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X IN RE MERRILL LYNCH & CO., INC. : 02 MDL 1484 SECURITIES LITIGATION (ANALYST- RELATED CASES) X 57r6
This document relates to X 02 Civ. 5002 (MP) tr. g ' r."-:! C7 7,' T.-- -11 • c-, J,-- '..:4:: F-- In Re MERRILL LYNCH & CO., INC. B2B : -7: 7)111 HOLDRS SECURITIES LITIGATION, : AMENDED CLASS ACTION COMPLAINT FOR VIDOrTION Og - THE FEDERAL SECURITIES is:AIAS C.CI —I
X JURY TRIAL DEMANDED
Plaintiffs, individually and on behalf of all other persons similarly situated, by their
undersigned attorneys, for their complaint, allege based upon the investigation made by and through
their attorneys, which investigation included, among other things, a review of filings ofDeferulants
Merrill Lynch & Co., Inc. as underwriter, Merrill Lynch Pierce Fenner & Smith, the initial depositor
and or statutory "issues" ("MLPFS," and together with Merrill Lynch & Co., Inc., "Merrill Lynch,"),
and Merrill Lynch 82B Internet HOLDRS SM Trust ("B2B" or the "Trust"), the issuer, with the
Secudties and Exchange Commission ("SEC"), public filings of the New York State Attorney
General ("Attorney General") concerning Merrill Lynch, non-public documents including e-mails
obtained by the Aftorney General, news articles, pleadings, and other papers: NATURE OF THE CASE
1. This is a class action brought on behalf of Pl aintiffs and all other persons or entities, except for Defendants, who bought B 2B Internet HOLDRS ("B 2B Internet HOLDRS" or HOLDRS) during the period February 24, 2000 through April 8, 2002, inclusive (the "Class" and the "Class
Period").
2. This action, asserting liability under Sections 11, 12(a)(2) and 15 of the Seetuities Act of 1933 ("Sectuiti es Act"), arises out of materially inaccurate, false and misleading statements and omissions of material fact contained in a Registration Statement and Prospectus (together, the
"Prospectus") filed with the SEC an February 24, 2000, for the issuance and initial public offering
(the "Offering") of one billion MR Internet HOLDRS.
3. The B2B Internet HOLDRS are "basket securities." "HOLDRS" stands for
"HOLding Company Depositary ReceiptS," both of which are service marks of Merrill Lynch & Co.
Each 13213 Internet HOLDRS represents an undivided beneficial ownership in 20 specified companies that are in the B2B sector of the Internet industry (the "Underl)ing Securities"). The price of the B213 Internet HOLDRS was directly related to and moved with the price of the
Underlying Securities. Accordingly, if the market price of even one of the Underlying Securities was inflated by inaccurate, false and misleading statements, then the offering price of the HOLDRS was similarly inflated. In this case, one of the Underlying Securities, Internet Capital Group, Inc.
("ICGE"), accounted for approximately 20% of B2B Internet HOLDRS as set forth below;
VerticalNet, Inc., accounted for approximately 6.75%; QRS Corporation accounted for approximately 1% of B2B underlying securities. As a result, the offering price of the HOLDRS was similarly inflated throughout the Class Period.
2 4. Throughout the Class Period, Merrill Lynch issued additional and supplemental prospectuses (the "Additional Prospectuses"). The Prospectus and the Additional Prospectuses are referred to herein together as the "Prospectuses." The Prospectuses were materi ally inaccurate, false and misleading because they failed to disclose or failed to correct defendants' earlier non-disclosure that at least one of the -Underlying Securities covered by Merrill -Lynch traded at artificially inflated prices created by the issuance by Merrill Lynch of falsely inflated ratings and biased analyst reports in order to ensure that Merrill Lynch received lucrative investment banking business from such companies. The inflated ratings and biased analyst reports created a false demand for the stocks of at least one of the Underlying Securities and other Internet stocks, corrupting all the analyst reports, which in turn artificially inflated the price of the B2B Internet HOLDRS security.
5. The inflation of the prices of stock of Internet companies covered by Merrill Lynch and thereby the B2B Internet HOLDRS was part of a larger pattern whereby Merrill Lynch research analysts in the Internet Group, as defined below, under pressure from Merrill Lynch's investment bankers, often initiated, continued and/or manipulated research coverage to maintain and attract investment banking clients, by producing misleading analyst reports with biased ratings and coverages. In fact, as set forth herein at times, the investment analysts regularly participated in investment banking activities and, in effect, as "shills" for the firm's investment banking division.
As alleged below, Merrill Lynch analysts simply disregarded or ignored negative information and their own negative opinions about intemet companies and, instead, published positi ve ratings in order to gain investment banking business from such companies. In fact, among other things, the analysts - compensation was tied to bringing such business into Merrill Lynch.
6. Via the inaccurate, false and misleading Prospectuses, Defendants successfully issued one billion B2B Internet HOLDRS, ofwhich approximately 10 million B2B Internet HOLDRS were
1 sold on the Offering at a price of $95.09 per B2B Internet HOLDRS, for total initial proceeds of over
S950.900,000 million. Thereafter, during the Class Period, Defendants issued additional B2B
Internet HOLDRS at $0.10 per B2B Internet HOLDRS. Thus, as a result of the false and misleading
Prospectuses, Defendants raised over $950 million dollars from the unsuspecting public.
7. The price of HOLDRS, subsequent to the Offering, sank like a rock. Within one year of the Offering, the B2B already had lost almost 88% of its original value, plummeting from the
Offering price of $95.09 per B2B Internet HOLDRS to $10.99 per B2B Internet HOLDRS. On
June 26, 2002, the B2B Internet HOLDRS closed at anew all time low of $2.73, down 97% from the Offering price.
8. Defendants' wrongful practices were revealed on April 8, 2002, the end of the Class
Period, when, after a 10-month investigation, the Attorney General of New York announced that he had concluded, based upon. inter ali a, a review of numerous internal e-mails by Merrill Lynch analysts, including ITenry Bloclget, that since late 1999, published ratings and investment advice of
Mcn-ill Lynch analysts for Internet stocks were misleading. He stated that the ratings in many cases did not reflect the analysts' true opinions of the companies which they had described internally as
"junk," "crap" and the like; that as a matter of undisclosed, internal policy, no "reduce" or "sell" recommendations were issued, (because to do so would prevent Merrill Lynch from obtaining lucrative investment banking business) thereby effectively converting a five category rating system to a three-tiered system and rendering the three remaining ratings inaccurate and misleading; and that
Merrill Lynch failed to disclose to the public that its ratings were rendered meaningless by research analysts whose compensation was directly tied to the investment banking business their analyst reports helped generate, rather than providing independent and objective research reports on those companies. These practices corrupted and tainted all of the Merrill Lynch coverage, inasmuch as
4 a reasonable investor would want to know of these pervasive practices before following any of the
Merrill Lynch investment advice to invest in or the Internet Group. Yet, none of this was disclosed in the Prospectuses.
JURISDICTION AND VENUE
9. Plaintiffs bring this action pursuant to Sections 11, 12(a)(2) and 15 of the Securities
Act {15 U.S.C. §§ 77k, 771(a)(2) and 77o].
10. Jurisdiction is conferred upon this Court by Section 22 of the Securities Act [15
U.S.C. §§ 77v] and Sections 1331 and 1337(a) of the Judicial Code [28 U.S.C. §§ 1331 and
1337(a)]. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U. S.C.
§ 78(aa), and Section 1391(b) of the Judicial Code [28 U.S.C. § 1391(b)]. The principal offices of
Defendants Merrill Lynch & Co., Inc. and MLPFS are located in this District, and many of the acts and transactions giving rise to the wrongs alleged herein, including the preparation and dissemination of the false arid misleading prospectuses, occurred in this District.
11. In connection with the acts, transactions and conduct alleged herein, defendants used the means and instrumentalities of interstate commerce, including the United States mails, interstate telephone communications and the facilities of the national securities exchanges and markets.
PARTIES
12. Plaintiffs Joan Markowitz and Huimin Qu purchased B213 Internet HOLDRS on the
Offering andlor traceable to the Offering as set forth in the certifications attached to this Complaint, and were damaged thereby.
13. Defendant Merrill Lynch & Co., a Delaware corporation, is a holding company that, through its subsidiaries and affiliates, provides investment-banking services w businesses. engages in retail and institutional sales to its customers, and publishes research reports and ratings on stocks.
5 Defendant Men-ill Lynch & Co.'s principal place of business is located at 250 Vesey Street, New
York, New York 10281. Merrill Lynch & Co. is identified in the Prospectus as an underwriter of the Offering.
14. Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS"). a wholly-owned subsidiary of Menill Lynch & Co., Inc., is a licensed broker/dealer in the United
States, does business worldwide, and is controlled by Merrill Lynch & Co., Inc. through stock
ownership, contracts and related officers and directors. MLPFS, a Delaware corporation, has its principal office in New York, New York. MLPFS provides investment-banking services to businesses, engages in retail and institutional sales to its customers, and publishes research reports
and ratings on stocks. MLPFS was the initial depositor and statutory issuer, (i.e. it deposited shares of the underlying securities into the Trust, which were then sold in the Offering) and an underwriter of the Offering. By depositing shares which it owned into the Trust, MLPFS was thereby able to rid itself of its investment in these companies at a time when its own analysts were recommending the stocks and prior to the crash of the Internet market. •
15. Defendant B2B is a trust formed under a depository trust agreement dated as of
February 18, 2000 among The Bank of New York, as trustee, MLPFS, and others. The Trust issued the B2B Internet HOLDRS, which trade on the American Stock Exchange ("AMEX") under the symbol "BHH." The Trust's stated purpose was to permit shareholders "to div ersify [their] investment in the B2B segment of the Internet industry through a single, exchange-listed instrument representing [their] undivided beneficial ownership of the underlying securities."
16. Defendant John L. Steffens was, at all times relevant hereto, Chief Executive Officer,
Chainnan of the Board and President of MLPFS, and Vice Chairman of the Board of Directors of
Merrill Lynch. Defendant Steffens signed the Prospectuses.
6 17. Defendant E. Stanley O'Neal was, at all times relevant hereto, Executive Vice
President and Director of MiLPFS. Defendant O'Neal signed the Prospectus.
18. Defendant George A. Schieren was, at all times relevant hereto, Senior Vice
President, General Counsel, and a Director ofMLPFS. Defendant Schieren signed the Prospectuses.
19. Defendant Ahmass L. Fakahany was, at all times relevant hereto, Senior Vice
President, Chief Financial Officer and Controller of MLPFS. Defendant Fakahany signed the
Prospectuses.
20. Defendant Thomas H. Patrick was, a director ofMLPF&S and signed the Additional
Prospectus.
21. Defendant Dominic A. Carone was First Vice-President and Controller ofMLPF&S
and signed the Additional Prospectus.
22. The individuals named as defendants in paragraphs 17 through 21 herein arc
collecti vely referred to herein as the "Director Defendants" or the "Individual Defendants." The
Director Defendants were involved in drafting, producing, reviewing and/or disseminating the
materially false and misleading statements and information alleged herein, including SEC filings,
the Prospectuses, press releases, additional prospectuses and/or other public documents, were aware
of, or negligently disregarded, that materially inaccurate, false and misleading statements were being
issued regarding the Tnist and its underlying securities, and approved or ratified these statements,
in violation of the federal securities laws. Each Director Defendant was provided with copies of the
documents alleged herein to be misleading prior to their issuance andlor had the ability and/or
opportunity to prevent their issuance or cause them to be corrected accordingly. Each Director
Defendant is responsible for the accuracy of the public reports and releases detailed herein and is
therefore primarily liable for the materially false representations complained of herein.
7 CLASS ACTION ALLEGATIONS
21 Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil
Procedure Rule 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased or otherwise acquired B2B Internet ITOLDRS between February 24, 2000 through April 8, 2002, inclusive (the "Class" and the "Class Period"). Excluded from the Class are the defendants, members of their families, any entity in which any defendant is trustee or has a controlling interest, and any of their parent, subsidiaries, affiliates, officers, directors, legal representatives, heirs, predecessors, successors and assigns.
24. The members of the Class are so numerous and geographically dispersed that joinder of all members is impracticable. As of March 6, 2002, a month prior to the end of the Class Period, there were 18.854 million B2B Internet HOLDRS outstanding. The B2B Internet HOLDRS are traded on the AMEX under the symbol "BHH." While the exact number of Class members is unknown to Plaintiffs, and can only be ascertained through appropriate discovery, Plaintiffs believe that there are thousands of members of the Class. Record owners and members of the Class may be identified from records maintained by B2B or its transfer agent and may be notified o f the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.
25. Plaintiffs' claims are typical of the claims of other Class members, all of whom have sustained damages arising out of the defendants' wrongful conduct alleged in this complaint.
26. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class actions and securities litigation.
Plaintiffs have no interests antagonistic to or in conflict with those of the Class.
8 27. 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 °flaw and fact common to the Class are:
(a) Whether defendants engaged in acts or conduct in violation of the federal securities laws as alleged herein;
(h) Whether defendants participated in and pursued the common course of conduct complained of herein;
(c) Whether statements disseminated to the investing public during the Class
Period made materially inaccurate statements of fact andlor misrepresentations or omissions of material fact as alleged herein;
(d) Whether market prices of certain of the Underlying Securities during the Class
Period and the B2B Internet HOLDRS were artificially inflated because of defendants' conduct complained of herein; and
(e) Whether the members of the Class have sustained damages and, if so, the proper measure of those damages.
28. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all members of the Class is impracticable.
Furthermore, because the damages suffered by the individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for the Class members individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.
9 BACKGROUND
29. Excitement over Internet stocks in the late 1990s led to the development of Internet sector investment funds, such as mutual funds or exchange-tradcd funds ("ETF"), that invested in companies expected to benefit from the growth of the Internet.
30. 1999 proved to be an exceptional year for the few mutual funds that focused on the
Internet sector. For exatnplc, a January 24, 2000 article in Pensions and Investments titled
"TRIPLE-DIGIT SCORES: Mutu.a1 funds find 1999 was a very good year indeed" stated in part:
The average U.S. equity mutual fund (excluding sector funds) returned 26.95% in 1999, making it the third best year ever. But. Wiesenberger found that the average technology sector mutual fund returned 122% and the average Internet sector fund returned 131%. In fact, all five In ternet mutual funds with track records longer than one year made it into the triple-digit club. [Emphasis added].
31. A June 8, 2000 Business Week article titled "Will Net Fund 'Old Timers' Be -Wisest?" stated in part:
Four funds were founded in 1996, and the largest, Munder's NetNet, posted a 173% return last year. Kinetics' -Internet Fund . had a 216% return, while WWW Internet charted a gain of 167%. Amerinclo's Technology Fund, the fourth old-timer, returned 248% last year. . Monument Internet, founded in late 1998, . . . posted huge numbers its first full year, with a 273% return, while Guinness Flight's Wired Index fund, the oldest of the Net index funds, recorded a 68% gain in '99.
32. "Ilic astronomical returns by Internet sector investment funds generated significant new cash inflows into these funds by investors. For example, the Munder NetNet Fund's assets grew from roughly S320 million to over $7.2 billion in 1999 alone.
Merrill Lynch Jumps on the Band Wagon and Markets Its Own Brand of Internet-Related Funds
33. Internet investment funds experienced sigriifcant cash inflows from investors during
1999; however, only several choices existed for investors. Merrill Lynch's Financial Consultants and retail stock brokers were forced to place their clients' assets into third party Internet investment
10 funds because Merrill Lynch did not have its own Internet mutual funds. In fact, according to Terry
Gardner, Munder Capital's chief financial officer, Merrill Lynch was the biggest distributor of the
Munder NetNet fund. Merrill Lynch's failure to offer its own Internet investment fund represented lost financial opportunities to Merrill Lynch.
34. As a result, Merrill Lynch decided to tap investor demand and market its own brand of Internet investment vehicles. Proprietary Menill Lynch Internet investment vehicles would enable Merrill Lynch to keep clients' Internet investment assets in-house and would enable Merrill
Lynch to earn underwriting and management fees on the assets.
35. One such Internet investment vehicle created by Merrill Lynch was exchange-traded funds, or ETFs. An ETF is essentially a mutual fund that trades throughout the day over a stock exchange, such as, in the case of the B2B, the American Stock Exchange. ETFs have low annual expenses, but investors must pay commissions to trade them. ETFs do not redeem shares for cash, and thus do not need to sell securities (possibly realizing capital gains) to pay investors who redeem their shares. ETFs are typically more tax-efficient than mutual funds. •
B2B Internet HOLDRS SM Trust
36. On February 24, 2000, Merrill Lynch commenced the Offering of one billion B2B
Internet HOLDRS, in round lots of 100, pursuant to the Prospectus. The B2B Internet HOLDRS are
"basket securities," representing an undivided interest in the U.S.-traded common stock of a group of 20 specified B2B Internet companies purported to be the "largest and most liquid" of Business to Business Internet companies, whose products and services are developed for and marketed to companies that conduct Internet business and electronic commerce.
37. The B2B was formed under a depository trust agreement, dated as of February 18,
2000, six days prior to the date of the Offering, among the Bank of New York, MerrillLynch, other
11 depositors, and the then current owners o f the B2B Internet HOLDRS. MLPFS was the original trust depositor and an underwriter of the Offering together with Merrill Lynch & Co. MLPFS as the original trust depositor was able to dispose of its interact holdings at prices inflated by its own wrongdoing.
38. Through the Offering, Defendants successfully raised approximately S950,900,000 million. As a result of the Offering and the continuous subsequent offering of B2B Internet
TIOLDRS, MLPFS earned over S19,020,000 in underwriting fees alone.
39. Investing in the B2B was like a direct investment in the stocks of the Underlying
Securiti es themselves. As explained in the Prospectus, the Trust issued B2B Internet -HOLDRS that represented B2B investors respective "undivided beneficial ownership interest in the shares of common stock held by the [T]rust on [their] behalf."
40. The Prospectus, emphasized the flexible nature o f the B2B Internet HOLDRS, under the heading "Purpose of B213 Internet HOLDRS:"
132B Internet HOLDRS are designed to achieve the following: •
Diversification. B2B Internet HOLDRS are designed to allow you to diversify your investment in the B2I3 segment of the Internet industry through a single, exchange- listed instrument representing your undivided beneficial ownership ofthe underlying securities.
Flexibility. The beneficial owners of B2B Internet HOLDRS have undivided beneficial ownership interests in each of the underlying securities represented by the B2B Internet HOLDRS, and can cancel their B2B Internet HOLDRS to receive each of the underlying securities represented by the B2B Internet HOLDRS
Transaction costs. The expenses associated with trading B2B Internet HOLDRS are expected to be less than trading each of the underlying securities separately.
Thus, an investor could cancel his/her B2B Internet HOLDRS and MC eive the securities of each of the Underlying Securities represented by such B2B Internet HOLDRS. However, the Prospectus
12 emphasized that investors saved money in transaction costs by investing in the B2B, rather than purchasing shares of each of the Underlying Securities outright.
41. The Prospectus, set forth a chart that listed the initial group of the Underlying
Securities, which chart provided the names of the 20 Underlying Securities, their ticker symbol, and the principal market on which such companies' shares were traded; indicative weightings as of
(February 7, 2000); and indicative share amounts represented by a round-lot of 100 B2B Internet
HOLDRS (as of February 23, 2000):
Indicative Primary Share Indicative Trading Name of Company Ticker Amounts Weightings Market
INTERNET CAPITAL GROUP, INC. ICGE 15 19.22% NASDAQ
ARIBA ARBA 7 18.75% NASDAQ
COMMERCE ONE, INC. CMRC 6 11.87% NASDAQ
VERTICAL NET, INC. VERT 3 6.72% NASDAQ
FREEMARKETS, INC. FMKT 3 6.51% NASDAQ
CAREINSITE, INC. CARI 6 4.77% NASDAQ
SCIENT CORPORATION SCNT 5 4.52% NASDAQ
CHECKFREE HOLDINGS CORPORATION CKFR 4 3.96% NASDAQ
CHEMDEX CORPORATION CMDX 6 3.55% NASDAQ
AGILE SOFTWARE CORPORATION AGM 2 3.34% NASDAQ
STERLING COMMERCE, INC. SE 6 2.99% NASDAQ
PLTRCHASEPRO.COIVI, INC. PPR 0 2 2.63% NASDAQ
13 SILKNET SOFTWARE, INC. SILK 1 2.34% NASDAQ
SCIQUEST.COM, INC. S Q S'I' 3 2.34% NASDAQ
PROX [COM, LNC. PX CM 2 1.92% NASDAQ
RETEK, INC. REIK 3 1.87% NASDAQ
QRS CORPORATION QRSI 1 0.98% NASDAQ
HARBINGER CORPORATION HRBC 3 0.97% NASDAQ
PEGASUS SYSTEMS, INC. PEGS 2 0.49% NASDAQ
IMAGMCOM, INC. IMGX 1 0.26% NASDAQ
42. The Prospectus, at page 10, discussing the Underlying Securities, provided that:
"[t]he specific share amounts for each round-lot of 100 B2B Internet HOLDRS . were determined on Febru ary 23, 2000, the pricing date, so that the initial weightings of each underlying security included in the B2B Internet HOLDRS approximates the relative market capitalizations of the specified companies (based on the closing market prices of the underlying securities on the trading day immediately preceding the pricing date), subject to a maximum initial weight of 20%. * * *
These companies generally are considered to be 20 of the largest and most liquid companies with U.S.-traded common stock involved in the 132B segment of the Internet industry, as measured by market capitalization and trading volume on February 22, 2000. The market capitalization of a company is determined by multiplying the price of its common stock by the number 'of outstanding shares of its common stock. (Emphasis added.)
43. The Prospectus, as set forth herein explained how the Underlying Securities were selected in the section entitled "DESCRIPTION OF THE UNDERLYING SECURITIES":
Selection criteria. The underlying securities are the comrnon stocks of a group of 20 specified companies involved in various segments of the B2B segment infrastructure segment of the Internet industry and whose common stock is registered under Section 12 o f the Exchange Act. The issuers of the underlying securities are considered to be 20 of the largest capitalized, most li qui d companies in the B2B segment as measured by market capitalization and trading volume. The
14 following criteria were used in selecting the underlying securities on February 7, 2000:
•Market capitalization equal to or greater than S450,000,000;
44. This statement was misleading since the total "market capitalization" was based upon false ratings by Merrill Lynch analysts.
45. The selection criteria continued:
.Average daily trading volume of at least 110,000 shares over the 60 trading days before February 7, 2000;
This statement was misleading because "trading volume" was inflated inasmuch as it was based upon false ratings by Merrill Lynch analyst.
46. The selection criteria continued:
• Average daily dollar volume (that is, the average daily trading volume multiplied by the average closing price over the 60 day period prior to February 7, 2000) of at least $5.25 million over the 60 trading days before February 7, 2000;
This statement was misleading because "average daily dollar volume" was inflated inasmuch as it was based upon false ratings by Merrill Lynch analysts.] and
47. According to the Prospectus:
The market capitalization of a company is determined by multiplying the price °fits common stock by the number o f shares of its common stock that are hcld by stockholders. In determining whether a company was to be considered for inclusion in the B2B Internet HOLDRS, Merrill Lynch, Pierce, Fenner & Smith -Incorporated examined available public information about the company, including analysts' reports and other independent market sources. The ultimate determination of the inclusion of the 20 specified companies, however, rested solely within the discretion of Merrill Lynch, Pierce, Fenner & Smith Incorporated. (Emphasis added.)
This statement was misleading since these "analyst reports" included the Merrill Lynch reports of the Internet Group which, as set forth herein above and below, were all corrupt and tainted.
15 48. After the Offering, Defendants updated the February 23, 2000 prospectus with
Prospectus Supplements dated June 30, 2000 and November 28, 2000.
49. Defendants caused a prospectus dated January 26, 2001 to be filed on behalf of the
B2B Internet HOLDRS with the SEC that, inter alia, updated the February 23, 2000 Prospectus.
The January 26, 2001 Prospectus itself was updated by Prospectus Supplements dated March 30,
2001, June 30, 2001 and September 30, 2001.
50. On May 7, 2002, Defendants caused a prospectus dated March 12, 2002 to be filed with the SEC on behalf of B2B Internet HOLRDRS. The March 12, 2002 Prospectus was supplemented by a Prospect-us Supplement filed March 31, 2002.
Merrill Lynch's Analyst Coverage of the Underlying Securities
51. As of the date of the Offering, Merrill Lynch provided coverage, i.e., misleading ratings and recommendations, for at least, three of the 20 Underlying Securities: Internet Capital
Group with a weighting of 19.22%, VerticalNet, Inc. with a weighting of approximately 6.72%, and
QRS Corporation, with a weighting of approximately 1%. During the Class Period, the number of covered companies grew to nine, or nearly 50% of the 20 original Underlying Securities, with a combined adjusted weighting of 58% (adjusted to reflect changes in the composition of the portfolio as a result o f acqui siti on s of c ertain of the Underlying Securities). Analyst coverage included issuing false and misleading analyst reports concerning the business of the company and the value of its stock compared to its market price and/or stock purchase recommendations. These practices corrupted and tainted all of the Merrill Lynch coverage, inasmuch as a reasonable investor would want to know that of these pervasive practices before following an y of the Merrill Lynch investment advice or the Internet Group. Yet none of this was disclosed in the Prospectuses, thereby inflating the market prices of the HOLDRS.
16 52. The following chart sets forth each Underlying Security with respect to which Merrill
Lynch issued investment advice and the approximate period thereof:
Name of Company Coverage Period
Internet Capital Group, Inc. 9/99 - 11/15/01'
.A.riba, Inc. 2/01 - 6/13/02
Commerce One, Inc. 8/01 - 2/5/02
VerticalNet, Inc. 1/00 - 6/01
FreeMarkets, Inc. 4/00 - 11/29/01
CheckFree Holdings Corporation 1/01 - 10/24/01
Sterling Commerce, Inc. 3/00 - 4/30/01
Retek, Inc. 9/00 - 7/17/01
QRS Corporation 5/99 - 10/24/01
Merrill Lynch ' s Intern et Analyst Henry Blod get Was A Highly Influential Spokesperson For The internet
53. Henry M. Blodget ("Blodget") was, at all times relevant hereto, until his departure from Merrill Lynch in December 2001, a managing director and First Vice President of Merrill
Lynch and head of Merrill Lynch's Internet Research Group (the "Internet Group") in New York
City. In the fall of 2001, Men-ill 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.
As of March 31, 2000 Merrill Ly-nch's Global Technology Fund had a position in ICGE of 301,200 shares. By September 30, 2000, while maintaining the positive ratings on ICGE for their public customers the fillid had its entire position. Merrill L ch' s Master Internet Strategy Fund had a position of 228,400 shares of ICGE on July 31, 2000. That position was also totally liquidated bv January 31, 2001.
17 54. Prior to and throughout the Class Period, Blodaet 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 appeared repeatedly Oil business- oriented television programs concerning the financial markets, which programs had significant influence on the financial markets and the prices of stocks. As demonstrated below, Blodget assumed virtual "celebrity status" which increased the influence and impact of his analyst reports.
He was hired by ML from CEBC Oppenheimer because his status would enable ML to use him to obtain investment banking business in the internet and underwriting market.
55. In its October 4, 1999 issue, Time Magazine named the "Digital 50 — The Most
Important People Shaping Technology Today" and Blodget was one of the "Digital 50." The article stated in part:
Henry M. Blodget The Forecaster Merrill Lynch Senior Internet and e-commerce analyst AGE:32 WEB:www ml corn
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. Arnazon.com's share price was hovering around $200; pundits were proclaiming that the party was over. But Blodget retnained 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. [Emphasis added].
56. lt was recognized in the financial media that Blodget's ratings and recommendations substantially impacted the price of Internet stocks. For example, an August 19, 1999 article in The
New York Times titled "Stocks Slump as Investors Take Profits" stated in part:
A surprisingly strong earnings report by Dell Computer and a recommendation of eight Internet stocks by Merrill Lynch's influential analyst, Henry Blodget, helped
18 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 111/16, to 99 3/16, and Yahoo 6 3/16, to 145 1/16. His other picks were eToys, Excite@Home, Ly-cos, Inktomi and Barnesandnoble.com.
57. Merrill hired Blociget as an Internet analyst because he was willing to prostitute himself and write false reports on Internet stocks in order to help Merrill obtain investment banking and underwriting business in the Internet sector. For example, on the CN13C television program
"Squawk Box" on November 15, 2001, David Faber said in part:
Merrill had always been looking for real strength in technology, banking especially, where they had a weakness to a certain extent. They felt that by hiring Blodget, such a cheerleader for the Internet, they would position themselves well with many companies. They did get some underwriting business out of it. Unfortunately, many of those issues did not do much of anything
58. In short, Blodget was synonymous with the unlimited potential upside of investing in the Internet and Menill Lynch used Blodget's fame alongside Merrill Lynch' s reputation to issue false ratings promote Internet stocks to unsuspecting investors, and gain investment banking business.
Merrill Lynch Analysts Maintained Artificially Strong Ratings on Internet Stocks in Order to Generate Hundreds of Millions of Dollars in Investment flanking Fees
59. The Merrill Lynch analyst ratings and reports were misleading for at least the following reasons. Merrill Lynch rated many Internet stocks, including many of the Underlying
19 Securities, both for Intermediate-Term and Long-Term growth as follows: Buy/Bay (1-1),
Accumulate/Buy (2-1), Accumulate/Accumulate (2-2), Ncutral/Buy (3-1), and Neutral (3-2).
Although Merrill Lynch's published rating system provided for a five-category stock rating system that included 4 (reduce) and 5 (sell), the Internet Group never used the reduce or sell rating, even though thc analysts believed that a stock was a piece of "junk" or a piece of "crap." The list of covered stocks for the second quarter of 2000, for example, lists 24 stocks, none of which was rated less favorably than "accumulate." From the spring of 1999 to the fall of 2001, (which period includes the dates of the Prospectuses,) Merrill Lynch never published a single reduce or sell rating on any stock covered by the Internet Group, notwithstanding that in many cases internal e-mails show that the investment analysts felt that the particular security sold was "crap," or the like. In sworn testimony provided to the New York State Attorney General, both Blodget and his subordinate, Kirstin Campbell, confirmed that the group never rated a stock reduce or se11.2
60. Thus, although represented to be a five-point system, internally it became a three-point system. Merrill Lynch maintained that misleading policy and practice because it would have jeopardized Merrill Lynch 's efforts to obtain lucrative investment banking and underwriting engagements and fees from Internet companies if Merrill Lynch had given stocks of Internet companies a rating or recommendation of less than "Accumulate/Buy."
The Internet Research Group Was Not Independent Of Investment Banking
61. A second reason the Merrill Lynch analyst ratings and reports were misleading is set forth below. Merrill Lynch's Internet research analysts were not independent of their investment
2 References to sworn testimony and internal Merrill Lynch e-mails are based on testimony taken and documents received by the New York State Attorney General in connection with his investigation of Merrill Lynch.
20 banking colleagues. Their relationship drove both the selection of covered stocks and the ratings ultimately assigned.
62. The interests of the Internet Group to satisfy both investment bankers and potential investment banking clients resulted in the group ignoring the bottom two categories of Merrill
Lynch's five-point rating system.
63. Research analysts at Merrill Lynch were actively involved in evaluating and effectuating investment banking transactions, even at roadshows and dealing with investment banking clients. Moreover, analysts' compensation and bonuses were tied to the success of their efforts in this regard.
64. The analysts' research and false and misleading misstatements played a role in attracting and keeping that investment banking business. On April 26, 2000, an analyst and investment banker discussed through an e-mail exchange how to attract investment banking business of a company from a competitor. The banker proposed a formula that had apparently worked in the past with another banking client: "we should aggressively link coverage with banking — that is what we did with Go2Net (Hcmy [13Iodget] 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," i.e. with no written trail. This e-mail lays bare the understanding that Merrill
Lynch intended the prospect of affmnative research to attract investment banking clients. Numerous other Merrill Lynch internal e-mails exist which demonstrate (a) the intimate involvement of Merrill
Lynch analysts in the Internet Group in investment banking activities even to the point of possibly reeeiNfing referral fees out o f contacts with private company executives; (b) that their compensation and bonuses were tied to investment banking business; and (c) that they did not believe their own ratings.
21 65. One factor Blodget used in prioritizing research coverage for stocks was whether the company had an investment banking relationship with Merrill Lynch. Consistent with this agenda,
Blodget, within weeks of joining Men-ill Lynch as head of the interne research group, distributed a memorandum entitled, "Managing the Banking Calendar for Internet Research," which he sent to the Co-Heads of [Merrill Lynch] -U.S. Equity Research and senior investment hankers. The memorandum =apologetically described Blodget's expectation that at /east 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 Bledget's work schedule for one week as being divided "85% banking, 15% research." Blodget's own time allocation reveals that Merrill Lynch viewed research as a sales tool for investment banking
66. From December 1999 to November 2000, the Internet Group was involved in investment banking deals that — on its own estimate — produced approximately $115 million of revenue to Merrill Lynch. The list of the group's activities for that year included participating in the bankers' sales pitch to potential clients; marketing transactions to institutional investors once the bankers had obtained the assignment; and then initiating and doing "follow-on" research coverage.
67. Further, 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 i ssue, in clear violation of Merrill Lynch policy that analysts may not disclose proposed investment conclusions" to company managoment.
68. Analysts conveyed to one another that they would "win brownie points" from investment banking Utile investment bankers could assure a company that the analysts would cover its stock. Implicit in this was that "coverage" would always be favorable. Numerous internal e- mails exist which demonstrate this. Investment bankers, in turn, attempted to use the analysts to
22 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.
69. On November 16, 2000, Merrill Lynch analysts discussed the conflict in internal 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."
70. Unbeknownst to investors, Merrill Lynch's research analysts objectivity and independence was further corrupted by the fact that their compensation depended in part on their efforts made on behalf of investment banking. In the fall of 2000, Merrill Lynch '5 Deepak Raj, then co-head of global equity research, in an internal email to all equity analysts requested:
We are once again surveying your contributions to investment banking during the Year. . . Please provide complete details on your involvement in the transaction, R_y_ua in arti cular degree your research coverage 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 was pivotal in securing participation in high yield offering. [Emphasis added].
71. A November I, 2000 e-mail from Blodgct to Kirsten Campbell set forth a few of the deals in which Blodget had been "involved:"
this is what I can think of that I was involved in:
amazing that they make you do this and its not in a data base.
HOMS secondary Travelscape M&A $100inm. pets.com IPO- I think $250, or so! pcts.com fairness opinion I was made to pick up coverage of Multex for Multex Direct Markets deal, but don't think that's considered banking or that we got paid for anything?
Goto.com advisory in Europe? prob haven't gotten any money yet
23 CMGI solutions? don't think we ever got paid for anything with cmgi besides UBE) merger
Lending tree- when was that?
lots of other stuff that never happened. blue nile, more.com , etc.
will look for that old e-mail- can't act on this computer- can get tomorrow but don't think said more than this.
72. A November 2, 2000 email from Blodget and the Internet Group to Deepak Raj, entitled "IBK Contributions: Internet Team," 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 intemet companies closed in Junc." Shortly after documenting these contributions,
Blodget's salary contract — which contained a guaranteed minimum — was canceled and replaced with a substantially larger compensation package. Overall, Blodget's agreed annual compensation, including "guaranteed" minimum cash bonus, increased from $3 million for 1999 to 512 million for
2001.
73. The e-mails quoted in in 69 through 72 above were sent just weeks prior to the publication of a B213 Internet HOLDRS "Prospectus Supplement" in connection with the issuance of additional HOLDRS initially registered pursuant to the February 24 Offering. Yet this additional
Prospectus Supplement once again failed to disclose the material facts set forth herein regarding the corrupt nature of all the investment analyses by the Internet Group.
Internet Ca I ital Grou —An Exam le of the Internet Grou • 's Treatment of a Stock
74. As alleged herein, ICGE is one of the Underlying Securities. Its "weight" constituted approximately 20% of the underlying securities at the time of the Offering.
24 75. TCGE was first listed on the NASDAQ National Market on August 5, 1999, in an initial public offering of 14,900,000 shares of commoii stock, approximately six months prior to the
February 24, 2000 B2B Prospectus. Merrill Lynch served as lead underwriter for ICGE's offering, and derived substantial fees therefrom.
76. Three weeks after the ICGE [PO on August 30, 1999 Merrill Lynch initiated analyst coverage of ICGE with its fu-st of a series of reports released to the public. The report recommended
TCGE common stock as "ACCUMULATE" and classified it as a "Long Term BUY" with a two year objective price of $125.00.
77. -Merrill Lynch stated in the August 30, 1999 analyst report that:
We have not assigned 1CGE our highest rating for one reason only: the stock has nm up significantly since the 14.9 million share IPO on August 4, 1999 at $12.00 and we expect that at some point it will consolidate. Long-term, we regard ICGE as a "must own." * * *
We believe ICGE is positioned to capture a meaningful percentage of the B2B] value. * * *
We believe Internet Capital Group presents investors with a great opportunity to play what we believe is the next big Internet wave, B2B e-commerce.
78. The impact of Merrill Lynch's recommendation was immediate and dramatic. ICGE common stock, which had closed on the previous day's trading at $53 1/2, jumped to S58 7/8 based on Merrill Lynch' s recommendation. No other significant information or news ab out ICGE had been reported between the close of trading on Friday, August 27, 1999, and the close of trading on
Monday, August 30, 1999, other than Merrill Lynch's August 30 analyst report. Moreover, investors responded to Merrill Lynch's "price target" of $125. By November 2, 1999, the stock reached S125.
On December 13, 1999, after reaching $270 per share, ICGE had a2 for 1 stock split.
25 79. On December 16, 1999, approximately two months prior to the February 24, 2000
B2B Prospectus, Defendant Merrill Lynch issued another analyst report relating to ICGE entitled
"B2B 's Land Baron," It reflected "Reason for Report: Company Update." The report continued to recommend ICGE common stock as "ACCUMULATE" and classified it as a "Long Tenn BUY."
80. Also, on December 16, 1999, the day of the favorable Analyst Report, 1CGE had a second offering of 6 million shares of ICGE common stock at S108.00 per share and a placement of $475 million of 5.5% convertible subordinated notes due 2004. Mtal ill Lynch served as the lead underwriter for both offerings, reaping $16.3 million in transaction fees from the two offerings.
81. On December 30, 1999, two weeks after the ICGE offering, Merrill Lynch issued another analyst report relating to ICGE entitled "ICG Keeps Pedal to the Metal with Investment in
Metalsite." The report continued to recommendlCGE common stock as ACCUMULATE" and classified it as a "Long Term BUY."
82. The impact of Merrill Lynch's December 30, 1999 recommendation was immediate and dramatic. ICGE common stock, which had closed on the previous day's trading at $164 1/2, jumped to $200 on January 3, 2000 based on _Merrill Lynch's recommendation.
83. In a January 3, 2000 Dow Jones press release, Blodget stated that he remained optimistic about leading Internet stocks and that ICGE was picked to perform well in 2000.
84. On January 10, 2000, Merrill Lynch issued yet another analyst report relating to
ICGE entitled "Barron's Article Highlights ICGE' s Lofty Valuation." The report continued to recommend ICGE common stock as "ACCUMULATE" and classified it as a "Long Term BUY."
The January 10 analyst report represented that "we continue to believe that strong, positive news flow and continued appreciation in new asset value will drive the stock higher over the long-term."
26 85. On February 18, 2000, just days ahead of the B2B Internet HOLDRS Offering,
Merrill Lynch issued another analyst report relating to ICGE, entitled "Speed & Power — ICG and
DuPont Form Joint Venture." The report continued to recommend ICGE common stock as
"ACCUMULATE" and classified it as a "Long Term BUY."
86. All of the above events set forth in TT 75 through 85 took place in the six months leading up to the B2B Offering on February 24, 2000.
87. It was at this point that the B2B HOLDRS were i ssued to the public at a price inflated by the misleading Merrill Lynch analyst reports.
88. On May 22, 2000, in a series of internal, non-public e-mails, Blodget expressed negative views about ICG that he never expressed in his public report on ICG. On May 22, 2000, at 12:30 p.m., Blodget received an email from Trent Cowles, a financial advisor at Merrill Lynch, asking: "Is there any possibility of replacing ICG on [Merrill Lynch's] Top Ten Tech list with anything offering better fundamentals?" Almost immediately, Blodget forwarded this email to
Edward McCabe, a Merrill Lynch Vice President and senior analyst in the Internet Group, with the following comment: ``why is this thing [ICG] still on [the Top Ten Tech list!. who do I have to call to get it off this is infuriating. ' (Emphasis added.)
89. Just two months later, Blodget was communicating internally with a colleague about
"Internet Investing while Rome burns."
90. On July 5, 2000, Merrill Lynch issued another analyst report relating to ICGE entitled
"Some of the Gray Clouds Overhanging Stock Appear to be Clearing." The report continued to recommend ICGE common stock as "ACCUMULATE" and classified it as a "Long Term BUY."
On August 11, 2000, Merrill Lynch issued yet another analyst report relating to 1CGE entitled
"Company Executing; Stock Still Needs Catalysts." The report continued to recommend ICGE
27 common stock as "ACCUMULATE" and classified it as a "Long Term BUY." The August 11 analyst report stated that "We believe, over the long-term, ICG remains a good play for investors that want to be long B2B. We continue to rate the stock ACCUMULATE/BUY."
91. In a September 12, 2000 internal e-mail directed to Blodget from Dexter Davis, a
Merrill Lynch broker, Davis requested information regarding whether he should recommend ICGE stock to his clients. In response to Davis, Ed McCabe, Merrill Lynch Vice President of B2B, at the direction of Blodget, stated internally that "this stock has been a disappointment" and "market conditions are poor for a company like ICG," (Emphasis added.) In an additional e-mail regarding
Davis' e-mail directed to Blodget and Merrill Lynch other analysts, McCabe stated:
I think this e-mail highlights the issue with having a name like ICG on the Top 10 Tech List. ICG is way off of its high so it might not he the right time to take it off. However, this stock will get pummeled if market conditions don't improve. More importantly, I continue to think FCs blindly recommend stock from the Top 10 Tech list (oftentimes without reading current research to get a "real-time" sense of our opinion) and ass 11111C they are suitable for the vast majority of their clients simply because they are on the list. If this is the case, we may want to think about whether speculative names that arc dependent on the IPO market, don't generate cash flow, and will require additional financing for foreseeable fixture should be on the list at all. In other words, if a stock holding a spot on this list is interpreted by FCs as suitable for most of their clients we need to tighten the parameters for inclusion on the list.
92. On September 25, 2000, Defendants issued another analyst report relating to ICG entitled "The State of ICG." It reflected "Reason for Report: Company Update." The report continued to recommend ICG common stock as "ACCUMULATE" and classified it as a "Long
Term BUY."
93. On September 30, 2000, however, Blodget wrote an email to a Merrill Lynch
financial consultant in which he states: "We, too, have lost a lot of faith in [IC& 's1 management,
28 and although we want to take it at face value that they can raise additional funds, we are skeptical of that as well. I think the next two to three months will be critical." Blodget expressed the opinion that "there is as good a chance that fICG1 stock goes to 5 as there Ls that it goes back to 30, although either is possible." (Emphasis added.)
94. Yet, defendants continued to tout and inflate the price of this stock, which was the highest weighted stock of the B2B Internet HOLDRS. On September 25, 2000, just one month ahead of the November 28, 2000 Supplement, Merrill Lynch issued au other analyst report relating to IC GE entitled "The State of ICG." The report continued to recommend ICGE common stock as
"ACCUMULATE" and classified it as a "Long Tenn BUY."
95. Ten days later, on October 5, 2000, with the stock at only $12.38, down from a high of S212 on December 22, 1999, in an internal e-mail exchange with another senior analyst, Blodget stated that Merrill Lynch did not do enough to hi ghlig_ht the risk CM ICGE. In an internal response to Blodget, Sofia Ghachem, Merrill Lynch Vice President of Infrastructure, stated that "part of the reason we didn't highlight it is bite we wanted to protect ICG' s banking business." [Emphasis added.]
Also in the e-mail Blodget predicted thc stock was "going to 5." The next day he wrote in an e-mail:
"No helpful news to relate [regarding ICGE], I'm afraid. This has been a disaster. . there really is no floor to the stock."
96. BUT eVell with these prognostic ations, Merrill Ly-neh's public rating remained 2-1 arid, when eventually downgraded on November 9, 2000, was changed only to a 2-2 (Accumulate). On this news, ICGE stock, which had closed on November 8 at S16-114, dropped to $11-1/2, a drop of over 30%.
29 97. The result was a continued recommendation to the investing public to continue to accumulate a stock which, internally, the head of the Internet Group believed was "a disaster" and had no floor."
98. The fact that the Defendants did not believe the positive recommendations and rating in the TCG Analyst Reports is also seen by the fact that Merrill Lynch was liquidating its position in ICG common stock, while recommending the purchase of ICG in the ICG Analyst Reports. For example, as of March 31, 2000, the Merrill Lynch Global Technology Fund, a proprietary fund that invested primarily in leaders in technology related industries, including internet and on-line service companies, owned 301,200 1CG shares. By September 30, 2000, while Merrill Lynch was maintaining a positive rating on ICG in the ICG Analyst Reports, the Global Technology Fund had liquidated its entire ICG position. Similarly, the Met-rill Lynch Master Internet Strategy Fund, a proprietary fund that invested exclusively in interact and on-line service companies, owned 228,400 shares of ICG on July 31, 2000. By January 31, 2001, that position was also totally liquidated, despite the fact that Merrill Lynch had given ICG an "ACCUMULATE/BUY" or
"ACCUMULATE/ACCUMULATE" rating in its ICG Analyst Reports during that six month period.
THE FALSE AND MISLEADING STATEMENTS CONTAINED IN THE PROSPECTUSES
99. On or about February 24, 2000, the Director Defendants and Merrill Lynch caused
B2B Internet HOLDRS to file thc first of its materially inaccurate, false and misleading Prospectuses with the SEC.
100. The Prospectus contained materially inaccurate false and misleading statements and omitted to disclose numerous material facts that were required to be disclosed in order to render the
30 statements made therein not materially misleading at the time it was declared effective. In particular, the sections of the Prospectus entitled: (1) "Description of the Underlying Securities," (ii) "Risk
Factors;" and (iii) "Annex A," each omitted and/or misrepresented material facts concerning B2B
Internet HOLDRS, including but not limited to (a) that Merrill Lynch analysts had an existing serious conflict of interest in both choosing which stocks to cover and in their ratings and recommendations; (b) that Merrill Lynch and its analysts internally resolved their conflict by favoring Merrill Lynch's investment banking and underwriting corporate drafts over its brokerage and retain customers; (c) that the purportedly five level rating system was, in fact, only a three level system; and (d) that the analysts compensation was tied to the Merrill Lynch investment banking and underwriting business. As a result, the B2B Prospectuses and Supplements were misleading in the manner set forth below.
The Material Omissions and/or Misrepresentations in the "Description of the Under/vin Securities" Section of tbe Prospectus
101. Under the "Description °fate Underlying Securities" heading, the February 24, 2000
Prospectus stated in relevant part:
Selection criteria. The underlying securities are the common stocks of a group of 20 specified companies involved in various segments of the 132B segment infrastructure segment of the Internet industry and whose common stock is registered under Section 12 of the Exchange Act. The issuers of the underlying securities are considered to be 20 of the largest capitalized, most liouid companies in the B2B segment as measured by market capitalization and trading volume. The following criteria were used in selecting the underlying securities on February 7, 2000:
. Market capitalization equal to or greater than $450,000,000;
. Average daily trading volume of at least 110,000 shares over the 60 trading days before February 7, 2000;
. Average daily dollar volume (that is, the average daily trading volume multiplied by the average closing price over the 60 day period prior to February 7, 2000) of at least $5.25 million over the 60 trading days before February 7, 2000; and
31 • A trading history of at least 90 calendar days.
The market capitalization of a company is determined by multiplying the price of its common stock by the number of shares of its common stock that are held by stockholders. In determining whether a company was to be considered for inclusion in the B2B Internet HOLDRS, Merrill Lynch, Pierce, Fenner & Smith Incorporated examined available public information about the company. including analysts' reports and other independent market sources. The ultimate determination of the inclusion of the 20 specified companies, however, rested solely within the discretion of Merrill Lynch Pierce Fenner & Smith Incorporated. [Emphasis added.] * * *
No investigation. In selecting the underlying securities, the trust, the trustee, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and any affiliate of these entiti es, have not performed any investigation or review of the selected companies, including the public filings by the companies, other than to the extent required to determine whether the companies satisfied the stated selection criteria. Accordingly, before you acquire B2B Internet HOLDRS, you should consider publicly available financial and other information about the issuers of the underlying securities. See "Risk factors" and "Where you can find more information." Investors and market participants should not conclude that the inclusion of a company in the list is any form of investment recommendation of that company by the trust, the trustee, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and any of their affiliates.
102. The statements set forth in the foregoing paragraph were materially false and misleading at the times they were made because:
(a) the section failed to state that Merrill Lynch's analysts, including Blodget and the Internet Group, were aware of specific undisclosed factors that they believed would affect certain of the Underlying Securities;
(b) they omitted to state that MLPFS plans to exercise its discretion to include in the Underlying Securities companies that Merrill Lynch analysts including Blodget and the
Internet Group privately believed were bad investments at the time of the B2B's offering;
(c) they omitted to state that Merrill Lynch analysts, including Blodget and the
Internet Group privately believed that at least onc (and possibly three) of the 20 Underlying
32 Securities, ICCiE, with the highest weight of all the underlying securities, i.e., 20%, was a poor investment and that specific factors existed at the time of tlic Offering that were known to Merrill
Lynch and Blodgct that would cause such company's individual stock to substantially decline. Yet defendants continued to issue, both prior to the B2B Offering and after, positive recommendations.
(d) they omitted to state that Blodget and the Intel nct Group did not personally believe that ICGE, the "weightiest" of the underlying securities, had potential for capital appreciation;
(e) they omitted to state that the B2B was being marketed at a time when Merrill
Lynch, via the Internet Group analysts, published strong positive investment ratings on internet stocks even though those analysts, including Blodget, held negative personal views of those same companies;
(f) they omitted to state that Merrill Lynch, Blodget and the Internet Group published strong ratings on Internet stocks in order to secure investment banking business;
(g) they omitted to state that substantial conflicts of interests already existed within Merrill Lynch that broke through the "Chinese Walls" that purportedly were established to ensure the objectivity of Henry Blodget and the Internet Group.
103. Moreover, the selection criteria described hereinabove are materially misleading because they failed to disclose how Merrill Lynch influenced certain of the Underlying Securities' market capitalization, average daily trading, and dollar volume with its false and misleading analyst reports.
104. Moreover, the statements set forth in paragraph 102 above that "Merrill Lynch,
Pierce, Fenner & Smith Incorporated examined available public information about the company, including analysts' reports and other independent market sources," failed to disclose that the analyst
33 reports issued by Merrill Lynch were false and misleading for the reasons described herein, including that the analyst rating system used was not a five-tier rating system, but a de facto three-tier onc that never rated a company below a 3 for fear of losing investment banking business, and further failed to disclose that those analyst reports, designed to obtain and retain investment banking business for
Merrill Lynch, were contradicted by personally-held views of the analysts who prepared such reports. As a result, the entire Internet Group and its reports and recommendations were tainted, a fact never disclosed to investors.
The Material Omissions and/or Misrepresentations In the "Risk Factors" Section of the Prospectus
105. Under the "Risk Factors" heading the Prospectus stated hi relevant part:
An investment in B2B Internet HOLDRS involves risks similar to investing in each of the underlying securities outside of the B 2B Internet HOLDRS, including the risks associated with concentrated investments in B2B Internet companies.
106. The statement set forth in the foregoing paragraph was materially false and misleading when it was made because:
(a) it omits to state that Defendant Blod get arid the Internet Group believed that
ICGE, one of the Underlying Securities with approximately 20% of the value of the underlying securities, was not likely to produce earnings growth;
(b) the B2B was being marketed at a time when the Internet Group published strong investment ratings on all Internet companies followed by Merrill Lynch even though those analysts, including Blodget, held negative personal views of those same stocks;
(c) Merrill Lynch analysts including Blodget and the Internet Group published strong ratings on Internet stocks in order to secure investment banking business; and
34 (d) substantial conflicts of interests already existed within Merrill Lynch that broke through any "Chinese Walls" that purportedly were established to ensure the objectivity of
Blodget and the Internet Group, vis a vis Merrill Lynch's investment banking activities.
107. Under the "General Risk Factors" subheading, the Prospectus stated in relevant part:
• Loss of investment. Because the value of B211 Internet IIOLDRS directly relates to the value of the underlying securities, you may lose all or a substantial portion of your investment in the B2B Internet ITOLDRS if the underlying securities decline in value.
* * *
• No investigation of underlying securities. The underlying securities included in the B213 Internet Ft Ot DRS were selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated based on the market capitalization of issuers and the market liquidity of common stocks in the B2B segment of the Internet industry, without regard for the value, price performance, volatility or investment merit of the underlying securities. Consequently, the B2B Internet HOLDRS trust, the trustee, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and their affiliates, have not performed anv investigation or review of the selected companies, including the public filings by the companies. Investors and market participants should not conclude that the inclusion of a company is any form of investment recommendation by the trust, the trustee, Merrill Lynch, Pierce, Fenner & Smith Incorporated, or their affiliates.
• Loss of diversification. As a result of business developments, reorganizations, or market fluctuations affecting issuers of the underlying securities, B2B Internet HOLDRS may not necessarily continue to be a diversified investment in the Internet infrastructure segment of the Internet industry. As a result of market fluctuation and/or reconstitution events, B2B Internet HOLDRS may represent a concentrated investment in one or more of the underlying securities which would reduce investment diversification and increase your exposure to the risks of concentrated investments.
108. The statements set forth in the foregoing paragraph were materially false and misleading when they were made because:
(a) the Underlying Securities would include ICGE, (and Verticalnet, Inc. and
QRS Corporation) which Merrill Lynch analysts, including Blod get and the Internet Group, believed
35 were not likely to produce earnings growth and maintain the market capitalization that qualified them for inclusion in the B2B;
(h) they omitted to state that the B2B was being marketed at a time when the
Internet Group published strong investment ratings on all Internet companies followed by Merrill
Lynch even though those Merrill Lynch analysts, including Blodget, held negative pet banal views of those same stocks;
(c) they omitted to state that Merrill Lynch analysts including Blodget and the
Internet Group published strong ratings on Internet stocks in order to secure investment banking business;
(d) they omitted to state that substantial conflicts of interests existed within
Men-ill Lynch that broke through any "Chinese Walls" that purportedly were established to ensure thc objectivity of Blodget and the Internet Group.
109. The "General Risk Factors" subheading, further provided in relevant part:
• Possible conflicts of interest. Merrill Lynch, Pierce, Fenner & Smith Incorporated, as initial depositor, has selected the underlying securities and may face possible conflicts of interest in connection with its activities. For example, Merrill Lynch, Pierce, Fenner & Smith Incorporated and its affiliates, collectively referred to as Merrill Lynch, ma y engage in investment banking and other activities, may provide services to issuers of the underlying securities in connection with its business, or may trade in the underlying securities for its own account. All of these activities ma y result in conflicts of interest with respect to the financial interest of Merrill Lynch, on the one hand, and, on the other hand, the initial selection of the underlying securities included in the B2B Internet HOLDRS, the selection of the B2B segment of the Internet industry, Merrill Lynch's activity in the secondary market in the underlying securities, and the creation and cancellation of B2B Internet HOLDRS by Merrill Lynch.
11 0. The statements set forth in the foregoing paragraph were materially false and misleading when they were made because:
36 (a) they omitted to state that the Underlying Securities would include ICGE that
Merrill Lynch analysts including Blodget and the Internet Group believed was not likely to produce earnings growth and maintain the market capitalization that qualified it for inclusion in the B2B;
(b) they omitted to state that the B2B was being marketed at a time when the
Internet Group published strong investment ratings on all Internet companies followed by Merrill
Lynch even though those Merrill Lynch analysts, including Blodget, held negative personal views of those same stocks;
(c) they omitted to state that Merrill Lynch analysts, including Blodget and the
Internet Group, actually did publish strong ratings on Internet stocks in order to secure investment banking business; and
(d) they omitted to state that substantial conflicts of interests actually did already exist within Merrill Lynch that broke through any "Chinese Walls" that were established to purportedly ensure the objectivity of Blodget and the Internet Group.
111. Under the "Risk Factors Specific to the B2B Segment of the Internet Industry" subheading, the Prospectus stated in relevant part:
• B2B Internet company stock prices have been and will likely continue to be extremely volatile, which will directly affect the price volatility of the B2B Internet HOLDRS, and you could lose all or part of your investment The trading prices of the common stocks of B2B Internet companies have been and are likely to be extremely volatile. Internet infrastructure companies' stock prices could be subject to wide fluctuations in response to a variety of factors, including the following:
• actual or anticipated variations in companies' quarterly operating results;
• announcements of' technological innovations or new services by Internet companies or their competitors;
• changes in financial estimates by securities analysts;
37 • conditions or trends in Internet online service companies;
• conditions or trends in online securities trading;
• changes in the market valuations of the Internet or online service companies;
• developments in Internet regulations;
• announcements by B2B Internet companies or their competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
• unscheduled system downtime;
• additions or departures of key personnel; and
• sales of B2B Internet companies; common stock or other securities in the open market. In addition, the trading prices of B2B Internet stocks in general have experienced extreme price and volume fluctuations in recent months. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. The valuations of many B2B Internet stocks are extraordinarily high when measured by conventional valuation standards such as price to earnings and price to sales ratios. Some of the companies do not or in the future might not have earnings. As a result, these trading prices may decline substantially. These trading prices and valuations may not be sustained. Also, any negative change in the public's perception of the prospects of Internet or e-commerce companies could depress the stock prices of a B2B Internet company regardless of its operating results. Other broad market and industry factors may also decrease the stock price of B2B Internet stocks, regardless of their operating results. Market fluctuations, as well as general political and economic conditions, such as recession or interest rate or currency rate fluctuations, also may decrease the market price of Inteinet infrastructure stocks.
112. The statements set forth in the foregoing paragraph were materially false and misleading when they were made because:
(a) they omitted to state that the Underlying Securities would include ICGE (and
VerticalNet, Inc. and QRS Corporation) that Merrill Lynch analysts including Blodget and the
38 Internet Group believed were not likely to produce earnings growth and maintain the market capitalization that qualified them for inclusion in the B2B;
(b) they omitted to state that the B2B was being marketed at a time when the
Internet Group published strong investment ratings on all Internet companies followed by Merrill
Lynch even though those Merrill Lynch analysts, includingRlodget, held negative personal views of those same stocks;
(G) they omitted to state that Merrill Lynch, Blodget, and the Internet Group were managing the price of tile stock of certain of the Underlying Securities, including Internet Capital
Group, by publishing positive ratings that contradicted their personal views of such companies;
(d) they omitted to state that Merrill Lynch analysts including Blodget and the
Internet Group published strong ratings on Internet stocks in order to secure investment banking business; and
(c) they omitted to state that substantial conflicts of interests actually did already exist within Merrill Lynch that broke through any "Chinese Walls" that were established to purportedly ensure the objectivity of Blodget and the Internet Group.
The Material Omissions anclior Misrepresentations In "Annex A" to the Prospectus
113. In "Annex A," the Prospectus provided a description of each of the businesses of the issuers of the Underlying Securities, including Internet Capital Group, and set forth the split-adjusted closing market prices, as reported on the applicable primary trading market, of each of the
Underlying Securities in each month starting in 1995 through January 2001.
114. The inclusion in Annex A of the Prospectus of historical pricing information for certain of the Underlying Securities, including ICGE, was materially false and misleading because
39 those prices reflected inflated pricing arising out of the market response to the Internet Group's published strong investment ratings on such Underlying Securities, including ICGE, that were contradicted by negative personal views held by Merrill Lynch analysts, including Blodget.
115. The misleading statements and/or omission set forth above were continued by the
Additional Prospectuses inasmuch the Additional Prospectuses related to the HOLDRS issued pursuant to the Prospectus and Offering and the Additional Prospectuses failed to correct those misleading statement and/or omissions.
THE TRUTH EMERGES
116. On April 8, 2002 The New York Times reported that Eliot L. Spitzer, the Attorney
General of New York, had obtained a court order ("Order") forcing Merrill Lynch to make immediate changes to its stock reports. 13ased on his office's 10-month investigation of Merrill
Lynch, including a review of documents and records (including internal emails) and employee testimony, Attorney General Spitzer called the investment advice of Merrill Lynch "tainted."
According to the Attorney General's investigation, investment ratings and research were available to financial consultants and retail brokers through Merrill Lynch's QRQ Opinion system. The misleading information was also disseminated through morning calls, where analysts discussed recent research reports before the market opened and where the institutional and retail sales forces were allowed to participate. Research reports were also available through Merrill Lynch's on-line
system. Other investment research services like Bloomberg and Mult ex each of which had their own
respective subscribers were also allowed to access research reports from Merrill Lynch through this
on-line system.
117. On or about April 25, 2002, the SEC announced that it had conunenced a formal
investigation into the question of conflicts o f interest involving Morrill Lynch's investment advice.
40 118. On or about May 21, 2002, Merrill Lynch agreed to pay a civil fine of $100 million as part of a settlement of claims of the New York State Attorney General. According to a May 21,
2002 Bloomberg News report, "[i]nvestment bankers will no longer have a say in the compensation of research analysts, Merrill Lynch Chief Executive Officer David Komansky said." In that same article, the SEC director of enforcement, Stephen Cutler, commenting on Merrill Lynch 's settlement with the New York State Attorney General, stated that "it is not the finish line, and will not preclude our own efforts on behalf of the investing public."
COUNT I
Against All Defendants For Violation of Section II of the Securities Act
119. Plaintiffs repeat and realleges each and every allegation contained in each of the foregoing paragraphs as if fully set forth herein.
120. This first claim for relief is brought by Plaintiffs pursuant to Section 11 of the
Securities Act, 15 U.S.C. § 77k, on behalf of Plaintiffs and the other Class members against all
Defendants.
121. The Registration Statement, of which the Prospectus was a part, and the Additional
Prospectuses were materially false and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements therein not misleading, and failed to disclose or correct adequately material facts concerning the Trust, as set forth above.
122. Plaintiffs acquired B2B Internet HOLDRS on or traceable to the Offering and issued pursuant to the Registration Statement.
123. Plaintiffs and the other members of the Class who acquired B2B Internet HOLDRS issued pursuant or traceable to the Registration Statement did not know of the material omissions
41 or misleading statements in the Registration Statement, as set forth herein, when they acquired their
B2B Internet HOLDRS.
124. Merrill Lynch & Co. and MLPFS were underwriters and/or issuers for the Offering and with the Trust issued and/or caused to be issued and/or participated in the issuance of materially false and misleading statements to the investing public which were contained in thc Registration
Statement, of which the Prospectus was a part. As issuers arid/or underwriters of the B2B Internet
HOLDRS sold in the Offering, the Trust, MI,P-FS and Merrill Lynch & Co. are strictly liable to
Plaintiffs and the other mem -hers of the Class for those material misrepresentations and omissions.
125. Merrill Lynch & Co. and M LPFS, the underwriters with respect to the B2B Internet
HOLDRS sold in the Offering, are underwriters within thc meaning of the Securities Act.
126. The Director Defendants signed the Registration Statement and/or Additional
Prospectuses, either personally, or through an attorney-in-fact.
127. Plaintiffs and the other Class members purchased or otherwise acquired the B2B
Internet HOLDRS pursuant to the defective Prospectuses referenced herein. Plaintiffs and the other
Class members did not know, or in the exercise of reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses. As a result of defendants wrongdoing, the prices of B2B securities were falsely inflated throughout the class period and plaintiffs and the
Class purchased B2B securities at these falsely inflated prices. As a diree.t and proximate result of these violations, Plaintiffs and the other class members sustained substantial damage in connection with their purchases andior acquisitions of the B2B Internet HOLDRS.
128. By reason of the foregoing, pursuant to Section 11 of the Securities Act, each
Defendant is liable to Plaintiffs and the other members of the Class for the difference between the mice paid for the B2B Internet HOLDRS bought and either the current value of such B2B Internet
42 HOLDRS if currently held by Plaintiffs or the other Class members, or the price at which such B2B
Internet HOLDRS were disposed of in the market if disposed of before the commencement of this action.
129. This action is being brought within one year after the discovery of the acts that give rise to liability as alleged herein under Section 11 of the Securities Act and within three years after the B2B Internet HOLDRS were offered to the public.
COUNT II
Against the Director Defendants, Defendant Merrill Lynch & Co. Inc. and Defendant MLPFS For Violation of Section 15 of the Securities Act
130. Plaintiffs repeat and reallege each and every allegation contained in each of the foregoing paragraphs as if fully set forth herein.
131. This second claim for relief is brought by Plaintiffs pursuant to Section 15 of the
Securities Act, 15 U.S.C. § 77o, on behalf of Plaintiffs and the other members of the Class against the Director Defendants and Defendants Merrill Lynch & Co. Inc. and MLPFS.
132. The false and misleading statements in the Prospectus were repeated in the Additional
Prospectuses, which consisted of a Prospectus Supplement to the Prospectus, dated June 3, 2000; a Prospectus Supplement to the Prospectus, filed November 28, 2000; a January 26, 2001 Prospectus which updated the Prospectus; and Supplements to the January 26, 2001 Prospectus, filed March 30,
2001, June 30, 2001, and September 30, 2001; a March 12, 2002 Prospectus which updated the
February 23, 2000 Prospectus; and a Supplement to the March 12, 2002 Prospectus filed March 31,
2002.
133, The Director Defendants and Defendants Merrill Lynch & Co. Inc. and MLPFS acted as controlling persons of the Trust within the meaning of Section 15 of the Securities Act as alleged
43 herein. The Director Defendants, as directors and/or officers of the Merrill Lynch and as signatories of the Prospectus, andlor the Additional Prospectuses and Defendants Merrill Lynch & Co. Inc. and
MLPFS had the power to influence and control and did influence and conn ol, directly or indirectly, the decision-making of the Trust, including the content and dissemination of the Prospectuses which
Plaintiff contends are false and misleading.
134. Pursuant to Section 15 ofthe Securities Act, by virtue of their positions as controlling persons, the Director Defendants and Defendants Merrill Lynch & Co. Inc. and MLPFS arc liable jointly and severally with and to the same extent as the Trust for the Trust's aforesaid liability under
Section II of the Securities Act.
COUNT III
Against All Defendants For Violation of Section 12a(2) of the Securities Act
135. Plaintiffs repeat and reallege each and every allegation contained in each of the foregoing paragraphs as if fully set forth herein. This third claim for relief is asserted against all
Defendants pursuant to § 12(a)(2) of the Securities Act, 15 U.S.C. § 771(2), on behalf of Plaintiff and the other Class members.
136. By means of the Prospectuses and sales campaigns through, for example, Merrill
Lynch's retail brokerage arm, Defendants were each able to, and did, sell, offer, and/or solicit thc sale of, or were a substantial factor in the ability to sell, the B2B Internet HOLDRS to Plaintiff and the other Class members. Merrill Lynch and the Trust, which orchestrated and controlled the sale
and distribution process, provided necessary expertise and marketing and distribution networks, without which the aforesaid shares could not have boon sold. Each Defendant was motivated, at
least in part, by a desire to serve their own financial interests and/or the financial interests of each
44 of the other Defendants. Merrill Lynch and the Trust received substantial proceeds from the sale of the B2B Internet HOLDRS.
137. The actions taken by Defendants in the solicitation of such sales included participation in thc preparation and dissemination of the false Prospectuses issued in connection with the Offering and/or securities traceable to the Offering, which contained untrue statements of material facts and/or omitted to state other facts necessary to correct the statements made and/or which failed to disclose material facts.
138. Defendants (other than Patrick and Carone who carried out the same v„Tongful activities in connection with the Additional Prospectuses) solicited and/or played a substantial role in the Offering and/or the sale of additional securities traceable to the Offering as referred to above.
But for the participation by Defendants, including the solicitation as set forth herein, the Offering could not, and would not, have been accomplished. Defendants did the following acts in furtherance of the sale of the B2B Internet HOLDRS:
(a) They actively drafted, revised, and approved the Prospectus and/or Additional
Prospectuses and other written selling materials by which the Offering was made;
(b) They finalized the Prospectus and/or Additional Prospectus and caused them to become effective. But for Defendants having drafted, filed, signed and/or authorized the signing of the Prospectuses, the Offering could not have been accomplished; and,
(c) They conceived and planned the Offering and orchestrated all activities necessary to effect the sale of the B2B Internet HOLDRS, by issuing the B2B Internet HOLDRS, promoting the B213 Internet TTOLDRS, supervising their distribution and ultimately selling the B2B
Internet I TOLDR S
45 139. Defendants were obligated to make a reasonable and diligent investigation of the written and oral statements made in the Prospectus and Additional Prospectuses related to the matters referenced herein, to insure that such statements were true and that there was no omission to state a material fact required to be stated in order to make the statements contained therein correct.
140. Plaintiffs and the other Class members purchased or otherwise acquired the B2B
Internet HOLDRS pursuant to the defective Prospectuses referenced herein. Plaintiffs and the other
Class members did not know, or in the exercise of reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses. As a result of defendants' wrongdoing, the prices of B2B securities were falsely inflated throughout the class period and plaintiffs and the
Class purchased B2B securities at these falsely inflated prices. As a direct and proximate result of these violations, Plaintiffs and the other class members sustained substantial damage in connection with their purchases andior acquisitions of the B2B Internet HOLDRS.
141. Plaintiffs, individually and representatively, hereby tender to Defendants those securities which Plaintiff and the Class members continue to own, if any, in return for the consideration paid for those securities together with interest thereon.
142. By reason of the conduct alleged herein, Defendants violated, and/or controlled a person who violated, Section 12(0(2) of the Securities Act, 15 U.S.C. § 771(a)(2). As a direct and proximate result of these violations, Plaintiffs and the other Class members sustained substantial damage in connection with their purchase and/or acquisition of B2B Internet HOLDRS. Plaintiffs and the other Class members who purchased or otherwise acquired their B2B Internet HOLDRS pursuant or traceable to the defective Prospectuses referenced herein, but who still hold their B2B
Internet T4OLDRS, have the right to rescind and to tender their securities to Defendants and hereby reserve that right.
46 143. Less tha.n one year has elapsed from the time when Plaintiffs and the other Class members discovered or reasonably could have discovered the facts upon which this claim is based to the time of the filing of this class action. Less than three years has elapsed from the sale to the public of the securities upon which this claim is based to the time that Plaintiffs filed this action.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs, on their own behalf and on behalf of the Class, pray kr judgment as follows:
A. Declaring this action to be a proper class action and certifying Plaintiffs as class representatives under Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure;
B. On the first claim for relief, awarding Plaintiffs and the other members of the Class the difference between the price they paid for thc B2B Internet HOLDRS that they acquired and either the current value of such stock if it is are currently held by Plaintiffs or the Class members or the price at which such stock was disposed of in the market if disposed of before the commencement of this action;
C. On the second claim for relief, awarding Plaintiffs and the other members ofthe Class the difference between the price they paid for the B2B Internet HOLDRS that they acquired and either the current value of such stock if it is are currently held by Plaintiffs or the Class member or the price at which such stock was disposed of in the market if disposed of before the commencement of this action;
D. On the third claim for relief, awarding rescission in favor of Plaintiffs and the other members of the Class against all Defendants, jointly and severally, for the damages sustained as a result of the wrongdoings of Defendants' together with interest thereon;
47 E. Awarding plaintiffs pre-judgment and post-judgment interest, as well as the fees and
expenses incurred in this action, including reasonable allowance of fees for plaintiffs' attorneys and
experts;
F. Awarding such other and further relief as the Court may deem just and proper.
JURY DEMAND
Plaintiffs demand a jury trial of all issues so triable.
DATED: March 14, 2003 Respectfully submitted,
WEISS & YOURMAN
Joseph H. Weiss (JW-4534) Moshe Balsam (MB-2809) David C. Katz (DK-6235) Jack I. Zwick (JZ-2514) Richard A. Acocelli (RA-2029) 551 Fifth Avenue Suite 1600 New York, New York 10176 (212) 682-3025
Attorneys for Plaintiff
48 CERTIFICATION OF SERVICE
I hereby certify that a copy of the foregoing was served as indicated on the 14 th day of March, 2003, to the following:
Frederic S. Fox, Esq. (By Hand) Jules Brody, Esq. (By Hand) KAPLAN FOX & KILSTIEIMER LLP Aaron Brody, Esq. 805 Third Avenue STULL, STULL & BRODY 22nd Floor 6 East 45th Street New York, NY 10022 New York, NY 10017 (212) 687-1980 (212) 687-7230
Jacqueline Sailer, Esq. (By Hand) RABIN & PECKEL, LLP 275 Madison Avenue New York, NY 10016 (212) 682-1818
Herbert E. Milstein, Esq. (Mail) COHEN, MILSTEIN, HAUSFIELD & TOLL, P.L.L.C. 1100 New York Avenue, N.W. Suite 500 Washington, D.C. 20005-2113 (202) 408-4600
Linda P. Nussbaum, Esq. (By Hand) Susan R. Schwaiger, Esq. COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 825 Third Avenue, 30th Floor New York, NY 10022-7519 (212) 838-7797
Edward F. Haber, Esq. (Mail) SHAPIRO HABER & URMY, LLP 75 State Street Boston, MA 02109 (617) 439-3939
Edward J. Yodowitz, Esq. (By Hand) SKADDEN, ARPS, SLATE, MEAGHER & FLOM Four Tunes Square New York, NY 10036 (212) 735-3000 1/ ZfLad A4:14.# astasi