Judge Says Merrill Clients Should've Known Better

Updated from 3:53 p.m. EDT

Investors trying to sue Merrill Lynch(MER Quote) over tainted research got a slap in the face Tuesday when a federal judge tossed their suit and lambasted the investors for their own naivete.

The judge referred to the investors as "high-risk" speculators who seek to hold Merrill Lynch accountable for their own folly and "rash speculation." The suit was the first of two dozen class-action suits filed against the brokerage.

The ruling by U.S. District Court Judge Milton Pollack in New York applies only to claims raised by investors in two stocks, 24/7 Media(TFSM Quote) and Interliant.

But it could be critical because Pollack oversees all the research class actions against Merrill Lynch. In a footnote to his 43-page decision, the judge indicated that he has yet to determine whether his ruling in dismissing the case will be applicable to all those remaining lawsuits.

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The dismissal is the first victory for a Wall Street firm in the aftermath of this year's $1.4 billion tainted-research settlement. It sparked buying in Merrill's shares: They closed at $48.20, a rise of $1.52, or 3.26%, in NYSE trading, while the Philadelphia Bank Index rose 1.28% on Tuesday.

A Merrill Lynch spokesman said "we are pleased with the judge's decision." A lawyer for the investors could not be reached for comment.

The dismissed lawsuit alleged that investors lost money on the stocks because Merrill Lynch analysts, led by disgraced Internet guru Henry Blodget, misled them by publishing overly bullish reports. Lawyers bringing the lawsuit on behalf of thousands of investors introduced evidence gathered during New York Attorney General Eliot Spitzer's investigation last year of Merrill Lynch's research division.

Pollack was unmoved by the emails Spitzer's office unearthed, in which Blodget and other Merrill analysts referred to some of the stocks they followed as "piece of crap" or "piece of junk." In fact, he blamed investors for ignoring an obvious stock market bubble in the making, and simply holding onto the stocks until it was too late to sell.