Lentell v. Merrill Lynch & Co., Inc.
| Decision Date | 20 January 2005 |
| Docket Number | Docket No. 03-7948. |
| Citation | 396 F.3d 161 |
| Parties | John Kilgour LENTELL, Brett Raynes and Juliet Raynes, Plaintiffs-Appellants, v. MERRILL LYNCH & CO. INC. and Henry M. Blodget, Defendants-Appellees, Thomas P. Willcutts, on behalf of himself and all others similarly situated, Yolanda Rice, individually and on behalf of all others similarly situated, Neil Trama, on behalf of himself and all others similarly situated, Brent Wickam, individually and on behalf of all others similarly situated, Marie Forte, on behalf of herself and all others similarly situated, C. Anthony Martignetti Trust, and on behalf of those similarly situated, Bob Raiano, individually and on behalf of those similarly situated, Christophe De Reynal, individually and on behalf of all others similarly situated, Diane Pilgrim, individually and on behalf of all others similarly situated, Turgut Ergun, on behalf of himself and all others similarly situated, Doug Seidenburg, individually and on behalf of all others similarly situated, Robert Rueben, on behalf of himself and all others similarly situated and Fulgham, individually and on behalf of all others similarly situated, Consolidated-Plaintiffs, Abraham Twersky Family Trust, on behalf of itself and all others similarly situated and John Deleo, on behalf of himself and all others similarly situated, Plaintiffs. |
| Court | U.S. Court of Appeals — Second Circuit |
Herbert E. Milstein, Cohen, Milstein, Hausfeld, & Toll, P.L.L.C., Washington, DC (Stephen J. Toll, Joshua S. Devore, Adam T. Savett, Cohen, Milstein, Hausfeld, & Toll, P.L.L.C., Washington, DC; Douglas G. Thompson, Donald J. Enright, Finkelstein Thompson & Loughran, Washington, DC; Frederic S. Fox, Laurence D. King, Donald R. Hall, Kaplan Fox & Kilsheimer, LLP, New York, NY; Edward F. Haber, Michelle Blauner, Theodore M. Hess-Mahan, Shaprio Haber & Urmy LLP, Boston, MA; Jacqueline Sailer, Gregory Linkh, Murray, Frank & Sailer, LLP, New York, NY, on the brief) for Plaintiffs-Appellants.
Jay B. Kasner, Edward J. Yodowitz (Scott D. Musoff, Joanne Gaboriault, on the brief) Skadden, Arps, Slate, Meagher & Flom LLP, New York, N.Y. for Appellee Merrill Lynch & Co., Inc.
Marc B. Dorfman (Samuel J. Winer, Brian S. Chilton, Adam J. Eisner, on the brief), Foley & Lardner LLP, Washington, DC for Appellee Henry M. Blodget.
Jean Lin, Assistant Solicitor General, New York, N.Y. (Eliot Spitzer, Attorney General of the State of New York, Daniel Smirlock, Deputy Solicitor General, Roger Waldman, Assistant Attorney General, on the brief) for Amicus State of New York.
David C. Frederick, Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Washington, DC (Neil M. Gorsuch, Paul B. Matey, Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Washington, DC; Robin S. Conrad, Stephanie A. Martz, National Chamber Litigation Center, Washington, DC, on the brief) for Amici United States Chamber of Commerce and Business Roundtable.
Before: JACOBS, SOTOMAYOR and B.D. PARKER, Circuit Judges.
John Kilgour Lentell and Brett and Juliet Raynes, as lead plaintiffs for purchasers of the publicly traded stock of two internet companies, appeal from the dismissal by the United States District Court for the Southern District of New York (Pollack, J.) of their securities-fraud actions against Merrill Lynch & Co. and its former star analyst, Henry M. Blodget (collectively, "Merrill Lynch," "Merrill," or "the Firm"). In a nutshell, plaintiffs allege that Merrill, through Blodget and other research analysts, issued false and misleading reports recommending that investors purchase shares of 24/7 Real Media, Inc. ("24/7 Media") and Interliant, Inc. ("Interliant"), even though the analysts did not then believe that those companies were a good investment. It is alleged that analysts were touted to investors as independent assessors of business prospects, but that they issued the falsely optimistic recommendations to cultivate the Firm's investment-banking clients.
In a thorough opinion, Judge Pollack concluded: [i] that the suits were time-barred and (in any event) that they fail [ii] to plead loss causation, [iii] to plead fraud with the particularity required by Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), and [iv] to overcome the "bespeaks caution" doctrine. We conclude that the underlying complaints were timely filed, but we affirm the dismissal on the ground that the complaints fail to plead that the alleged misrepresentations and omissions caused the claimed losses.
These securities-fraud suits arise from an investigation by the New York Attorney General ("NYAG") into investment recommendations and research issued by prominent financial institutions, including Merrill Lynch. The NYAG sought a state court order in April 2002 compelling the production of documents, testimony, and other evidence by Merrill Lynch and several of its current and former employees. The supporting affidavit outlined a scheme by Merrill Lynch's research arm to publish bogus analysis in an effort to generate investment banking business. The NYAG's papers cited dozens of internal communications that expressed bluntly negative views on internet stocks that the Firm's analysts were then recommending to the investing public.
Within weeks, some 140 class-action complaints were filed, relying on the NYAG's application to allege securities fraud in connection with Merrill Lynch's analyses and investment recommendations concerning 27 publicly traded internet companies — including 24/7 Media and Interliant. See In re Merrill Lynch & Co. Research Reports Sec. Litig., 273 F.Supp.2d 351, 357-59 (S.D.N.Y.2003). The Judicial Panel on Multi-District Litigation ("MDL") transferred these cases to Judge Pollack, see id., who consolidated the cases, appointed lead plaintiffs (by issuer), and ruled that the 24/7 Media and Interliant actions would proceed first and together. Id. at 359 n. 14. Amended, consolidated class-action complaints were filed in February 2003; the dispositive issue on appeal is the sufficiency of those complaints.
I
Because we assume plaintiff's factual allegations to be true on review of a motion to dismiss pursuant to Rule 12(b)(6), DeMuria v. Hawkes, 328 F.3d 704, 706 (2d Cir.2003), the facts of Merrill Lynch's fraud are taken from the amended complaints and any documents upon which they rely. See Rothman v. Gregor, 220 F.3d 81, 88-89 (2d Cir.2000).
Merrill Lynch employs analysts to study and publish research and investment recommendations on a wide range of publicly traded companies. The Firm's Internet Group covers so-called new economy companies that emerged in the 1990s as investment was ignited by electronic commerce and other internet-based business models. Merrill Lynch is also an investment bank; among the services it provides in that capacity, Merrill assists companies seeking access to the capital markets by underwriting public offerings of securities. In theory, a "Chinese Wall" isolated Merrill's Internet Group analysts from the investment bankers soliciting business from companies in the new economy. Plaintiffs claim that the Chinese Wall was breached.
Identical frauds are alleged as to 24/7 Media and Interliant: the publication by Merrill Lynch's Internet Group of false and misleading research and investment recommendations "aimed at fraudulently driving up the market prices of [those] companies... and motivated by the desire to obtain and maintain investment banking business for Merrill Lynch." "The result of the scheme was to manipulate, inflate and maintain the market prices of the securities of the Internet companies at artificially high levels ... [and w]hen the market prices of the Internet companies fell, public investors lost hundreds of millions of dollars." The complaints challenge approximately 80 reports issued during a combined class period of May 12, 1999 through February 20, 2001. Merrill Lynch, 273 F.Supp.2d at 360. Henry Blodget — then a star analyst — headed the Internet Group throughout the putative class periods, and he figures prominently in plaintiffs' allegations.
The scheme had five elements common to research published on 24/7 Media and Interliant:
(i) "the public issuance and maintenance of knowingly or recklessly false, bullish research reports";
(ii) the publication of false "BUY or ACCUMULATE recommendations" on 24/7 Media and Interliant;
(iii) the setting of "profoundly unrealistic price targets for [those] stocks";
(iv) the existence of undisclosed agreements between Merrill Lynch and 24/7 Media and Interliant to "`trade' favorable, bullish Analyst Reports for investment banking business directed to Merrill Lynch"; and (v) the undisclosed "sharing of investment banking fees among Merrill Lynch and its internet analysts."
The false "buy" and "accumulate" recommendations appear in each of the challenged reports. Analyses issued on 24/7 Media and Interliant during the combined class periods were of three types: "Comments"; briefer, but largely similar "Bulletins"; and the terse "Morning Call Notes" (for 24/7 Media) and "Intra-Day Special Notes" (for Interliant). Page one of every challenged Comment and Bulletin includes a four-barreled "Investment Opinion" expressed in the form "X-a-b-c" where (according to the margin notes) "X" is an "Investment Risk Rating" that ranged from "A" to "D"; "a" is a number keyed to intermediate "Appreciation Potential Rating," i.e., a prediction of the investment's growth potential over the ensuing twelve months; "b" is a number keyed to long-term "Appreciation Potential Rating," i.e., a prediction of growth potential on a time-line greater than one year; and "c" is a number keyed to "Income Rating," i.e., a prediction of likely dividend payout.
Only the Appreciation Potential Ratings are alleged to have been false and misleading. Those ratings appeared in the full...
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