Want to sue over bad stock advice? You're not alone

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Want to sue over bad stock advice? You're not alone

Larry Dignan
Department Editor, CNET Investor
Monday, August 20, 2001

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It took only a few weeks, but class-action lawsuits against Wall Street analysts are topping the absurdity levels of the usual run-of-the-mill shareholder lawsuits.

In the typical shareholder class-action suit, a stock falls and lawyers come out from under their respective rocks to sue companies. Some cases are warranted, but often lawyers just land some fees.

HOWEVER QUESTIONABLE some class-action lawsuits are, they usually allege some specific wrong: a company misstated earnings, fudged numbers, or withheld material information.

Until now. Thanks to Merrill Lynch, which settled an arbitration case against Internet analyst Henry Blodget, Wall Street analysts are wearing the litigation bull's-eye, and class-action lawyers are salivating.

A host of law firms have launched class-action lawsuits against Morgan Stanley's Mary Meeker for playing a dual role of investment banker and analyst and not disclosing it. That's about all the specifics you'll find.

CONFLICTS OF INTEREST among brokerages and their analysts are well known, but it still doesn't make these lawsuits any easier to swallow. The latest batch of cookie-cutter lawsuits against Meeker for her bullish calls on eBay, Amazon and AOL Time Warner reek of bottom feeding.

Here's what the class-action crowd is hoping will happen: Pester Morgan Stanley with lawsuits, and the brokerage settles to avoid bad publicity.

The lawyers had better hope these analyst class-action suits get settled, because if not, they're likely to get dismissed, said John Coffee, a securities litigation expert at Columbia University's law school.

For its part, Morgan Stanley said the class-action lawsuits are "without merit" and "should be and will be dismissed." The brokerage said it would defend itself "vigorously."

Morgan Stanley argues that Meeker is being targeted just so the class-action suits garner a few headlines. That's not a hard argument to make. Here are just a few reasons why these suits are a bunch of baloney:

"We're all in this together" logic. If you take these complaints at face value, Meeker was Queen of the Universe as well as the Internet. She allegedly influenced Morgan Stanley clients and individual investors who used other brokers. Even that New York cabbie who wouldn't shut up about dot-coms two years ago followed Meeker.
Coffee said plaintiffs will have a big hurdle trying to prove Meeker held that much influence over the masses. "Just because Meeker made a recommendation doesn't mean everyone followed it to the same degree," Coffee said. "Her advice wasn't relied on or heard by all. Her opinions reached the markets through osmosis."
Fred Taylor Isquith, an attorney with Wolf Haldenstein Adler Freeman & Herz, one of the firms involved in the class-action suit, obviously disagrees. "In many cases, Meeker moved the market and was much more enthusiastic than her peers," he said.
Meeker's calls are opinion. In the eBay complaint, Meeker was blasted for not changing her rating on the stock from Sept. 24, 1998--eBay's first day as a publicly traded company--to May 14, 2001. Meeker is clearly in the buy-eBay-all-the-time camp, but that's her right. She is registered with the government to provide investment advice.
Of course, Morgan Stanley was an underwriter for the eBay initial public offering, but much of her praise was warranted. eBay closed at a split-adjusted $7.89 on its first day of trading and closed May 14 at $55.24. If you bought eBay shares back in March 2000, you would have had losses, but if you listened to the Queen on the first day and held eBay shares--underwriting conflicts and all--you would have made out pretty well.
As for the other stocks mentioned in various class-action suits against Morgan Stanley, Meeker was generally on target about AOL Time Warner, but was obviously drinking the dot-com Kool-Aid about Amazon. In any case, it's still her opinion, and she's entitled to it. Analysts are often wrong, but that doesn't mean you should sue them for it. If bad stock calls justified lawsuits, we'd sue weather forecasters and economists, too.
Major legal hurdles. Coffee notes that these suits are too mushy, and the court may not even certify them, let alone allow a jury trial to proceed. Proving that investors blindly followed Meeker will be tough, and assessing damages will be even tougher. Arbitration cases such as the one against Merrill Lynch are easier to settle because there are specific losses involved.
And if the losses related to Meeker are hard to pin down, so is the class-action status of the lawsuit. "Analysts don't ensure an outcome just because they make a recommendation," Coffee said.

Do you think these class-action lawsuits amount to ambulance-chasing? TalkBack to me.

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