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A federal judge last week said he would allow a class action lawsuit against former analysts at Robertson Stephens over their recommendations for the technology stock Corvis Corporation. Southern District of New York Judge Gerard E. Lynch said the suit, which alleges that the analysts recommended the stock to inflate its price and then sold off their own shares in the company, was distinguishable from a similar suit against Merrill Lynch that was dismissed last summer by Southern District of New York Judge Milton Pollack. Lynch said that in the case of Corvis stock, analysts at Robertson Stephens could be sued for securities fraud because they deliberately shielded their true opinions of the stock from the public for personal gain. The investment bank has since been subsumed by other financial companies. “When defendants chose to speak about Corvis, they hid their true opinion, which could have depressed the price, and lied with the intent to increase the demand for Corvis stock for their own gain,” Lynch wrote in DeMarco v. Robertson Stephens Inc., 03 Civ. 590. “The impact of defendants’ false opinions on share price is a question of fact for a jury to decide.” Judge Lynch rejected the argument that there was not a sufficient connection between the analysts’ actions and the eventual fall of Corvis stock. A 2001 New York Times article reported that Robertson Stephens analysts were privately selling their shares of Corvis while advising the public to purchase the stock. “On the facts in this case, the Court must conclude that plaintiffs have adequately alleged loss causation because the decline in stock price was a foreseeable consequence of defendants’ fraudulent statements that allegedly inflated the price, because in an efficient market, revelation of the misrepresentations will lead inexorably to a price correction,” Lynch wrote. In a footnote, Judge Lynch said the concern of Judge Pollack — that allowing such suits would “open the floodgates” against analysts — did not apply in this case. The Corvis plaintiffs, Lynch said, relied on “particularized proof of direct misrepresentations of opinion” to inflate stock prices. “Such conduct is hopefully rare,” the judge wrote. “If it is not, a flood of lawsuits may be appropriate.” Last July Judge Pollack dismissed a suit against Merrill Lynch that accused its analysts, especially Henry Blodget, of pumping up stocks to win investment banking business from those companies. Pollack said investors had simply gambled and lost, and should have been aware of Merrill’s investment banking interests. He also found that Merrill’s stock reports contained detailed information beyond a stock’s rating that should have aided investors. In the Corvis suit, Judge Lynch did dismiss allegations of insider trading, but sustained claims regarding a scheme to defraud or manipulate stock prices. Marc I. Gross of Pomerantz Haudek Block Grossman & Gross represents the plaintiffs. Andrew J. Frackman of O’Melveny & Meyers represents Robertson Stephens.

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