In re Merrill Lynch & Co., Inc.

• Decision Date: 30 June 2003
• Docket Number: No. 02 MDL 1484 MP.,Nos. 02 CV 3210 MP, 02 CV 3321 MP.,02 MDL 1484 MP.,s. 02 CV 3210 MP, 02 CV 3321 MP.
• Citation: 273 F.Supp.2d 351
• Parties: In re MERRILL LYNCH & CO., INC. Research Reports Securities Litigation In re Merrill Lynch & Co., Inc. 24/7 Real Media, Inc. Research Reports Securities Litigation In re Merrill Lynch & Co., Inc. Interliant, Inc. Research Reports Securities Litigation
• Court: U.S. District Court — Southern District of New York

273 F.Supp.2d 351

In re MERRILL LYNCH & CO., INC. Research Reports Securities Litigation

In re Merrill Lynch & Co., Inc. 24/7 Real Media, Inc. Research Reports Securities Litigation

In re Merrill Lynch & Co., Inc. Interliant, Inc. Research Reports Securities Litigation

No. 02 MDL 1484 MP.

Nos. 02 CV 3210 MP, 02 CV 3321 MP.

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

June 30, 2003.

Order Denying Reconsideration August 12, 2003.

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Kaplan Fox & Kilsheimer LLP, (By Frederic S. Fox, Laurence D. King, Donald R. Hall, of counsel), New York City, for Plaintiffs' Liaison Counsel.

Cohen, Milstein, Hausfeld & Toll, P.L.L.C., (By Herbert E. Milstein, Steven J. Toll, Joshua S. Devore, of counsel), Washington, DC, for the Interliant Class Co-Chairs of Plaintiffs' Executive Committee.

Shapiro Haber & Urmy LLP, (By Edward F. Haber, Michelle Blauner, Theodore M. Hess-Mahan, of counsel), Boston, MA, Co-Chairs of Plaintiffs' Executive Committee.

Finkelstein, Thompson & Loughran, (By Donald G. Thompson, Donald J. Enright, Conor R. Crowley, Adam T. Savett, of counsel), Washington, DC, for the 24/7 Class Member of Plaintiffs' Executive Committee.

Rabin, Murray & Frank LLP, (By Jacqueline Sailer, Eric J. Belfi, Sharon M. Lee, of counsel), New York City, Co-Chairs of Plaintiffs' Executive Committee.

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

Foley & Lardner, (By Douglas M. Hagerman, James D. Ossyra, of counsel), Chicago, IL, Samuel J. Winer, Washington, DC, for Defendant Henry Blodget.

DECISION AND ORDER

POLLACK, Senior District Judge.

Defendants Merrill Lynch & Co., Inc. (ML & Co.) and its wholly-owned subsidiary Merrill Lynch, Pierce, Fenner & Smith Inc. (MLPF & S) move to dismiss the amended class action complaints in the 24/7 Real Media, Inc. (24/7) and Interliant, Inc. (Interliant) consolidated actions for, inter alia, (1) failure to state a claim upon which relief can be granted, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, and (2) failure to plead fraud with particularity, as required by the Private Securities Litigation Reform Act of 1995 (Reform Act) (see 15 U.S.C. § 78u-4(b)) and Rule 9(b) of the Federal Rules of Civil Procedure. Individual defendant Henry Blodget (Blodget) joins the motion.¹ For the reasons set forth below, the motion is granted.

LEGAL STANDARDS — RULE 12(b)(6) AND FRAUD ALLEGATIONS

In deciding a motion to dismiss under Rule 12(b)(6), this Court, "accepting all factual allegations in the complaint as true and drawing all reasonable inferences in the plaintiffs' favor,"² must dismiss the action if "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations."³ The Court's role is "to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof."⁴ "General, conclusory allegations need not be credited, however, when they are belied by more specific allegations of the complaint."⁵

In the fraud context, plaintiffs do not enjoy a "license to base claims ... on speculation and conclusory allegations."⁶ Federal Rule of Civil Procedure 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The Second Circuit has held that, at a minimum, the complaint must identify the statements plaintiff asserts were fraudulent and why, in plaintiff's view, they were fraudulent-specifying who made them and where and when they were made.⁷ This particularity requirement is reinforced by the Reform Act, in which Congress required that all private securities class action complaints alleging material misrepresentations or omissions "shall specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading."⁸

In deciding a Rule 12(b)(6) motion, the Court may consider the following materials: (1) facts alleged in the complaint and documents attached to it or incorporated in it by reference,⁹ (2) documents "integral" to the complaint and relied upon in it, even if not attached or incorporated by reference,¹⁰ (3) documents or information contained in defendant's motion papers if plaintiff has knowledge or possession of the material and relied on it in framing the complaint,¹¹ (4) public disclosure documents required by law to be, and that have been, filed with the Securities and Exchange Commission,¹² and (5) facts of which judicial notice may properly be taken under Rule 201 of the Federal Rules of Evidence.¹³

PROLOGUE

The two cases before the Court are part of a large group assigned to this Court by the Multidistrict Panel for consolidated administration. These cases, and the New York Attorney General's report which precipitated them, brought to specific public attention certain aspects of the internal operations in securities firms that had notoriously and long existed and had been variously publicized but not focused on as undesirable conflicts that should be ameliorated, modified, conceivably controlled or eliminated.

Securities firms had traditionally employed on their rosters paid professional analysts to furnish their opinions and predictions of future targets of prices for the securities being handled by the firms, in effect "risk advisors." Those opinions and predictions were broadcast extensively and distributed free of charge. No customer relationship with defendants is claimed by the plaintiffs; no fiduciary or contractual relations existed, at least none is claimed.

Those analyst "seers" and their employers have been faulted in the present cases with having conflicting self-interests which influenced and impaired the publicized advice and opinions by exhortations of "BUY" advice and "Target" expectations to market speculators in the then popular internet field.

At the times here involved, the stock markets were in the throes of a colossal "bubble" of panic proportions. Speculators abounded to capitalize on the opportunities presented by this bubble.

The market "bubble" burst intervened before plaintiffs got out of their holdings and their holdings lost value. The plaintiffs, learning of the subsequent actions of the regulators concerning the conflicts mentioned above, rushed to the courts in these cases seeking to recover the losses they experienced due to the intervening cause, the burst of the bubble.

The companies involved herein were duly registered with the SEC. Their assets, liabilities and economics were there disclosed for any holder or purchaser including these plaintiffs to evaluate at his own risk. What was missing, was what a willing buyer would pay to a willing seller to own the stock-with all the relevant information of the fully published underlying corporate values there for everyone to see and evaluate.

In the euphoric early phase of the bubble experienced by the market-buyers of stock traded in the optimistic expectation of finding someone who valued acquiring and possessing the stock at a level higher than the holder did—even if some of the risk analysts of the stock privately had doubts from time to time, on price, future market value, but not underlying assets.

The risk manager's forecasts on future price were both correct and incorrect-depending on the timing of the mercury level in the market thermometer. "Buy" or "accumulate" opinion was an appraisal of the direction of the unsteady market fever. Those who listened to those prognostications were rewarded with huge paper profits if they cashed in — depending on the cycle of the bubble. Others missed out with the collapse of the fever.

OVERVIEW

The record clearly reveals that plaintiffs were among the high-risk speculators who, knowing full well or being properly chargeable with appreciation of the unjustifiable risks they were undertaking in the extremely volatile and highly untested stocks at issue, now hope to twist the federal securities laws into a scheme of cost-free speculators' insurance. Seeking to lay the blame for the enormous Internet Bubble solely at the feet of a single actor, Merrill Lynch, plaintiffs would have this Court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners. Those few lucky winners, who are not before the Court, now hold the monies that the unlucky plaintiffs have lost-fair and square-and they will never return those monies to plaintiffs. Had plaintiffs themselves won the game instead of losing, they would have owed not a single penny of their winnings to those they left to hold the bag (or to defendants).

Notwithstanding this — the federal securities laws at issue here only fault those who, with intent to defraud, make a material misrepresentation or omission of fact (not opinion) in connection with the purchase or sale of securities that causes a plaintiff's losses. Considering all of the facts and circumstances of the cases at bar, and accepting all of plaintiffs' voluminous, inflammatory and improperly generalized allegations as true, this Court is utterly unconvinced that the misrepresentations and omissions alleged in the complaints have been sufficiently alleged to be cognizable misrepresentations and omissions made with the intent to defraud. Plaintiffs have failed to adequately plead that defendant and its former chief internet analyst caused their losses. The facts and circumstances fully within this Court's proper province to consider on a motion to dismiss show beyond doubt that plaintiffs brought their own losses upon themselves...