Merrill Lynch & Co., Goldman Sachs Group Inc., Morgan Stanley and Credit Suisse Group won dismissal Monday of lawsuits accusing them of misleading investors with biased research tailored to win investment banking business.
The rulings by two federal judges in New York were the first to address the banks' liability for research since 10 of the largest Wall Street firms agreed in April to pay $1.4 billion to settle similar charges by regulators.
U.S. District Judge Milton Pollack said investors who sued Merrill and Henry Blodget, its former top technology analyst, were "high-risk speculators" who "now hope to twist the federal securities laws into a scheme of cost-free speculators' insurance."
The decisions will hurt other suits in which investors don't have direct evidence that analysts lied to them, said Marcel Kahan, a New York University law professor.
The rulings boosted brokerage stocks. Merrill shares rose $1.52 to $48.20, Goldman Sachs shares rose $2.10 to $85.85, Morgan Stanley shares rose $1.44 to $44.19, and Credit Suisse gained 18 cents to $26.50. Citigroup Inc. added $1.01 to $43.81, and Lehman Bros. Holdings Inc. rose $1.25 to $67.73. All trade on the New York Stock Exchange.
One hundred and sixty investors who had seen their stock holdings plummet filed suits against Merrill Lynch after New York Atty. Gen. Eliot Spitzer began an investigation into the firm's analyst practices. Pollack dismissed suits involving research about two Internet companies, 24/7 Real Media Inc. and Interliant Inc.
"We're pleased with the decision and that the judge accepted our arguments," Merrill spokesman Mark Herr said.
Spitzer had released e-mails from Merrill analysts, including Blodget, in which they disparaged companies whose shares they were recommending. Prosecutors said the firms slanted their recommendations to garner fees for such services as selling stock and bonds and advising on mergers.
In April, Blodget agreed to pay $4 million and be barred from the securities industry in a settlement with regulators over publishing misleading research.
The investors said they relied on the analysts when they decided to buy shares. Eventually, investors filed suit concerning 27 stocks.
Pollack in his ruling cited numerous reasons to dismiss the cases, including the plaintiffs' failure to explain why two e-mails they introduced concerning 24/7 rendered the analyst research reports on the company false. He said the plaintiffs failed to put forth enough facts to support their case.
The dismissals for Goldman, Credit Suisse First Boston and Morgan Stanley involved research about Covad Communications Group Inc., an Internet company. U.S. District Judge Harold Baer also cited deficiencies in the complaint by investors, though he didn't address the merits of the case.
Baer first dismissed the complaint in February, though he allowed the plaintiffs to file a new suit. They did so in April, this time including internal bank e-mails that regulators made public. In one, a CSFB analyst complained of bank rules that hindered him from expressing his true opinions, Baer said.
Baer said those e-mails weren't specific enough to support a case involving Covad. He also said the plaintiffs waited too long to file the initial case in 2002 after learning of the alleged fraud in mid-2001.
And he said there was inadequate evidence that the banks had acted to deceive investors. "Given the irrational exuberance of the stock market at the time, especially with respect to technology stocks, the plaintiffs' allegations about a general industrywide conflict of interest fails" to show that the analysts intended to cheat investors in Covad, he said.
David Trone, an analyst at Prudential Securities Inc., called Pollack's opinion in the Merrill case "scathing." The decision, "in our view, provides zero opportunity for plaintiffs' attorneys to bring these suits back in another form," he said.
Steven Toll, who represents investors in the Merrill case, said the plaintiffs would either appeal or ask Pollack to reconsider his ruling.
"These plaintiffs were not speculators," he said. "These plaintiffs were hardworking people who built up businesses" and then invested in Internet companies that later collapsed.
In an interview, Pollack said he expected that his ruling would supply grounds for dismissal in other analyst cases, if the plaintiffs made similar allegations.
He said he hadn't decided whether to dismiss the other cases pending before him because Merrill Lynch hadn't asked him to do so. "They haven't been presented," he said.
Suits against analysts at other firms, including Lehman and Citigroup's Salomon Smith Barney, now known as Citigroup Global Markets Inc., are pending before other judges in Manhattan and elsewhere.
Most recently, U.S. District Judge Denise Cote refused to toss out a case that claimed Citigroup and its former telecommunications analyst, Jack Grubman, issued biased research about WorldCom Inc.