Dot-bombs rock economy, roil investors

If Henry Blodget and Mary Meeker were the king and queen of Internet analysts, then one high-profile New York attorney wants to be their Robespierre.

As hearings got under way in Congress last week examining the role of securities analysts in the dot-com implosion, New York securities lawyer Jacob Zamansky was already deep into his own inquisition.

Before he’s through, Mr. Blodget of Merrill Lynch & Co Inc., Ms. Meeker of Morgan Stanley Dean Witter & Co. and others could be on the hook for tens of millions of dollars in damages.

Mr. Zamansky has also targeted top securities analyst Jack Grubman of Salomon Smith Barney Inc. and soon may be putting other securities executives in the dock, including Frank Quattrone of Credit Suisse First Boston Corp.

“I think you are going to see a trend here,” says Brian Smiley, a partner in Paige Gard Smiley & Bishop LLP, an Atlanta law firm specializing in securities litigation. “There’s a great deal more scrutiny on analysts.”

Heretofore, suing analysts directly for stock market losses has been rare, but furious investors increasingly blame Wall Street analysts for helping to pump up the dot-com bubble. Now they want their day in court – or before an arbitration panel.

“I invested through Merrill Lynch. I trusted them. I followed their analyst’s recommendations, and I lost all my children’s education money,” says Dr. Debases Kanjilal, a New York pediatrician and Zamansky client.

He says he lost $518,000 on an Internet stock, InfoSpace Inc., which Mr. Blodget rated highly..

Mr. Blodget, he claims, was biased in his recommendation, failing to disclose that the day before he reiterated a “buy” on InfoSpace in July, Merrill Lynch investment bankers had met with Go2Net Inc. to serve as an adviser in its $4 billion sale to InfoSpace.

Merrill spokesman Joseph Cohen calls Dr. Kanjilal’s claim “meritless” and the timing a “coincidence.”

“We anticipated that these decisions might be scrutinized. But the fact is there was a Chinese wall,” says Mr. Cohen. “We’re damned if we do and damned if we don’t.”

The doctor’s arbitration case against Mr. Blodget, Merrill Lynch and his broker, seeking to recoup losses and $10 million in punitive damages, is the first of a number of claims Mr. Zamansky is pursuing.

He says he also may pursue claims against Ms. Meeker, Mr. Grubman and Mr. Quattrone.

“I have been contacted by a number of individuals claiming that they relied upon the analysts’ advice, and that this advice was tainted by conflicts of interest, and that the valuation criteria used by these analysts were baseless,” he says.

He plans to decide next month whether to file claims against the others for arbitration with the New York Stock Exchange or in court.

A case must go to arbitration if the investor is a customer of the firm being sued, but it can go to court on the grounds of security fraud.

“If Mary Meeker is recommending Priceline.com at $150 a share, and the firm has just underwritten the stock, that ought to be noted,” Mr. Zamansky says.

“Grubman was very bearish on AT&T for years. Late last year, he reversed his recommendation and gave a `buy’ recommendation of AT&T without disclosing that at the same time his firm had just been retained as part of a $10 billion syndicate underwriting of AT&T Wireless,” he adds.

Adds Mr. Smiley: “As long as the clients you represent bought the stock through a firm on the basis of the firm’s recommendation, and if that basis was not well founded or if there were conflicts of interest that were not disclosed, the firm is going to be liable for whatever its analyst did or didn’t do.”

Countering the growing distrust of analysts, the Securities Industry Association, a Wall Street trade group, last week adopted a set of guidelines to ensure the integrity of securities research.

Endorsed by 14 Wall Street firms, the recommendations say that analysts should not report to investment bankers, their compensation should not be directly linked to investment banking transactions, they should not trade against their recommendations, and they should disclose their own interests in the stocks they cover.

“Behind every transaction or piece of advice given to an investor is one simple but important principle: The client’s interests come first,” says Mark Sutton, chairman of the SIA’s board of directors and president of the private-client group of UBS PaineWebber Inc.

But Dr. Kanjilal, a tech investor who built an initial $250,000 investment up to $1.2 million largely on his own, describes a far different experience.

Working with his Merrill Lynch broker, he decided in March 2000 to invest $571,200 in InfoSpace, paying a split-adjusted price of $122 and $133 a share, respectively, in two separate purchases.

He also put $481,000 into JDS Uniphase Corp., which Mr. Blodget did not cover. As the stock price tumbled, Dr. Kanjilal says, he repeatedly asked the broker to sell.

“He talked me out of it,” says Dr. Kanjilal. “He said not to sell: `Blodget is recommending the stock, and it will go back up. Why lose money?”‘ he recalls.

“I was suspicious, but because of Blodget, I kept it. Everybody thought he’s one of the best guys. Whenever he talked on CNBC, I heard it, and the price was going up immediately. So I trusted him too much, I think.”

In December, Mr. Blodget downgraded InfoSpace after it had fallen to under $10 per share. Dr. Kanjilal called his broker and sold at $11.

Mr. Cohen says Mr. Blodget’s recommendations are just that. “Henry Blodget had warned investors for more than two years that the vast majority of Internet stocks would fail,” says Mr. Cohen.

“This particular investor was experienced, made his own decisions and chose a risky investment strategy,” he adds.

At last week’s hearing, analysts received both solace and scorn.

“There is no question that Wall Street’s research is riddled with conflicts of interest,” said David Tice, president of David W. Tice & Associates in Dallas and publisher of an institutional research service called Behind the Numbers.

But James K. Glassman, of the American Enterprise Institute, said analysts should not be scapegoats.

“Analysts have a professional and moral obligation to make sure that research is the most honest and thoughtful they can offer. Most of them … live up to that obligation,” he added.