Ex-Analyst Blodget Is Barred By NASD, Will Pay $4 Million ---------------------------------------------------------
By CHARLES GASPARINO Staff Reporter of THE WALL STREET JOURNAL April 28, 2003
Henry Blodget, whose bullish research calls as an Internet analyst once symbolized the technology-stock mania of the 1990s, will pay $4 million in penalties and be barred from the securities industry for life as part of a settlement scheduled to be announced as early as Monday, people close to the matter say.
The action stems from an investigation launched by the National Association of Securities Dealers, which earlier this year disclosed that it was preparing to take formal action against Mr. Blodget for some of his research calls during the stock-market bubble. The NASD settlement with Mr. Blodgett is scheduled to be announced Monday as part of the broad settlement with Wall Street firms over conflicted research.
The NASD examined whether Mr. Blodget, once the star tech analyst at Merrill Lynch & Co., hyped ratings on Internet stocks to win lucrative investment-banking deals for his firm, while he privately harbored doubts about these very same companies.
Under the terms of the settlement, Mr. Blodget will pay $2 million in fines and $2 million in disgorgement of any ill-gotten gains in addition to a lifetime bar from the brokerage business, these people say. Mr. Blodget will neither admit nor deny wrongdoing in the matter, which will cap an investigation headed by the NASD, as well as the Securities and Exchange Commission and the New York Stock Exchange. Mr. Blodget, contacted by e-mail, had no comment. A NASD spokeswoman had no comment.
The move comes as regulators conclude the broad settlement over allegations that brokerage houses issued overly optimistic research on companies to win investment-banking deals, misleading investors in the process. The settlement includes $1.4 billion in fines, restitution and other payments, as well as guidelines designed to prevent Wall Street firms from issuing compromised research to win lucrative banking deals. The settlement is expected to be announced after the SEC formally votes to approve the measure, which is expected Monday.
The action involving Mr. Blodget marks the second major settlement against a stock analyst during the recent regulatory investigation of conflicts involving Wall Street research. Also Monday, regulators including New York state Attorney General Eliot Spitzer and the SEC will formally announce a previously disclosed settlement pact with former Salomon Smith Barney analyst Jack Grubman over allegedly conflicted research. Mr. Grubman will pay $15 million, without admitting or denying wrongdoing, and like Mr. Blodget, will be barred from the securities industry for life. Mr. Grubman has declined to comment.
The payments from Wall Street and its former superstars won't likely end here. The Blodget settlement is expected to trigger more arbitration claims by those who say they lost money in stocks Mr. Blodget recommended. Some analysts have predicted that such private litigation could add significantly to the price tag Wall Street firms will pay from allegedly faulty research.
"This is huge," said Miami plaintiff lawyer Mark Raymond, who has a number of cases currently pending against Merrill, alleging tainted research. "To date I think investors have been greatly disappointed by lack of accountability to individuals."
In many ways the broad research settlement, scheduled to be announced at SEC headquarters in Washington, finds its roots in the allegations of conflicted stock research issued by Mr. Blodget. During the tech bubble, Mr. Blodget made a name for himself by putting a $400 target on Amazon.com Inc., the online retailer. For a time, the analyst was right.
But when the Internet stock bubble burst, Mr. Blodget became a symbol of 1990s excesses. In 2001, Mr. Spitzer launched a high-profile inquiry into Mr. Blodget's research calls, and the following April, released details of his probe, including damaging e-mails showing that Mr. Blodget and analysts in the Merrill tech-research department privately doubted stocks that won higher public ratings.
In an affidavit, the attorney general's office cited the once-highflying technology stock InfoSpace Inc., which it said was on Merrill's "Favored 15" list of stocks the firm was recommending. Documents released by the attorney general's office show Merrill kept InfoSpace on the list from at least August 2000 until Dec. 5, 2000, even though Mr. Blodget as early as July 2000 said the "stock was a 'powder keg' and that 'many institutions' had raised 'bad smell comments' about it."
The state office said Mr. Blodget was unaware that the stock -- which he had been covering -- was on the favored list. After a complaint by a Merrill broker in October 2002, Mr. Blodget contacted another Merrill analyst and said in an e-mail "can we please reset this stupid price target and rip this piece of junk off whatever list it's on. If you have to downgrade it, downgrade it." The state office said InfoSpace wasn't removed from the list until December. At the time, Merrill said the e-mails were "taken out of context," and Infospace declined to comment.
But the case was damaging, not just for Merrill and Mr. Blodget, but for all of Wall Street. Mr. Blodget's e-mails and those of analysts in his internet-research group outraged investors and regulators for their blunt assessment of the stocks that they once peddled to small investors as sound companies. The e-mails showed that the Merrill analysts said certain stocks were "going a lot lower," they were also described as "crap," or a "dog" in the various e-mail exchanges released by Mr. Spitzer's office.
Merrill agreed in May 2002 to pay $100 million to settle the case brought by the New York attorney general and to make some changes to its research practices. Mr. Blodget, who left Merrill in December 2001, wasn't charged in the matter.
But after the Spitzer case, the NASD, SEC and NYSE began inquiries into potentially conflicted stock research. The NASD focused on individual analysts and bankers who allegedly propelled the tech bubble, such as Mr. Blodget, Mr. Grubman and Frank Quattrone, the former Credit Suisse First Boston technology banker, who also was charged in a civil case by the agency. Mr. Quattrone faces criminal charges from the U.S. attorney's office for obstruction of justice; he says he has done nothing wrong. People familiar with the NASD action against Mr. Blodget said it resembles Mr. Spitzer's case because the agency will claim that Mr. Blodget harbored doubts about companies that received higher ratings, evidence, in the NASD's opinion, that he issued conflicted research.
-- Susanne Craig contributed to this article. Write to Charles Gasparino at charles.gasparino at wsj.com
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