Just weeks after Merrill Lynch of New York settled a case with the State of New York to improve its disclosure of business dealings with the companies it analyzes, the New York investment and banking firm faces a smattering of lawsuits.
The complaints include a claim that Merrill Lynch inappropriately inflated the values of one of the mutual funds it manages, as well as several stocks it analyzes. One of the suits, filed by the New York law firm Wolf Popper LLP, alleges that Merrill Lynch drove up the value of the Merrill Lynch Internet Strategies Fund by manipulating the market value of several of the stocks in the portfolio.
A statement from the law firm said Merrill Lynch accomplished this through "inflated ratings and biased research reports" that were intended to drum up business for its investment banking unit.
Two other complaints against Merrill Lynch and its Internet analyst Henry Blodget allege that analysts issued misleading statements that promoted individual Internet stocks, such as Openwave Systems of Redwood City, Calif., and Internet Capital Group of Wayne, Pa.
Merrill Lynch is dismissing the suits as groundless, opportunistic claims meant to capitalize on an investigation by the State of New York.
"We don't believe this suit to have any merit," said Merrill Lynch spokeswoman Christine Walton of the Wolf Popper case. "It illustrates a fundamental lack of understanding of how the firm operates. This is a time when a lot of opportunistic claims are being made, and we consider this one of them."
"They don't seem to understand what a portfolio manager does," she continued. "They come to their own conclusions based on their own research and other outside research."
The suits were spawned by an investigation by New York State Attorney General Eliot Spitzer after it was alleged that Merrill Lynch analysts were talking up certain companies' stocks in an effort to bolster the company's investment banking relationships with those companies. Although analysts had been publicly enthusiastic about some of the stocks, it was alleged that those analysts were privately skeptical.
Last month Merrill Lynch said it had reached a deal with Spitzer to disclose more about its business relationships, including stating in research reports whether the firm is likely to receive compensation from any company it reviews. The firm has until June 3 to implement many of the changes.
No Smoking Gun?
"Merrill Lynch as an institution had a view that the Internet sector was overvalued and failed to disclose that to investors," said Robert Finkel, an attorney with Wolf Popper.
The Wolf Popper suit, a class-action complaint that was filed with the U.S. District Court for the Southern District of New York, lists Irving Gordon, an investor in Merrill Lynch's Internet Strategies Fund, as the main plaintiff.
The Internet Strategies Fund fared poorly and was eventually merged into the company's Global Technology Fund, said Morningstar analyst Chris Traulsen.
Traulsen said some liability might be proved against Merrill Lynch in the case, but he was skeptical of the suit's overall premise. "If Merrill's analysts were pushing stocks that they didn't believe in, Merrill might have some liability there," he said.
But, Traulsen continued, "I think it was a terrible fund. I'm not sure people who lost money in it can go back and say, I didn't know this was so risky.'"
Traulsen suggested that if investors could sue Merrill Lynch for allegedly misleading them to invest in a Merrill Lynch fund, then any other mutual fund that used Merrill Lynch research might be a target. That doesn't make much sense, he said.
"Any Internet fund that subsequently went into the tank would be affected by that," he said. "Anybody who invested in an Internet stock [that Merrill Lynch] covered could make the same argument. At some point there does have to be a sense of personal responsibility about your investments."