Lawyer in Blodget Settlement Says More Suits Are Possible

Jacob Zamansky says he has more fish to fry -- and he's naming names.

Zamansky is the lawyer who exacted a $400,000 arbitration settlement from Merrill Lynch(MER - Cramer's Take - Stockpickr) for a client who claimed to have sustained heavy losses due to a bullish call from Internet analyst Henry Blodget. Reports of the settlement fueled lots of talk on an otherwise sleepy summer Friday, but it was hard to figure out what was the bigger response -- bafflement or worry.

The suit alleged that Zamansky's client, Debases Kanjilal, had lost $500,000 on an investment in InfoSpace (INSP - Cramer's Take - Stockpickr) because his Merrill Lynch broker convinced him not to sell in May of last year when the stock was at $60, citing Blodget's bullishness on the stock. InfoSpace closed Friday at $3.16.

Although Blodget has no apparent connection with Merrill's investment banking department, and Merrill did no banking for InfoSpace, Kanjilal claimed there was a conflict of interest because the firm was a financial adviser for Go2Net, which InfoSpace bought last summer. The firm had an undisclosed interest in InfoSpace's stock remaining high, the suit alleged, because that improved the prospect for the Go2Net deal going through. A Merrill spokesman declined to comment on the settlement.

The Merrill settlement is somewhat surprising because the firm has maintained that Blodget was unaware of the Go2Net deal until just before it was announced. But Zamansky says the settlement opens up the doors for further arbitration cases against Wall Street firms whose analysts, he says, did not fully disclose conflicts of interest.

"The significance of this groundbreaking case," he says, "is that it establishes the principle that when an investor relies on an analyst who fails to disclose a conflict of interest, the firm will be held responsible."

Zamansky says he may file arbitration against Merrill over another stock, Internet incubator Internet Capital Group (ICGE - Cramer's Take - Stockpickr), which Blodget remained bullish on while it declined sharply. Merrill was the lead underwriter for Internet Capital Group's August 1999 initial public offering . Merrill did not return calls for comment.

Zamansky is also setting his sights on the recommendations of two other high-profile analysts, Mary Meeker of Morgan Stanley (MSD - Cramer's Take - Stockpickr) and Jack Grubman of Salomon Smith Barney, which is owned by Citigroup (C - Cramer's Take - Stockpickr).

Both Meeker and Grubman have the reputation for making the church/state separation between their firms' research and investment banking groups seem less than solid. Meeker's investment banking relationship with the companies she followed has always been fairly upfront -- one of the alluring things for a dot-com company going public with Morgan as its banker was the cachet of having the top-ranked Internet analyst following it. But while the firm's research always discloses its banking relationships with companies it covers, the disclosures on Meeker's research never detailed the analyst's role in landing these deals.

Zamansky says that he's looking in particular at Meeker's recommendations of drugstore.com (DSCM - Cramer's Take - Stockpickr) and priceline.com (PCLN - Cramer's Take - Stockpickr), two Morgan-led former highfliers that have since fallen on hard times.

A Morgan Stanley spokeswoman declined to comment on the potential suits.

The links between Grubman and his firm's investment banking group are tenuous at best. A Salomon spokeswoman says that Grubman is "first and foremost, a research analyst." (She declined to talk on the subject of a possible suit, citing firm policy.) Yet on Wall Street, Grubman is seen as something more than a research analyst, using his close relationships with leaders in the telecommunications industry to help broker deals for his firm. Such talk can be interpreted as sour grapes, of course, originating from other firms envious of the investment banking money Salomon has drawn from the telecommunications industry.

Zamansky says that in the cases of Meeker and Grubman, the lines between research and banking became blurred. "There's supposed to be a wall separating the research department from the investment banking department," he says. "That wall should not have been crossed."

He also believes that the recent list of "Best Practices" that the Securities Industry Association has lately penned are "toothless," and that rather than firms policing themselves, "regulators need to step in with clear and firm new disclosure rules for analysts."

Whether Zamansky will win any more big arbitration settlements is unclear. Merrill did relatively little investment banking in the Internet sector, so it may have deemed it had little to lose in settling the suit. But Morgan was the King Daddy -- or, more accurately, the Queen Mommy -- of Internet banking, and Salomon has made big investment banking bucks in telecom. Both have every reason to fight Zamansky tooth and nail because, if they settle with one brokerage client, many more will get in line.