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Add yet another casualty to the wreckage of the Internet stock market crash. Mary Meeker, the once high-flying Morgan Stanley analyst crowned “Queen of the Internet” for her bullish reports, has become the target of a trio of class action lawsuits filed earlier this month alleging her analysis of three stocks — AOL Time Warner, Amazon.com and eBay — was biased. Securities lawyers said more lawsuits were sure to follow. The suits, which are pending before U.S. District Judge Milton Pollack in the Southern District of New York, are a first, as analysts have never been held legally accountable to investors for their stock recommendations. But the legal actions claim that Meeker was not acting as an analyst, providing objective reports on the Internet companies she followed. Rather, they allege, her perpetually upbeat reports were used to secure investment banking business for Morgan Stanley, aimed at keeping corporate clients happy. Moreover, the actions allege, Meeker was far more than just an e-commerce cheerleader disguised as analyst. At the height of the Internet bull market, Meeker is claimed to be “virtually indistinguishable from an investment banker … participating in deal-making and business generating activities.” She was compensated like an investment banker too, allegedly making $15 million in 1999. By failing to disclose this conflict of interest, it is claimed, Meeker and Morgan Stanley defrauded investors. Morgan Stanley, which is also named as a defendant, is standing by its analyst. “Mary Meeker is one of the most respected analysts on Wall Street,” the company said in a statement in response to the complaints. “The allegations are unfair, inaccurate and cannot be supported in court.” The lawsuits come in the midst of intense scrutiny of Wall Street analysts by the press, regulators and Congress. This past spring, a flurry of news articles on the role of Wall Street analysts came out, many of which detailed the extent to which firms were using their analysts to sell investment banking products. Around the same time, the Securities and Exchange Commission launched an investigation into analyst independence. As then acting Chairwoman Laura S. Unger told Congress earlier this month, the first reports from those investigations appear to confirm suspicions that many analysts act essentially as sales representatives for their firms’ investment banking services. She said the agency had found that at all of the largest brokerage firms, analysts helped their investment banking departments win underwriting deals by going on road shows to stir up investor interest and initiating positive coverage in prospective clients. Unger also reported that more than one-fourth of the analysts surveyed had bought cheap stock in private companies, then later touted the stock when the company went public. What’s more, three unnamed analysts under investigation sold shares in companies on which they had “buy” recommendations, pocketing $100,000 to $3.5 million. Although these conflicts of interests no doubt come as a surprise to many individual investors, they are apparently common knowledge on Wall Street. As portfolio manager David W. Tice told Congress, institutional investors view analyst reports “as little more than bullish propaganda.” With such damning findings, securities lawyers said it was only a matter of time before the lawsuits began to flow. “You can almost set a clock by how long it takes until private plaintiffs crop up” after an SEC investigation and Congressional hearings, said Barry Barbash, former director of the SEC’s division of investment management and a partner with the New York and Washington, D.C., offices of Shearman & Sterling. In addition to the class action suits, earlier this month, an investment trust brought suit in New York federal court against six of the largest securities firms for fraudulently failing to disclose that the companies required their analysts to issue positive reports on their clients’ stock. But, securities lawyers pointed out, governmental findings go only so far. “Just because the SEC is looking into it doesn’t translate into a right to money damages,” said Jonathan J. Lerner, a securities lawyer with Skadden, Arps, Slate, Meagher & Flom in New York. HURDLES AHEAD The class action lawsuits against Meeker are based on the well-established “fraud on the market” theory, by which the plaintiffs need not prove individual reliance by each class member on Meeker’s reports, but rather reliance on the integrity of the price set in the market. Defense lawyers said the plaintiffs’ toughest challenge will be to show that Meeker’s reports had an impact on the market. Unlike a typical shareholder’s suit brought under �10b-5 of the Securities Exchange Act of 1934, here, the companies’ financial results are totally separate from Meeker’s analyses, Lerner said. Roger Crane, a partner at McCarter & English in New York, agreed: “They probably have a good argument that for a week or two, stock prices were inflated because of her reports.” But it will be difficult to prove that her influence continued over the nearly three-year period alleged in the complaints, he added. “It will come down to a battle of experts,” Crane said. INFLUENTIAL REPORTS Fred Isquith, a partner at Wolf Haldenstein Adler Freeman & Herz in New York, the firm representing the plaintiffs in the suits before Judge Pollack, countered that Meeker’s reports carried much more weight than typical. “She was a market mover,” he said. News reports cited in the complaint such as an October 1999 Fortune Magazine article naming Mary Meeker the third most powerful woman in business may bolster Isquith’s view. “Her power is awesome,” that article stated, “If she ever says, ‘Hold Amazon.com,’ Internet investors will lose billions.” He argued the lawsuits covered well-trodden ground: “When information is sent out into the market in connection with the sale of securities and intended to attract investors, all material facts must be disclosed.” Meeker, he said, failed to disclose her self interest. “If she had, her opinion would have been discounted.” MORE TO COME Despite the hurdles, lawyers predicted more suits down the pike. “The theory is so logical and the potential damages are so large that — yes — I think there will be many more lawsuits,” Crane said. He said potential plaintiffs may also be motivated by a recent lawsuit against another high-profile Internet analyst. Last month, Merrill Lynch & Co. paid $400,000 to settle an arbitration brought by a former client who claimed he was misled by the bullish report of the firm’s analyst Henry Blodget. Merrill claimed in a statement that it settled the case to avoid the costs of litigation, which is in fact, a common reason to settle. However, Crane speculated that the size of the settlement — $400,000 where the plaintiff was claiming a loss of about $500,000 — indicated there were issues that must have “deeply troubled” Merrill. While their lawyers get ready to battle it out in court, industry trade groups and firms have started working on damage control. Both Merrill Lynch and Credit Suisse First Boston are barring analysts from buying shares in the companies they cover. The Securities Industry Association, a Washington, D.C., trade group, has issued a set of best practices, including a prohibition against tying analyst compensation directly to deals. In June, Morgan Stanley was among a group of Wall Street firms that signed on to the guidelines. But Isquith said these measures do not remedy the damage already done. “In my view,” he said, “it’s too little, too late.”

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