Merrill to Settle Suits Over Stock Research

It will pay $164 million to settle 23 class-action complaints alleging conflicts of interest.
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Merrill Lynch

(MER)

is close to putting the ghost of disgraced Internet guru Henry Blodget behind it.

The Wall Street firm announced Friday that it had reached a $164 million settlement with litigants in 23 securities class actions arising out of allegedly biased research reports issued by Blodget and his team of dot-com analysts.

The settlement means there are just two research class actions pending against Merrill Lynch.

Merrill Lynch said the settlement will result in an after-tax charge of $102 million, or 11 cents a share, which it will book in the fourth quarter of last year. The settlement will reduce Merrill Lynch's fourth-quarter earnings to $1.40 a share, which is still a dime more than analysts had been expecting.

More important, the deal is a relatively cheap resolution of a litigation mess that has hung over Merrill since the firm paid a $100 million penalty to settle an investigation by New York Attorney General Eliot Spitzer into analyst conflicts of interest. The Merrill investigation ultimately spawned an even broader investigation into Wall Street's conflict of interests that culminated with an industrywide $1.3 billion settlement and changed the way stock analysts and investment bankers interact.

In the research settlement, Blodget paid a $4 million fine for touting stocks he personally believed were not worth the prices they were fetching during the Internet boom of the late 1990s. Blodget was banned from working on Wall Street for life. Recently, the former analyst has been trying to rehabilitate his image by becoming a journalist.

In the negotiations with the plaintiffs' lawyers, Merrill Lynch had the upper hand. Two years ago, U.S. District Judge Milton Pollack dealt a blow to investors when he dismissed 11 of the research class actions filed against the firm. Pollack, who died last year at the age of 97, ruled that most investors had no one to blame but themselves for buying overpriced Internet stocks.

Pollack took a dim view of the research settlement. He referred to the plaintiffs as "high-risk speculators,'' looking for someone to blame for their losses in the market.

Another factor working against the lawyers bringing the class-action lawsuits is that many investors could not show they had actually relied on one of Blodget's bullish reports before buying a stock. Legal experts had predicted the inability of investors to demonstrate they actually relied on an analyst's advice would be the downfall for many legal claims.