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Pulling Curtain Back On Hype-Master Blodget

Apr 14, 2002 | San Francisco Chronicle

"For 'tis the sport to have the enginer / Hoist with his owne petar" --

"Hamlet III," William Shakespeare. .

Well said, Will. 'Twas great sport last week to read how internal e-mails exposed the great Internet analyst Henry Blodget as nothing more than a foul- mouthed shill.

The missives, obtained by New York Attorney General Eliot Spitzer, show that Blodget's ubiquitous ratings were a sham, and that the Merrill Lynch analyst actually held most Internet companies in contempt. They also show that he and his cohorts are colorful writers, using words like "dog" and "crap" to describe their top-ranked firms.

An alternately hilarious and horrific chart buried in a court affidavit pulls out comments written by Blodget and others about certain dot-bombs and contrasts them with the firm's ratings. For instance:

While ExciteAtHome was rated "accumulate," an analyst's e-mail dubs it "such a piece of crap."

Aether Systems was rated "neutral" while Blodget & Co. told their colleagues the firm's fundamentals were "horrible."

On Internet Capital Group, an analyst wrote there was "No hopeful news to relate . . . We see nothing that will turn this around," while telling the public to "accumulate."

Lifeminders, also an "accumulate" stock, was dubbed a "POS (piece of s--. "

And, worst of all, was Infospace. While being touted as a "Top 15" firm by Merrill Lynch with a "buy" rating, Blodget told his colleagues, "This stock is a powder keg . . . given the 'bad smell' comments that so many institutions are bringing up."

While it's all kind of fun reading this outrageous commentary, the real smoking gun resulting from Spitzer's investigation is the confirmation that there was no Chinese wall between banking and research at Merrill Lynch. It was more like a revolving door.

Over and over, Spitzer cites documents proving that the research arm of the investment bank was nothing more than a tool used to drum up business. Once again, internal e-mails obtained by Spitzer sank Merrill Lynch on this one. One analyst complained to her boss about a bogus "buy" rating by writing, "I don't think it is the right thing to do. John and Mary Smith are losing their retirement because we don't want a client's CEO to be mad at us." Too bad. The rating stuck.

Spitzer also lays out how Blodget's Internet Group downgraded GoTo.com after the company used rival bank Credit Suisse First Boston for a stock offering. In concise Blodget-ese, the analyst writes "beautiful f-- em."

"This was a shocking betrayal of trust by one of Wall Street's most trusted names," said Spitzer. "The case must be a catalyst for reform throughout the industry."

Apparently, New York's Supreme Court agrees. On Monday, a judge ordered Merrill Lynch to disclosue whether the company does banking business with the firms its analysts cover.

The chastised investment bank issued a statement saying it was "outraged" by the allegations and that it is "confident that a fair review of the facts will show that Merrill Lynch has conducted its research with independence and integrity."

The firm vigorously defended its separation of banking and research and said the "e-mails in question show that there was normal give and take . . . among analysts as they assessed different companies."

Blodget, who holds a bachelor's from Yale and could not be tracked for comment, "retired" from Merrill Lynch last December. After reigning atop the Internet hype machine, along with Morgan Stanley analyst Mary Meeker, Blodget's legacy will be felt on Wall Street for some time to come.

Published reports last week said Spitzer's next targets include Goldman Sachs Group Inc., Credit Suisse First Boston, Morgan Stanley Dean Witter & Co.,

UBS PaineWebber, Salomon Smith Barney and Bear Sterns Co. The Wall Street Journal says Lehman Bros. Holdings Inc. and Lazard Freres were also among the firms that have been subpoenaed.

Spitzer has also said he's considering criminal indictments in the matter. Who knows? Maybe Blodget can graduate to the Milken level of Wall Street shame.

It's an even bigger shame it took a grandstanding AG to expose this farce. While the SEC is allegedly investigating the same stuff, they've been conspicuously slow on the issue.

It's high time Washington gets hip to the greatest pyramid scheme since King Tut sailed the Nile and hoists somebody into jail.


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