Former Merrill Lynch star Internet analyst Henry Blodget is negotiating a deal that could allow him to escape being sued by securities regulators on allegations of fraud and securities rule violations, people close to the situation say.
Blodget received notice last month that the NASD, the nation’s largest securities regulator, was preparing to take action against him that would say he misled small investors by hyping stocks to gain investment banking business.
Lawyers for Blodget are negotiating a settlement with the NASD that would bar him from the securities industry and force him to pay a fine of more than $10 million, people with knowledge of the situation say.
If agreed, the deal would mirror a similar action taken against former Salomon Smith Barney telecom analyst Jack Grubman, who last month settled fraud charges by paying a $15 million fine. Grubman is also prohibited from working in the securities industry.
Hundreds of Wall Street analysts were said to have issued tainted research during the late 1990s technology and telecommunications stock bubble to improve pay packages based on dealmaking prowess.
But securities regulators seem resigned to making examples of only a handful of high-profile offenders, although many more face civil lawsuits by individual investors.
Other one-time highfliers who are expected to face similar lawsuits are Frank Quattrone, a technology dealmaker at Credit Suisse First Boston, and Mary Meeker, another star of the high-tech boom at Morgan Stanley.
The NASD, Blodget and his lawyers could not immediately be reached for comment.
While working for a smaller firm before joining Merrill, Blodget made his name in 1998 by predicting shares of Amazon.com, then at $240, would reach $400 within a year. Amazon.com’s stock soared after his forecast, reaching that price a month later. Soon after, Blodget received a high-paying job at Merrill.
In November 2001, almost two years after the bubble burst and with many of his favorite stocks on the floor, Blodget resigned from Merrill and is now reportedly working on a book about the period.
Less than five months later, New York Attorney General Eliot Spitzer accused Merrill of misleading investors with overly bullish and biased stock research. Spitzer disclosed e-mail messages in which several Merrill analysts, including Blodget, privately disparaged stocks they had touted in public.
Merrill agreed to pay $100 million weeks later to settle the charges. That settlement became part of a $1.4 billion deal last month that settled investigations of analyst research at the nation’s top 10 brokerages. It also introduced rules to prevent future misdeeds.
In one now infamous e-mail released by Spitzer, Blodget was asked by an unidentified institutional investor about the prospects for GoTo.com, an Internet search engine. Merrill initiated coverage of the company in January 2001.
Asked by the customer: ”What’s so interesting about GoTo except banking fees?” Blodget replied: ”Nothin.”