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Spitzer Charges Against Wall Street Were Baseless

January 30, 2005

A federal appeals court has upheld a lower court's dismissal of lawsuits accusing Merrill Lynch of hyping stocks and causing investor losses during the collapse of the tech bubble. Hundreds of lawsuits spawned by New York state attorney general and gubernatorial candidate Eliot Spitzer have been filed against Merrill, Morgan Stanley, and Lehman Brothers.

Their core conflict-of-interest argument, that Wall Street research analysts harmed investors by publishing misleading stock recommendations in a bid for investment banking business, has been rejected as false.

The ruling is likely to result in the dismissal of approximately 130 other lawsuits against Merrill Lynch based on the initial Spitzer charges. The three-judge 2nd Circuit appeals court panel rejected arguments presented by Spitzer in briefs supporting the plaintiffs. The panel upheld an earlier ruling by district judge Milton Pollack (now deceased)calling plaintiffs "high-risk speculators" who "now hope to twist the securities laws into a scheme of cost-free speculators' insurance."

It further noted that Merrill's research report, written by Internet analyst Henry Blodget, "adequately warned investors that the Internet companies it was recommending were "high-risk investments" with "no proven track record of earnings."

Despite the now established fact that conflict of interest charges had no basis in securities law, Spitzer has collected $1.4 billion in fines from a dozen Wall Street firms. Under the terms of the Spitzer settlement, these enterprises must still transfer millions each year to nominally "independent" competitors in order to make amends for past infractions.

Too late for the investment banks, we now know the misconduct was non-existent.

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