The securities industry’s self-regulatory body told former Merrill Lynch & Co. Internet analyst Henry Blodget that it is prepared to take action against him for his bullish recommendations on stocks that later crashed, according to a source familiar with the matter.
The regulatory arm of the NASD has said Blodget supported weak stocks to generate investment banking fees for his firm. His “buy” calls made him a star analyst during the dot-com stock market bubble.
The NASD issued Blodget what is called a Wells Notice, giving him a chance to defend himself before regulators decide what action to pursue.
Blodget, who left Merrill Lynch in late 2001 and is working on a book about his experiences on Wall Street, could be fined several million dollars. He could also be expelled from the securities industry. Blodget could not be reached last night. Spokesmen for Merrill Lynch did not return calls.
Blodget is the second high-profile analyst targeted by the NASD in recent months. Former Salomon Smith Barney telecommunications analyst Jack Grubman agreed to pay $15 million last year to settle charges that his stock recommendations were too optimistic. He was also banned from the industry under the settlement with the NASD.
Blodget, a Yale graduate with a degree in literature and a winning television presence, became a media darling during the stock boom with his ebullient calls on companies such as Pets.com and eToys, both of which are out of business. He vaulted to stardom in December 1998 when he predicted that the stock of online retailer Amazon.com, then trading at $242 per share, would reach $400 within a year. It reached that level in three weeks and got Blodget a $3 million job with Merrill.
He went on to make more than 100 media appearances over the next two years and his pay rose to $12 million, according to an affidavit filed by New York state Attorney General Eliot L. Spitzer in his lawsuit against Merrill Lynch.
Blodget’s fortunes faded when the market retreated and Internet stocks crashed. He was Spitzer’s first Wall Street target.
The attorney used a New York state banking law to subpoena internal Merrill e-mails. Spitzer found e-mails in which Blodget and other Merrill analysts privately mocked stocks that they publicly urged investors to buy.
Spitzer’s lawsuit was the first of several investigations by state and federal regulators into allegations that analysts regularly hyped the stocks of dubious companies to earn investment banking fees. Those fees helped make Blodget, Grubman and others among the highest-paid employees on Wall Street for a time. Spitzer settled his case against Merrill for $100 million and agreed not to press charges against Blodget.
The regulatory investigations ended last month with a settlement between state, federal and industry regulators and 10 of Wall Street’s biggest firms, including Merrill Lynch.
Under the deal, the firms agreed to pay about $1.4 billion in fines and other penalties. The deal includes stricter rules governing when analysts may interact with investment bankers. Details are still being worked out.
The settlement ended investigations of the firms but not of individual analysts such as Grubman and Blodget.