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Investors Sue Over Bum Steers

Oct 10, 2002 | Detroit Free Press Back when making money on stocks seemed simple, investors treated the tumble of a highly touted stock as a chance to bag a bargain. Buy on the dips and wait to get rich.

And Basil Nemer chased the bargains like everybody else.

Nemer, a 69-year-old semiretired architect from Troy, first bought Excite@Home Corp. stock in January 2000. The stock was about $41. But it was heading to $99 a share, according to a forecast by Merrill Lynch & Co.'s Internet analyst Henry Blodget. Blodget was the guy who said was going to the moon and it did.

So when Excite@Home fell and fell and fell, Nemer kept buying and buying and buying. At about $30. At about $15. At about $4.

When Excite@Home hit 40 cents a share in late August 2001, he bought another 4,000 shares.

"The nature of the company appeared to be one that could bounce back," Nemer said.

Excite@Home never bounced back. The provider of high-speed Internet access went bankrupt. It's being liquidated.

Nemer lost about $75,600.

Now, Nemer is taking on a legal fight against Merrill Lynch. He's also trying to get back more than $35,000 that he lost on Merrill Lynch's Focus Twenty Fund, a large-growth mutual fund that has had miserable returns.

Thanks to Excite@Home and Focus Twenty, Nemer says more than one-third of his retirement savings is gone. He has no pension.

The twist that makes this story different from other folks who lost a bunch of money in the market is that Nemer and others will be using Merrill Lynch's own e-mails against the nation's largest brokerage house.

You remember the internal Merrill Lynch e-mails. Who could forget them? Snarky comments involving seven stocks became public last spring as part of an investigation by New York Attorney General Eliot Spitzer.

Excite@Home? Well, according to comments made in June 2000, that one was "such a piece of crap."

Would anyone have stepped into Excite@Home if they knew somebody at Merrill Lynch called it excrement?

Investors entitled to the truth
We're about to see some real interesting legal claims. And they won't be limited to Merrill Lynch.

Investors and their attorneys are charging that analysts at big-name Wall Street firms didn't always believe what they said.

After all, lucrative investment banking deals could be snagged when analysts gave favorable ratings. Last week, Spitzer, Securities and Exchange Commission Chairman Harvey Pitt and the industry's self-regulatory organizations said they would seek a speedy conclusion to probes into several Wall Street firms, including Citigroup Inc., Credit Suisse First Boston and Goldman Sachs Group Inc.

Thanks to the e-mails and the bad publicity, Merrill Lynch announced a $100-million settlement in May with Spitzer. Merrill Lynch also agreed to more separation between its analysts and its investment-banking business to avoid future conflicts of interest.

Merrill Lynch did not admit wrongdoing. Blodget left the company.

But that's not the end of that.

No settlement money went to individual investors. So now we'll see plenty of investors especially those who lost hundreds of thousands of dollars take their claims through the arbitration system with the National Association of Securities Dealers.

Merrill Lynch won't say how many cases are in the pipeline. The NASD said it doesn't have such a number. But one New York attorney estimated that hundreds of cases could be filed against Merrill Lynch. Another estimate suggested that angry investors could seek as much as $2 billion from Merrill Lynch.

"Investors were entitled to the truth and if Merrill Lynch lied to their clients, they are responsible for their clients' losses," said Laurence Schultz, an attorney at Driggers, Schultz & Herbst in Troy.

Schultz, who is representing Nemer, said he sees the case as one of fraud and misrepresentation. Among other things, he said Merrill Lynch failed to disclose its investment banking relationship with Excite@Home and issued false analyst recommendations.

"You get retail customers who believe the analyst recommendation has a rational basis," Schultz said.

Most investors, he notes, never heard of these stocks until they were recommended by a Merrill Lynch broker and touted in its research reports.

As for the Focus Twenty fund, Schultz is charging that Merrill Lynch never disclosed that 80 percent of the fund's investments were in tech stocks.

Mark Herr, a Merrill Lynch spokesman in New York, said that after a 2 1/2-year bear market it's not surprising that investors would look at their losses and try to place some blame.

But Herr said Merrill Lynch maintains that its "research integrity was not compromised."

"We believe our research was appropriate and has integrity," Herr said.

It will be that research, though, that attorneys will challenge. Some charge that Merrill Lynch acted like a boiler room during the tech boom, when brokers pushed risky ventures.

Jacob Zamansky, a New York attorney, won a $400,000 settlement from Merrill Lynch on an InfoSpace claim last year and paved the way for many of these research claims.

As for InfoSpace, Merrill Lynch had high hopes in 2000. But in private e-mails, analysts called it a "piece of junk."

After reaching a settlement in the case, Zamansky provided evidence to Spitzer's office.

Zamansky said investors could have legitimate claims if they bought a stock and can show they relied on the integrity of a research report. They may be able to claim research analysts had a conflict of interest or had no reasonable basis for the stock price target.

Zamansky said he's working with at least 10 complaints against Merrill Lynch, with some investors losing several million dollars. He expects several hundred of these cases could be filed.

Schultz is looking into filing arbitration claims for six other clients against Merrill Lynch.

Zamansky also has filed a $455,000 arbitration claim against Salomon Smith Barney and its former telecom analyst Jack Grubman for misleading stock recommendations involving Global Crossing Ltd. Grubman resigned Aug. 15.

"It's a whole niche sort of case right now," Zamansky said.

And one nasty mess for investors to try to clean up.

Nemer said he was doing fine on his own buying well-known, big-name stocks after they dropped in price and waiting for the price to rebound until the Excite@Home and tech fund mess.

Now, he's cutting back where he can. He used to travel to Colorado for skiing and to get together with his grown children for vacations. But he doesn't travel, or eat out, as much.

He works some. But after losing about $110,000 on tech stocks, what nags him is the thought that his savings could fall short in retirement.

"I have to watch my money," Nemer said. "The realization is if I live long I don't think I'll have enough money to make it."

Never, he says, did Merrill Lynch tell him to sell Excite@Home. It was all about buying more and more.

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