Lentell v. Merrill Lynch & Co., Inc.

Merrill Lynch & Co. (Merrill), an investment bank, employs analysts of publically traded companies to make investment recommendations. The Internet Group, one of Merrill’s analyst groups, researched and offered up investment recommendations on up and coming internet companies. The Internet Groups lead analyst, Blodget, recommended two companies, 24/7 Real Media, Inc. (24/7 Media) and Interliant, Inc. (Interliant). Once New York’s Attorney General (NYAG) investigated and requested to bring securities fraud actions against Merrill on the basis that Merrill participated in a strategy where its research departmentdistributedfalse analysis on internet companies, including 24/7 Media and Interliant, in an attempt to create investment banking business, 140 class-action complaints were filed, depending on the NYAG’s supporting affidavits. The 24/7 Media and Interliant actions went first, after they consolidated all the actions. In the aforementioned actions, Merrill was accused of participating in a strategy that included five components: (1) knowingly, carelessly dishonest research reports maintained and published for the public; (2) 24/7 Media and Interliant publishing fake “BUY or ACCUMULATE recommendations”; (3) setting outrageously unreal price goals for those stocks; (4) the presence of undisclosed arrangements betwixt Merrill, 24/7 Media and Interliant to “trade” promising, optimistic analyst reports for investment banking business lead to Merrill; and (5) the undisclosed sharing among Merrill and its internet analysts of investment banking fees. The purported reason behind this strategy was to make the price of the recommended stock falsely rise so that Merrill would attain and sustain investment banking business from the very companies whose stock the analysts recommended. The “BUY” and “ACCUMULATE” recommendations were deceiving due to the reports not disclosing that Merrill and Blodget had a policy of not issuing a rating or recommendation aside from “BUY” or “ACCUMULATE” seeing as to do so would risk Merrill’s capability to attain underwriting or investment advisory arrangements, according to the investors. During the class period, 24/7 Media’s stock went from around $45 to a high of $65 and falling to a low of $3, while Interliant’s stock went from about $16 to a high of $56 and dropped to a low of $4. During this time, Merrill’s investment-banking department helped Interliants attain 27 companies, and underwrote a multimilliondollar convertible-bond offering while Merrill’s analysts clearly specified that the companies referenced in their reports were in danger of price instability and were high risk companies. The reports also included specific financial information and complex analysis, the majority of signifying that the companies were unstable investments and were in jeopardy of “imploding.” The district court dismissed the actions for failure to plead loss causation. The court of appeals granted review.