Merrill Lynch to pay client US$400,000 to settle allegations
( 2001-07-21 11:05 ) (7 )

Merrill Lynch & Co agreed to pay a former client US$400,000 to settle allegations that he was misled by overly bullish research by Internet stock analyst Henry Blodget as well as information provided by his broker at the Wall Street powerhouse.

In an arbitration case filed in March with the New York Stock Exchange, Debasis Kanjilal claimed that he lost about US$518,000 in the Internet stock Infospace Inc due to the fact that Blodget had kept a "buy" recommendation on the stock as Merrill Lynch as the firm brokered a deal to get another Web company bought by Infospace.

Kanjilal, 46, a pediatrician and father of two who had been trying to build his children's education fund, also claimed that he lost about US$311,000 in JDS Uniphase Inc. due to a long-term inflated rating, according to the case filing.

A spokesman for Merrill Lynch, which is the nation's largest brokerage firm, said Friday that it had settled the arbitration case to "avoid the further distraction and expense of protracted litigation."

Joe Cohen added that "all claims with respect Henry Blodget and Henry Blodget himself were dismissed from this case."

The case comes as brokerage firms face growing criticism that Wall Street analysts aren't independent enough from the companies they tout. They have been accused of being cheerleaders for companies the analysts' investment firms own stock in or do business for, giving investors biased advice.

The Securities and Exchange Commission warned investors last month to take the stock recommendations of financial analysts with a grain of salt. In Congress, lawmakers are putting together a group of experts to review the new Wall Street guidelines.

In addition, the Securities Industry Association, Wall Street's biggest trade group, recently unveiled new voluntary guidelines for analysts, requiring analysts to clearly disclose their holdings in companies they cover and prohibit them from trading against their own recommendations. The guidelines also say analysts should not have their pay directly linked to the investment banking transactions handled by their firms for companies they cover.

The ramifications of the arbitration case, the settlement of which was first reported by The Wall Street Journal, are unclear. It is costly to file such cases, so it may only be worthwhile for those investors with big losses. But Merrill Lynch's willingness to settle does raise the idea that investors do have some recourse.

Jacob Zamansky, an attorney with Zamansky & Associates in New York, represented Kanjilal and said he is looking into similar cases against other brokerages.

"The regulators need to step in with clear and firm new disclosure rules for analysts," Zamansky said.

Under the arbitration case, Kanjilal said he bought 4,600 shares of Infospace stock at the split-adjusted price of US$122 to US$133 a share in March 2000. The claim states that as tech stocks began to weakened, he was concerned about his positions, and spoke daily to his broker, Michael Healy, about the situation. Healy, according to the claim, told him to "sit tight" and not sell.

Infospace's shares, however, began to fall. In mid-May 2000, they were trading at around US$60 a share and then slipped to US$50 a share. Kanjilal noticed that the company's CEO was selling large positions of the stock. When asked about the situation, the broker said that there was nothing wrong with the company and reminded Kanjilal that Blodget had a "buy" recommendation on the stock and a US$100 price target.

By December, the stock had plummeted. Kanjilal heard on the news that Blodget had downgraded Infospace. Kanjilal called his broker and sold the stock for US$11 a share, losing about US$518,000.

According to the claim, Kanjilal later learned that Merrill Lynch had been retained as a financial adviser for another Internet company, Go2Net Inc, which Infospace purchased for about US$4 billion in July 2000. The case claims that the deal would have been jeopardized if Infospace shares had come under selling pressure

A similar situation happened with his investment in JDS Uniphase. In early 2000, he bought 6,800 shares of the company at a split-adjusted price of between US$64.50 and US$89.44. In March of that year, he had heard reports that the company was overvalued and put in a claim to sell at a split-adjusted price of US$120-US$130. His broker convinced him otherwise.

At numerous other times during the year, Kanjilal discussed the possibility of selling his shares but was dissuaded. Finally, in January of this year, Kanjilal sold the shares for US$45 each, for a total loss of US$311,619.

The US$400,000 that Kanjilal agreed to in the settlement was far below the amount he had originally sought from New York-based Merrill Lynch. According to the claim, he had asked for US$800,000 to recover his investment losses and US$10 million in punitive damages to "punish and deter respondents and other firms from engaging in similar conduct in the future."