (“buy”) and 5 as the
weakest rating. In reality, Merrill Lynch’s rating system was far different. Merrill Lynch’s analysts did
not cover anything below a 3.
51. Merrill Lynch e-mails demonstrate that Merrill Lynch failed to disclose to the public
that Merrill Lynch’s ratings were tarnished by an undisclosed conflict of interest: the research analysts
were acting as quasi-investment bankers for the companies at issue, often initiating, 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 as they purported to
be.
-16-
268789
52. As one employee stated, “I think we are off base on how we rate stocks and how
much we bend backwards to accommodate banking, etc.” (ML 64239 dated October 9, 2000)1.
53. This was certainly true in regard to Excite@Home, where Merrill Lynch published a
rating of 2-1 (near-term accumulate, long-term buy) in December 1999 when internal emails indicated
that Merrill Lynch analysts did not regard Excite@Home as a near-term accumulate or long-term buy:
December 27, 1999 (“We are neutral on the stock”) (ML 37899) (emphasis added); December 29,
1999 (six month outlook is “flat” without any “real catalysts” for improvement seen) (ML 37956). By
June 3, 2000, with Excite@Home still rated 2-1, an internal Merrill Lynch e-mail referred to
Excite@Home as “such a piece of crap.” ML 51453.
54. In another example, Aether Systems, a company underwritten by Merrill Lynch was
recommended by Merrill Lynch as a “Buy”. During early October 2000, Merrill analysts put out a
report stating that though Aether shares were weak, Merrill continued to “view Aether as a leader in
the sector and reiterate our Buy rating particularly on weakness.” Internally, Merrill was saying
something very different. The analysts knew that while the stock was trading at $96.50 the stock
“needs to go pretty low” and “could hit $50 or $60 . . .” (ML 63652 dated October 2, 2000).
55. Further, in late September 2000, a Merrill Lynch analyst, Virginia Syers stated during
a telephone call to Merrill Lynch’s European office that Aether was not the best opportunity given the
choices in that field. Nonetheless, Merrill continued with its buy recommendation of Aether stock.
1 Documents produced by Merrill Lynch to the New York Attorney General are referenced as “ML xxxxx”.
-17-
268789
When Syer’s hesitation concerning Aether showed up in an e-mail to all European Merrill Lynch
brokers, she attempted to have the European colleague retract the e-mail. She wrote:
Eric is there anyway to recall this email without making it a bigger deal by doing so? Research management will have both your head and mine if they see this. Additionally it could impair our relations with those companies we do cover. We are marketing a big secondary for AETH (led by Tom Watts), and we were Go2Net’s advisor in its sale to INSP. This is the sort of email that gets forwarded by a salesperson, and could very well get be [sic] sent directly to any of these companies. (ML 63333)
56. The problems at Aether continued and the company continued to deteriorate
throughout 2000 and into 2001. Though Merrill Lynch analysts internally continued to voice major
concerns about the lack of fundamentals at Aether and their desire to downgrade the Aether stock,
Merrill Investment banking executives prevented and/or delayed the analysts from downgrading the
stock. In March 2001, a Merrill Lynch analyst wrote in an e-mail that the fundamentals at Aether
were horrible; nonetheless Merrill Lynch stubbornly maintained its previous rating. (ML 82578)
57. The contrast between a Merrill Lynch stock rating and the true understanding of the
company by Merrill Lynch analysts was not unusual. On a stock in which Merrill Lynch had given its
highest rating (1-1 or “Buy”), Blodget wrote that the stock was “a powder keg, given how aggressive
we were on its earlier this year and given the ‘bad smell’ comments that so many institutions are
bringing up” (ML 06413). Again, on stocks that had some of Merrill’s highest ratings, internally
Blodget and his colleagues internally referred to those same stocks as a “piece of junk” (ML 06578:
-18-
268789
Excite@Home), “such a piece of crap” (ML 51453: Excite@home) and “P[iece] O[f] S[hit]” (ML
60903, ML 64372: Lifeminders and 24/7 Media).
58. Merrill Lynch’s own analysts had no pretense that they were in any way independent
of the investment banking department, nor were they able to ignore what company executives
demanded of them. In a November 16, 2000 e-mail to Blodget with regard to GoTo.com, a Merrill
Lynch analyst write:
Who are we trying to please by doing a 2-2? I don’t want to be a whore for f-ing mgmt. If 2-2 means that we are butting half of Merrill retail into this stock because they are out accumulating it then I don’t think that’s the right thing to do. We are losing people money and I don’t like it. John and mary smith are losing their retirement because we don’t want todd [CEO of GOTO.com] to be mad at us. Mazzucco said he is fine with a 3-2 (I said to him the whole idea that we are independent from banking is a big lie . . . so the next time we think something is a 3 and mgmt demands a list of all our ratings we can show that this is not a slight on them personally . . . (ML 09045)
59. Merrill’s stock ratings were designed not to inform investors, but rather to protect the
firm’s investment banking business. The managing director of Merrill Lynch Technology Investment
Banking, Mazzucco, while putting pressure on the Merrill Lynch analysts to maintain the accumulate
rating against their will on the stock, was pitching business to the GoTo.com CEO for mergers and
acquisitions business, and a secondary offering. During the week of November 10, 2001, when
Mazzucco was pitching GoTo.com’s investment banking business Blodget announced internally his
true assessment of GoTo.com.
John D. Faig: What’s so interesting about GOTO except banking fees????
-19-
268789
Blodget: nothing. (ML 03806)
60. The analysts at Merrill Lynch knew very well that the formula used in GoTo.com to
attract additional business by issuing favorable analyst opinions translated into revenue for both the
firm and themselves. In one e-mail exchange, an analyst and investment banker discussed how to
attract investment banking business of a company which is one of the subjects in this litigation,
Looksmart. A Merrill Lynch investment bankers stated: “we should aggressively link coverage with
banking – this is what we did with Go2Net . . . we can probably get by on a ‘handshake.’” (ML
05229-30)
61. Merrill Lynch analysts were concerned that they would “piss off” other companies if
they actually put the truth in their reports. (ML 63399 dated 9/26/00) This standard practice at
Merrill left one analyst to sum up succinctly the Merrill Lynch way of valuing stocks: “I don’t think
I’ve downgraded a stock on valuation since the mid-90s.” (ML 04097)
62. A November 2, 2000 internal Merrill Lynch e-mail, written by Henry Blodget entitled
“IBK [Investment Banking] Contributions: Internet Team,” underscored the Merrill Lynch analysts’
close involvement in the firm investment banking activities and their contributions to the firm’s financial
results from such activities: “The completed deals . . . produced about $115mm of revenue (including
$25mm from the issuance of two HOLDRs baskets). In some of the cases, we supported other
industry groups and analysts (we were still very involved, however). *** Research was heavily
involved in most of the completed transactions and mandates.” (ML 09544)
-20-
268789
63. In its public dealings, however, Merrill Lynch sought to conceal the fact that its
analysts worked hand in glove with the investment banking group. An e-mail dated February 23,
2000, from Merrill Lynch’s Joanne Tutschek to Henry Blodget states:
CNN called and wanted to know if we are in AOL deal as an advisor. Head of media relations gave them a no comment. If you are asked on Moneyline interview about that say something to the effect that you are not in the loop on that as you are in research not banking.
(ML 41152).
64. Merrill Lynch did not rate stocks consistent with the analysts’ actual opinions of the
companies. This is reflected in an e-mail by Blodget in late 2000 written after receiving e-mails from
Merrill brokers asking why Blodget continued to recommend stocks in the face of the issuer’s true
financial credentials:
The more I read of these [e-mails], the less willing I am to cut companies any slack, regardless of predictable temper-tantrums, threats, and/or relationship damage that are likely to follow [from companies and investment banking.]
. . . .
If there is no new e-mail forthcoming from Andy [Melnick, then head of global equity research at Merrill] on how the instructions below should be applied to sensitive banking clients/situations, we are going to just start calling the stocks (stocks, not companies), including [Aether], like we see them, no matter what the ancillary business consequences are.
(ML 68401)
-21-
268789
Merrill Lynch’s Enforcement Actions
65. Merrill Lynch analysts took action on several occasions to punish companies that
denied Merrill Lynch investment banking business:
66. Blodget downgraded Goto.com from “accumulate” to “neutral” on or about June 13,
2000. This downgrade occurred immediately after Goto.com announced that CSFB would be the
lead underwriter for its secondary offering. On June 13, 2000, the Wall Street Journal “Deals and
Deal Makers” column and Bloomberg News each pointed out the coincidence, and that Merrill Lynch
had been seeking to lead the Goto.com follow-on offering.
67. Merrill Lynch analysts also downgraded Ziff Davis the first day its ZDNet tracking
stock traded. The downgrade caused the parent stock to drop $7.50 per share to $21.50, despite
the fact that its tracking stock was souring. RedHerring.com on April 1, 1999 said this about the
episode:
Merrill Lynch’s downgrade was a delicious episode of Wall Street backstabbing, as the investment bank conveniently went bearish on Ziff- Davis on the same day as ZDNet’s IPO. Merrill Lynch had been locked out of the ZDNet deal despite taking ZD public a year ago.
-22-
268789
The Defendants’ Analyst Reports Regarding Excite@Home
68. The Defendants initiated their analyst coverage of Excite@Home with a report that
was released to the public on September 10, 1997. The “Reason for Report” stated by the
Defendants was “Initiation of Coverage.” The report’s recommendation was “ACCUMULATE” and
it categorized Excite@Home as a “Long Term BUY.”
69. During the Class Period, the price of Excite@Home stock reached almost $80 per
share as a result of Defendants’ fraudulent analyses and recommendations. On April 8, 2002, the end
of the Class Period, the price of a share of Excite@Home stock was $0.00588.
70. All of the analyst reports which the Defendants issued regarding Excite@Home, were
issued by the Defendants as part of Merrill Lynch’s effort to obtain investment banking business in
connection with the initial public offerings of other Internet companies, in order to provide Merrill
Lynch with lucrative investment banking fees.
71. From September 10, 1997 until August 2001, Defendants issued a series of reports
on Excite@Home all designed to inflate the price of Excite@Home stock.
72. On August 7, 2000, Defendants issued a report entitled “Internet Sector, Reset of
Sector Ratings.” In that report, the Defendants announced that they were downgrading their ratings on
11 of the 29 Internet companies on which they had been issuing analyst reports. Most of the
companies which were not downgraded were the larger companies, with the larger market
capitalization, including Excite@Home as well as Amazon.com, AOL, CMGI, Inktomi, Priceline, and
-23-
268789
Yahoo! By that time, the price of Excite@Home had already fallen to $15.00 on August 7, 2000
from a high of almost $38.00 at the end of March 2000.
DEFENDANTS= FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD
73. All of the Excite@Home analyst reports which were issued by the Defendant from
September 10, 1997 through and including August 2001 (the “Analyst Reports”) were false and
misleading because they did not reflect the judgment of the Merrill Lynch analysts and because they
did not disclose the analysts’ conflict of interest.
74. When the Defendants issued the Excite@Home Analyst Reports, they knew of the
fact that Merrill Lynch investment bankers wanted Merrill Lynch analysts to tailor their reports on the
Internet companies to support the efforts of the Merrill Lynch investment bankers to obtain lucrative
IPO and merger business.
75. As of the issuance of the Excite@Home Analyst Reports, the Defendants knew that
the information regarding their role in Merrill Lynch’s investment banking business which they
possessed was material, adverse, non-public information, which reasonable investors deciding
whether to invest would want to know in making their investment decision.
76. The Defendants, when they issued the Excite@Home Analyst Reports, knew that
their issuance would, as had the past Analyst Reports by the Defendants regarding Excite@Home,
and other Internet companies, serve to increase or inflate the price at which Excite@Home stock
traded, compared to the price it would have traded at had the Excite@Home Analyst Reports not
-24-
268789
been issued. The Defendants issued the Excite@Home Analyst Reports with the express intention of
increasing and inflating the price at which Excite@Home stock would trade.
77. The Defendants issued the Excite@Home Analyst Reports as part of Merrill Lynch’s
effort to obtain substantial investment banking and advisor fees, which it would obtain as the financial
advisor to other Internet companies in connection with mergers and IPOs.
78. In each of the Excite@Home Analyst Reports, the Defendants set forth a “Reason for
Report.” The “Reason for Report” set forth in each of the Excite@Home Analyst Reports was false
and misleading because, in fact, the reason that the Defendants had issued each of the Excite@Home
Analyst Reports was to assist Merrill Lynch in its efforts to obtain investment banking fees.
79. The Excite@Home Analyst Reports were deceptive and misleading because the
Defendants failed to disclose in those Reports that the 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.
80. The Excite@Home Analyst Reports, and particularly, the Defendants’
“ACCUMULATE/BUY” and “ACCUMULATE/ACCUMULATE” recommendations of
Excite@Home 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
-25-
268789
respect to the stock of that company was other than a “BUY/ BUY” or “ACCUMULATE/ 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 the Defendants had assigned an Internet company a rating of less than “ACCUMULATE/BUY” it
would jeopardize Merrill Lynch’s ability to obtain underwriting or investment advisory engagements
from those companies or others. The Excite@Home Analyst Reports were deceptive and misleading
because the Defendants did not disclose in those Reports the existence of, and Defendants’ reason
for, the above- described rating policy and practice.
81. The Excite@Home Analyst Reports were deceptive and materially misleading
because they failed to disclose Defendants’ “ACCUMULATE/BUY” and
“ACCUMULATE/ACCUMULATE” recommendations of Excite@Home and the price target which
the Defendants set for Excite@Home stock in the Excite@Home Analyst Reports, 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.
82. All of the Excite@Home Analyst Reports were deceptive and misleading because
they failed to disclose the significant and material conflicts of interest which Merrill Lynch and Blodget
-26-
268789
had in issuing analyst reports on Excite@Home, while seeking to support the Merrill Lynch investment
bankers in their quest for fees in mergers and IPOs.
83. The Defendants’ analyst reports on Excite@Home contained, at the end, in extremely
small, virtually illegible print, a series of legal and factual statements, including: “MLPF&S [Merrill
Lynch Pierce Fenner & Smith, Incorporated] or its affiliates may from time to time perform investment
banking or other services for, or solicit investment banking or other services from, any entity
mentioned in this report.” Merrill Lynch uniformly placed that “boilerplate” statement on all of its
analyst reports, with regard to the specific investment banking relationship, if any, between Merrill
Lynch and the company which was the subject of the analyst report. Excite@Home was never
mentioned by the Defendants in any of the Excite@Home Analyst Reports which were issued during
the Class Period. The above-quoted statement, in light of its virtually illegible presentation, its general
“boilerplate” text and its literal inapplicability to Merrill Lynch’s solicitation of, and obtaining of,
investment banking work, which was not mentioned in any of the Excite@Home Analyst Reports
which were issued during the Class Period, did nothing to mitigate the false, deceptive and misleading
aspects of the Excite@Home Analyst Reports detailed herein.
SCIENTER ALLEGATIONS
84. Historically, brokerage firms like Merrill Lynch that performed both investment
banking and research analysis functions maintained a AChinese wall@ between the two functions to
-27-
268789
ensure that the analysts= research and recommendations remained objective and were not influenced
by the firm=s interest in attracting and retaining investment banking business.
85. In recent years, however, the AChinese wall@ has apparently crumbled, with research
analysts such as defendant Blodget directly performing investment banking functions and receiving
compensation based on his contributions to generating investment banking business, including
underwriting initial public offerings (AIPO=s@) and secondary offerings of equity securities, underwriting
debt offerings, and performing services in merger and acquisition transactions, without disclosing such
material conflicts of interest to the investing public.
86. During the Class Period, defendant Blodget made materially false and misleading
statements designed to and successfully encouraging individual investors, including members of the
Class, to purchase securities of Excite@Home based not on objective analyses, but rather on
Defendants= desire to attract and retain investment banking business for Merrill Lynch. Blodget’s
ratings, recommendations, and positive comments regarding Excite@Home during the Class Period
were also improperly influenced by his desire to increase his undisclosed personal compensation,
which depended in large part upon the amount of investment banking business he generated for Merrill
Lynch.
87. Blodget=s conflicts of interest remained undisclosed as he issued Ainflated@ ratings and
recommendations for Excite@Home. Blodget knew that the financial condition and future business
prospects of Excite@Home did not support his positive comments and recommendations, but he
-28-
268789
nevertheless issued positive reports encouraging investors, including members of the Class, to
purchase shares of Excite@Home. He knowingly issued inflated ratings for the purpose of improperly
benefiting himself and Merrill Lynch.
88. Moreover, even when objective analyses demonstrated that Excite@Home was
substantially over-valued, Blodget refused to Adowngrade@ Excite@Home because that would
potentially impair Merrill Lynch’s ability to generate additional investment banking business from other
companies whose securities offerings Merrill Lynch wished to underwrite. Based on his pay structure,
if Merrill Lynch earned less in investment banking revenue, Blodget=s personal compensation would
be negatively affected, as well. Thus, Blodget continued his campaign of misinformation and non-
disclosure with respect to Excite@Home, even in the face of legitimate research entering the
marketplace.
89. Blodget=s campaign had its intended effect of artificially inflating the price of
Excite@Home common stock while simultaneously attracting and retaining other Internet companies,
such as Go2Net, as Merrill Lynch investment banking clients.
-29-
268789
DEFENDANTS= UNLAWFUL CONDUCT CAUSED HARM TO THE CLASS
90. During the Class period, Blodget continually promoted Excite@Home in the press, on television, and on the Internet. This publicity campaign was intended to and did reach not only investors who were brokerage customers of Merrill Lynch, but also individual investors, including members of the
Class, who traded with other brokers.
91. As a result of his fame and influence, Blodget=s recommendations became valuable
commodities which he and Merrill Lynch used to attract investment banking clients, including Go2Net.
92. Although other analysts covered Excite@Home, many took their cues from Blodget,
who was widely regarded as the most authoritative voice on all things Internet. Moreover, unlike
most other analysts, Blodget had the power to cause the Internet market in general, and
Excite@Home stock in particular, to move in direct response to his comments. The popular and
financial press recognized Blodget=s influence and often credited his positive comments with
precipitating jumps in the price of Excite@Home shares.
93. As evidenced by numerous media reports, the AChinese wall@ did not exist for
Blodget. Rather, at the height of the Internet boom, Blodget was virtually indistinguishable from an
investment banker. This material fact, however, was not disclosed in connection with his ratings,
recommendations, and other statements regarding Excite@Home.
-30-
268789
94. Multitudes of individual investors, including members of the Class, followed Blodget=s
recommendations and purchased Excite@Home at prices higher than they would have paid had the
defendants not engaged in the unlawful conduct described herein. As alleged herein, the materially
false and misleading positive comments by Blodget were directly responsible for increases in the price
of Excite@Home stock, and in many cases for causing the entire market for technology stocks to rise.
95. The Defendants= unlawful conduct allowed Merrill Lynch to gain millions of dollars in
investment banking fees during the Class Period, and Blodget received millions of dollars in salary and
cash bonuses in part due to his false and misleading ratings, recommendations, and positive statements
regarding Excite@Home. Meanwhile, members of Class lost enormous sums of money investing in
Excite@Home as a result of Defendants= unlawful conduct.
COUNT I
Against Defendants for Violation of ' 10(b) of the Exchange Act and Rule 10b-5
96. Plaintiff repeats and realleges all preceding and subsequent paragraphs as if set forth
fully herein.
97. During the Class Period, Defendants carried out a plan, scheme and course of
conduct which was intended to, and did, throughout the Class Period: (i) deceive the investing public,
including plaintiff and other Class members, as alleged herein; (ii) artificially inflate and maintain the
price of Excite@Home common stock; and (iii) cause plaintiff and other members of the Class to
-31-
268789
purchase Excite@Home common stock at artificially inflated prices. In furtherance of this unlawful
scheme, plan and course of conduct, Defendants took the actions set forth herein.
98. Defendants: (i) employed devices, schemes, and artifices to defraud; (ii) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statements not
misleading; and (iii) engaged in acts, practices and a course of conduct which operated as a fraud and
deceit upon the purchasers of Excite@Home common stock in an effort to maintain artificially high
market prices for Excite@Home common stock in violation of Section 10(b) of the Exchange Act and
Rule 10b-5.
99. As a result of the dissemination of the materially false and misleading information and
failure to disclose material facts as alleged herein, the market price of Excite@Home common stock
was artificially inflated during the Class Period. In ignorance of the fact that the market price of
Excite@Home common stock was artificially inflated, and relying directly or indirectly on the false and
misleading statements made by the Defendants, or upon the integrity of the market in which the
securities trade, and/or on the absence of material information that was known to Defendants but not
disclosed in public statements by Defendants during the Class Period, Plaintiff and the other members
of the Class acquired shares of Excite@Home common stock during the Class Period at artificially
inflated prices and were damaged thereby.
100. At the time of the misrepresentations and omissions as alleged herein, Plaintiff and the
other members of the Class were ignorant of their falsity and believed them to be true. Had Plaintiff
-32-
268789
and the other members of the Class and the marketplace known the material information omitted
pursuant to Defendants= fraudulent scheme, Plaintiff and the other members of the Class would not
have purchased or otherwise acquired shares of Excite@Home common stock during the Class
Period, or, if they had acquired such shares during the Class Period, they would not have done so at
the artificially inflated prices which they paid.
101. By virtue of the foregoing, Defendants violated Section 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder and are liable to plaintiff and the other members of the Class.
102. As a direct and proximate result of Defendants= unlawful conduct as alleged herein,
Plaintiff and the other members of the Class suffered damages in connection with their purchases of
Excite@Home common stock during the Class Period.
COUNT II
Against Defendant Merrill Lynch for Controlling Person Liability Pursuant to ' 20(a) of the Exchange Act
103. Plaintiff repeats and realleges all preceding and subsequent paragraphs as if set forth
fully herein.
104. Among other things, Blodget, with the assistance and concurrence of the other
Individual Defendants, issued numerous reports in the name of Merrill Lynch and made other public
statements that were materially false and misleading, as alleged herein. With respect to Blodget=s and
the other Individual Defendants’ unlawful conduct as alleged herein, Merrill Lynch is a controlling
person pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. ' 78t(a), because as Blodget=s and
-33-
268789
the other Individual Defendants’ employer, Merrill Lynch controlled the dissemination of Blodget=s
false and misleading reports, and Merrill Lynch had and exercised the power and influence to cause
Blodget to engage in the conduct complained of herein.
105. By virtue of the foregoing, Merrill Lynch is liable to Plaintiff and the other members of
the Class.
106. As a direct and proximate result of Merrill Lynch=s unlawful conduct as alleged herein,
Plaintiff and the other members of the Class suffered damages in connection with their purchases of
Excite@Home common stock during the Class Period.
WHEREFORE, Plaintiff, on behalf of himself and on behalf of the Class, prays for judgment as follows:
A. Declaring this action to be a proper class action pursuant to Rule 23(a) and (b)(3) of the
Federal Rules of Civil Procedure and certifying Plaintiff as class representative of the Class
and his counsel as class counsel;
B. Against Defendants, jointly and severally, for damages suffered as a result of Defendants=
violations of the securities laws;
C. Awarding Plaintiff and the other members of the Class pre-judgment and post-judgment
interest, as well as their reasonable attorneys= fees and expert witness fees and other costs
and expenses;
-34-
268789
D. Awarding recission or recissionary damages to members of the Class who no longer hold
Excite@Home stock; and
E. Granting such other and further relief as the Court deems just and proper.
-35-
268789
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: May 2, 2002
WOLF HALDENSTEIN ADLER FREEMAN & HERZ, LLP
By:______Fred Taylor Isquith (FI 6782) Robert Abrams (RA 7559) Gustavo Bruckner (GB 7701) 270 Madison Avenue New York, NY 10016 Telephone (212) 545-4600 Fax (212) 545-4653
Charles J. Piven LAW OFFICES OF CHARLES J. PIVEN, P.C. The World Trade Center – Baltimore Suite 2525, 401 East Pratt Street Baltimore, Maryland 21202 (410) 332-0030
Richard S. Schiffrin Andrew L. Barroway Mark Topaz SCHIFFRIN & BARROWAY, LLP Three Bala Plaza East, Suite 400 Bala Cynwyd, Pennsylvania 19004 (610) 667-7706
Attorneys for Plaintiff
-36-