Investors Sue Merrill Lynch for 1 Billion Dollars

INVESTORS SUE MERRILL FOR $1B
Miami Herald

October 10, 2002

The tech bust landed in the Broward County courts Wednesday. A shareholder lawsuit filed in Broward's circuit court seeks $1 billion in damages from Merrill Lynch & Co. on behalf of investors in the Focus Twenty Fund, a Merrill mutual fund that tanked with the technology sector, said plaintiffs' lawyer Darren C. Blum.

"It's almost like enough is enough," said Blum, who hopes to send Merrill a message. "I think they need to pay." Court papers filed Wednesday cite conflicts of interest between the brokerage firm's investment bankers and its research analysts, who allegedly touted stocks to help the firm secure lucrative banking deals. The claims echo findings made earlier this year by New York Attorney General Eliot Spitzer, whose office said Merrill's independent research division had harmed investors with biased stock ratings and advice. Merrill analysts - paid to help recruit new investment-banking clients - gave preferred clients favorable coverage even when their stocks were dubious investments, Spitzer's investigation found. "Those stocks were artificially inflated due to Merrill's conflict of interest," Blum said. "If they're looking at a company and the analyst is playing hokeypokey with the report, then the reports are no good." Merrill spokesman Mark Herr said these allegations were baseless because Spitzer's investigation did not implicate Merrill's mutual-fund analysts. "It's simply not true," Herr said. "This fund relied on its analysts and its analysts relied on industry-wide information to come up with their recommendations.

"There's no there there to the claim their recommendations were tainted." Much of the earlier controversy focused on Merrill's chief Internet analyst, Henry Blodget. Internal e-mails showed he called one Internet stock a "piece of junk" yet gave the company, an investment-banking client, the firm's highest stock rating. Blodget left Merrill in December 2001. Merrill settled with Spitzer's office in May for $100 million, without admitting any wrongdoing. The shareholder suit also accuses Merrill of fraud, saying it downplayed Focus Twenty's riskiness. Sales materials pitched the fund as suitable for retirement or funding a child's education, Blum said. But with up to a 90 percent concentration in technology and telecommunications companies, such as Inktomi and Exodus, the fund was inappropriate for all but the wealthiest investors, according to court papers. "You can't overconcentrate," Blum said. "At least have a hedge. Have an exit strategy."

Merrill disagrees that it misled investors. "The prospectus disclosed the risk of investing in the Focus Twenty fund," Herr said. The shareholder suit was filed on behalf of Thomas G. Strano, 54, a retired Hertz bus driver and investor living in Boynton Beach. Strano plowed savings of about $100,000 into Focus Twenty in 2000, said Blum, who seeks to represent investors nationwide with similar losses and have the suit certified as a class action. Strano has since returned to work as a seafood-counter clerk at a Boynton Beach Publix. Court papers recall the bubble of the late 1990s and early 2000, when investors clamored to ride the Internet and tech bandwagons. In March 2000,the Focus Twenty IPO raised $1.05 billion. The fund was managed by James McCall. Merrill hired him from Pilgrim Baxter & Associates in 1999 to attract investors with new growth-oriented funds. Investors had withdrawn $1.2 billion from Merrill's traditionally value-driven stock and bond mutual funds in January 2000 alone. Focus Twenty soared briefly, ranking No. 6 of the top 20 best selling funds in March 2000. But its tech-heavy portfolio cratered in 2001, losing roughly 70 percent of its value. McCall left Merrill in November 2001, Herr said. The fund, which peaked at $10.92 in September 2000, closed Wednesday at $1.11. It serves as a lightning rod for disgruntled mutual-fund customers.

Other investors have hauled Merrill into court over Focus Twenty, Herr said. But he would not say how many.

"There's no excuse," Blum said. "These people should not have lost the amount of money they lost."