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Tainted touters at Morgan Stanley

AOL TW shareholders sue over false, misleading statements

Another set of disgruntled investors slammed Wall Street with a lawsuit Tuesday in what’s emerged as the hottest trend of the summer: Seeking to recoup losses on stocks touted by banks and analysts with alleged conflicts of interest.

The class-action suit filed in the Southern District of New York was courtesy of purchasers of AOL Time Warner stock between August 1998 and May 2001. It names Morgan Stanley Dean Witter and the firm’s “star” Internet analyst, Mary Meeker, as defendants, accusing them of issuing false and misleading statements and failing to disclose material information about Meeker’s relationship with AOL.

In a statement, Morgan Stanley called the claims “totally meritless” and the firm’s research thorough and objective. “Ms. Meeker, whose integrity is beyond reproach, is one of the most respected analysts on Wall Street. Naming her in this suit is nothing more than a publicity stunt to mask a flawed complaint,” it said.

In fact, it’s hard to justify claims of financial losses, which the plaintiffs do, during the period named in this particular suit — from Aug. 6, 1998, to May 14. Adjusted for splits and the merger, the shares were trading at $13.17 at the start of the period and at $51.60 at the finish. (Not that investors who paid out $94 a share when the stock hit its high in December 1999 haven’t felt some pain.)

Setting a trend

Americans have been buying stocks for years, yet never have so many sought legal recourse for what in the old days would have been called bad investment advice, not an actionable offense.

Yet a truly enormous amount of wealth was lost in the Internet meltdown. Financial news networks like CNBC made media stars of analysts such as Meeker and Merrill Lynch’s Henry Blodget, who, in hindsight, ought to have been the first to see the crash coming. At the same time, many banks have a glaring weak spot to be exploited in the lucrative investment banking arms that pay their bills.

The latest class-action suit alleges Meeker’s ratings, recommendations and positive statements regarding AOL, which merged with Time Warner last January, were not based on objective analysis, “but rather on her desire to attract and retain AOL as a Morgan Stanley banking client.” Meeker’s compensation, suit said, was directly tied to the amount of investment banking business she generated.

People close to Morgan Stanley deny that outright. And some on Wall Street say they’re getting fed up. “What a witch hunt. It’s disgusting. Since when is there a guaranteed return on investment?” said one top analyst. “Our job is to recommend stocks, when to buy and when to sell. You can’t always be right.”

Spreading the pain

But the floodgates have opened. Earlier this month shareholders of a dozen tech companies sued CS First Boston, Goldman Sachs, Merrill Lynch, Morgan Stanley, BancBoston Robertson Stephens and Salomon Smith Barney.

Suit claims the banks violated federal securities laws and New York state law by systematically issuing buy recommendations for securities of technology companies that they knew or should have known had dubious financial histories, negative cash flows, insufficient revenue and overall deteriorating fundamentals.

And investors of Amazon.com and eBay sued Meeker and Morgan Stanley alleging that Meeker issued positive recommendations on the companies’ stock to generate investment banking business and that her purported $15 million salary in 1999 was directly linked to her ability to secure that business.

In July, Merrill Lynch settled an arbitration case brought by Debases Kanjilal, a former client, who claimed he was misled by bullish stock calls from analyst Blodget that cost him $400,000.

SEC weighs in

The complaints came one day after the SEC said in a report that it had found widespread conflicts of interest among analysts at the nation’s largest brokerage firms. The SEC noted the breakdown of the supposed line separating analysts from investment bankers, particularly as analysts routinely got involved in corporate finance deals and participated in roadshows. The SEC also said analysts’ pay at some firms was linked to the performance of the investment banking unit.

As the pressure mounted, 14 major banks have agreed to a voluntary code of conduct that stresses fuller disclosure of investment banking relationships and other issues. Merrill Lynch has officially forbidden analysts from owning stock in companies they cover.

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