Henry Blodget, the former Merrill Lynch & Co. analyst who touted Internet stocks that later plunged, may be charged with fraud by regulators for public recommendations of stocks that he disparaged in e-mails to colleagues, people familiar with the situation said.
The enforcement staff of the National Association of Securities Dealers told Blodget late last month they are preparing a case against him, sources said.
Blodget recommended companies such as InfoSpace while privately saying it was a “piece of junk.” The stock has lost 93 percent of its value from its peak in 2000.
Blodget, 36, would be the second analyst accused by regulators of research conflicts of interest. Jack Grubman, formerly of Citigroup Inc., in December reached an agreement to pay $15 million and be barred from the securities industry for life.
The case may allege that Blodget committed securities fraud and violated NASD rules, and that his reports were inappropriately influenced by Merrill’s investment bankers, sources said.
Blodget, who quit Merrill in November 2001, didn’t return two calls for comment to his New York home. His lawyer, Samuel Winer of Foley & Lardner in Washington, declined to comment.
NASD spokeswoman Nancy Condon declined to comment, as did Merrill spokesman Mark Herr.
In April, state Attorney General Eliot Spitzer announced an investigation of Merrill Lynch and revealed e-mails from Blodget and other analysts at the firm that showed them privately disparaging the same companies they publicly recommended. Merrill agreed in May to pay $100 million to settle the case. The firm still faces about 150 lawsuits and investigations over its research practices.
The NASD’s decision to notify Blodget of possible charges is not surprising, especially in light of the settlement with Grubman, said Stephen Crimmins, a former trial lawyer in the Securities and Exchange Commission’s enforcement division. In announcing the settlement with investment banks last month, the regulators said individual analysts could still face charges, Crimmins said.
“The message is that the matter is not over and the investigations are proceeding against individuals,” said Crimmins, a partner at Pepper Hamilton in Washington.
Merrill hired Blodget in 1999 from CIBC Oppenheimer as Merrill sought to catch up to rivals such as Credit Suisse First Boston and Morgan Stanley in arranging stock sales for technology companies. Blodget, a former freelance journalist, tracked more than two dozen companies, including AOL Time Warner, Amazon.com and Ebay Inc.
He captured investors’ attention and became one of the most famous analysts on Wall Street during the Internet bubble when he predicted in December 1998 that shares of Amazon.com Inc., then at $240, would reach $400 within a year. Amazon.com’s stock soared after his forecast, reaching that price a month later. It now goes for $20.52.
After Merrill client Internet Capital Group Inc. fell from $200 in 1999 to $13 a share in October 2000, Blodget wrote an e-mail saying “there really is no floor to the stock,” according to court documents. Merrill kept recommending the stock even after Blodget’s comments.
In 2001, when investors began shunning Internet stocks, Blodget dropped off the list of most widely read Wall Street analysts after placing fourth in 2000.