In re Merrill Lynch & Co., Inc. Research Reports

• Decision Date: 02 July 2003
• Docket Number: No. 02 MDL 1484.,02 MDL 1484.
• Citation: 272 F.Supp.2d 243
• Parties: In re: MERRILL LYNCH & CO., INC. RESEARCH REPORTS SECURITIES LITIGATION This Document Relates to: In re Merrill Lynch & Co., Inc. Global Technology Fund Securities Litigation, 02-cv-7854(MP)
• Court: U.S. District Court — Southern District of New York

Page 243

272 F.Supp.2d 243

In re: MERRILL LYNCH & CO., INC. RESEARCH REPORTS SECURITIES LITIGATION

This Document Relates to: In re Merrill Lynch & Co., Inc. Global Technology Fund Securities Litigation, 02-cv-7854(MP)

No. 02 MDL 1484.

United States District Court, S.D. New York.

July 2, 2003.

Decision and Order Denying Motions to Alter Judgment and Amend Complaint August 19, 2003.

COPYRIGHT MATERIAL OMITTED

Wolf Haldenstein Adler Freeman & Herz, LLP (by Daniel W. Krasner, Jeffrey G. Smith and Stefanie A. Lindeman), New York, New York, for Plaintiffs.

Swidler Berlin Shereff Friedman, LLP (by Andrew J. Levander, Joseph F. Donley and Laura Proctor), New York, New York, for Defendant Merrill Lynch Global Technology Fund, Inc.

Clifford Chance U.S. LLP (by James N. Benedict, Mark Holland, Mary K. Dulka and Jennifer Wendy), New York, New York, for Defendants Merrill Lynch Investment Managers, L.P. (f/k/a Merrill Lynch Asset Management, L.P.), FAM Distributors, Inc. (f/k/a Merrill Lynch Funds Distributor), Princeton Services, Inc., Terry K. Glenn, Donald C. Burke and Arthur Zeikel.

Merrill Lynch Investment Managers, L.P. (by Lori A. Martin, First Vice President and Assistant General Counsel), Plainsboro, New Jersey, for Defendants Merrill Lynch Investment Managers, L.P. (f/k/a Merrill Lynch Asset Management, L.P.), FAM Distributors, Inc. (f/k/a Merrill Lynch Funds Distributor), Princeton Services, Inc., Terry K. Glenn, Donald C. Burke and Arthur Zeikel.

Bressler, Amery & Ross (by Hugo A. Hilgendorff IV and David J. Libowsky), New York, New York, for Defendants Donald Cecil, Roland M. Machold, Edward H. Meyer, Charles C. Reilly, Richard D. West, Edward D. Zinbarg, Roscoe S. Suddarth, Ronald W. Forbes, Cynthia A. Montgomery, and Kevin A. Ryan.

Bass Berry & Sims PLC (by James H. Cheek III, Michael L. Dagley and Matthew M. Curley), Nashville, Tennessee, for Defendants Donald Cecil, Roland M. Machold, Edward H. Meyer, Charles C. Reilly, Richard D. West, Edward D. Zinbarg, Roscoe S. Suddarth, Ronald W. Forbes, Cynthia A. Montgomery, and Kevin A. Ryan.

Skadden, Arps, Slate, Meagher & Flom LLP (by Jay B. Kasner, Edward J. Yodowitz, Scott D. Musoff and Joanne Gaboriault), New York, New York, for Defendants Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

DECISION AND ORDER

MILTON POLLACK, Senior District Judge.

The case before this Court is yet another of the consolidated lawsuits which followed the New York Attorney General's investigation into certain notorious aspects of the internal operations of prominent Wall Street securities firms. The case is, however, one removed from those brought against Merrill Lynch analysts for their widely broadcast, and ultimately erroneous, predictions of future target prices for speculative securities in the technology sector. This action is not against the analysts responsible for these predictions, but against a proprietary mutual fund that invested in the common stock of companies in the technology sector, including companies covered by the Merrill Lynch analyst reports.

Plaintiff, a shareholder in the Merrill Lynch Global Technology Fund (the "Fund"), brings this action against the Fund, its directors, its investment adviser and affiliates, and the adviser's corporate parent, Merrill Lynch & Co., Inc. ("ML & Co."), and broker-dealer affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF & S"). Plaintiff alleges that the Fund's Registration Statements and Prospectuses failed to disclose several material facts.

The "material facts" that Defendants allegedly failed to disclose fall into three categories. (See e.g., Compl. ¶¶ 15, 213.)¹ First, that the Fund invested in the securities of companies with which MLPF & S had or sought investment banking business. (See e.g., Compl. ¶¶ 15(1), (2), (3)). Second, that MLPF & S issued purportedly misleading research reports on many of the securities held in the Fund's portfolio. (See e.g., Compl. ¶¶ 15(4)-(10)). Third, that the Fund invested in companies at market prices inflated by the misleading research reports "in order to enhance [MLPF & S's] ability to obtain investment banking business from those companies, without regard to whether they were good investments for investors in the Fund." (See e.g., Compl. ¶¶ 15(11)-(15).)

The alleged conflict of interest between brokerage firms, investment bankers and research analysts that underlies the entire complaint was a matter of public knowledge for years before the amazing boom of the market initially rewarded those who disregarded such caveats. It was also public knowledge that the Fund included stocks covered by the Merrill Lynch analysts' research reports.

The additional allegation that the Fund took part in a scheme to invest disproportionately in stocks covered by Merrill Lynch research reports to the detriment of the Fund is equally insufficient to state a claim. Moreover, the Fund stated clearly in its Prospectus that it sought capital appreciation by investment in market leaders or potential leaders in the technology sector. Plaintiff has not alleged any facts demonstrating that the companies held by the Fund did not satisfy these criteria. Nor has Plaintiff alleged facts that would show that this alleged "scheme" caused concomitant loss of Fund value, or that participants in this "scheme" acted with scienter — essential elements of a federal securities law claim.

I. THE PARTIES

Lead Plaintiff Michal N. Merritt purchased shares of the Fund in January and February of 2000. (Compl.¶ 24.) She seeks to represent all persons who purchased shares of the Fund between October 2, 1999 and October 1, 2002. (Compl.¶ 1.) Plaintiff filed her lawsuit on October 1, 2002.

The Complaint conflates the various corporate Defendants into a single entity characterized as the "ML Defendants" in an attempt to attribute knowledge or conduct by any one Defendant to all the other Defendants. (See e.g., Compl. ¶ 5.) However, the named Defendants actually comprise several distinct corporations and individuals.

The Fund is a diversified open-end investment company registered with the U.S. Securities and Exchange Commission ("SEC") pursuant to the 1940 Act. (Compl.¶¶ 30, 62.)² The Fund was first offered to the public in June 1998. The Fund is an aggressive growth product that seeks long-term capital appreciation through worldwide investment in equity securities of issuers that, in the opinion of its investment adviser, Merrill Lynch Investment Managers, L.P. ("MLIM"), derive a substantial portion of their income from products and services in technology related industries. (Compl.¶ 30.) The Fund's main investment strategy is to invest in companies that MLIM believes are leaders in their product or service niches, or are likely to develop leadership positions. (Holland Decl. Ex. A, 1999 Prospectus at 3.)

The Fund's Prospectuses warn that investing in the Fund involves substantial risk. The Prospectuses state that technology related securities "historically have been very volatile" which "increases the risk that the securities may lose value." (See, e.g., id. at 9.) The Prospectuses note that the Fund may invest in smaller companies which "may be less financially secure than larger, more established companies," and that as a result "such companies may be subject to abrupt or erratic price movements and more unpredictable price changes than the stock market as a whole." (Id.) In addition, the Prospectuses state that technology related companies "may face special risks that their products or services may not prove to be commercially successful" or "may rapidly become obsolete." (Id.)

Defendant MLIM (formerly known as Merrill Lynch Asset Management, L.P.), the Fund's investment adviser, is an asset management company with its headquarters in Princeton, New Jersey. (Id. at 31.) Pursuant to its advisory agreement with the Fund, MLIM received a fee for managing the Fund, paid at the annual rate of 1% of the Fund's average daily net assets not exceeding $1 billion and 0.95% of the Fund's average daily net assets in excess of $1 billion. (Id. at 29.) MLIM is an indirect, wholly-owned subsidiary of Defendant ML & Co.

Defendant Princeton Services, Inc. is a subsidiary of ML & Co. and the general partner of MLIM. (See Holland Decl. Ex. B, 1999 SAI at 17.) Defendant FAM Distributors, Inc. (formerly known as Merrill Lynch Funds Distributor, Inc.) distributed shares of the Fund. (Compl.¶ 32.)

Defendants Arthur Zeikel, Terry Glenn and Donald Burke are present or former executives of MLIM who served as directors and/or officers of the Fund during part or all of the Class Period. The ten other individual defendants served as independent directors of the Fund during part or all of that time. (Compl.¶¶ 38-50.)

Defendant ML & Co. is a Delaware corporation that, through its subsidiaries and affiliates, provides financial services on a global basis. (Compl.¶ 28.) Defendant MLPF & S is a securities broker-dealer and investment bank with its head-quarters in New York, New York. MLPF & S is a wholly-owned subsidiary of ML & Co. (Compl.¶ 29.)

Apart from their common ownership by ML & Co., MLPF & S and MLIM are entirely separate. They are in different businesses and are subject to different principal regulatory structures — the 1940 Act for MLIM, and the 1934 Act for MLPF & S. Plaintiff does not allege that MLPF & S and MLIM share management, employees, or offices. Nor does she allege any cross-ownership between them.

II. THE CLAIMS

The Complaint contains six counts. Counts I and II allege violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. §§ 77k, l(a)(2), respectively. (Compl.¶¶ 223-268.) Plaintiff also asserts claims in those Counts for control person liability under Section 15 of the 1933 Act, 15 U.S.C. § 77o. (Compl.¶¶ 241-245, 264-268.) Count III alleges a violation of Section 34(b) of the Investment Company Act of 1940 ("1940...