Judge Throws Out Meeker Suit

A Southern District of New York Senior Judge threw out a class action lawsuit against Morgan Stanley Internet analyst Mary Meeker yesterday, calling it, among other things, in "bad taste." The suit, and others like it, emerged in the aftermath of the blowup of many of the companies that rose to spectacular heights at the end of the 1990s. Trouble is, the judge noted that people who were willing to believe whatever they were told should be held responsible for doing so.

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By Bill Mann (TMF Otter)
August 22, 2001

U.S. District Court Judge Milton Pollack found Morgan Stanley (NYSE: MWD) star analyst Mary Meeker "Not Guilty by Reason of Stupidity" yesterday.

No, not really. You can't find someone "guilty" in a lawsuit. Essentially, however, Judge Pollack took a big meaty swipe at investors' willingness to suspend belief in reality and any sort of common sense in the pursuit of easy riches in stocks. The judge called the lawsuit against Meeker and similar actions predictable responses to the dramatic fall of the stock market.

The class action suit, brought by Mark S. Thompson "on behalf of himself and all others similarly situated" and filed by class action firm Wolf Haldenstein, sought to hold Meeker responsible for issuing opinions on equities such as Amazon.com (Nasdaq: AMZN) and eBay (Nasdaq: EBAY), among other companies, with the purpose of generating fees for her employer. Judge Pollack ridiculed the filings as being "an abuse on the tenets of federal pleading."

Here was my favorite quote:

"A collection of market gossip pervades the endless stream of news organization tidbits which are spread throughout [the suits]. Generally, these are expectable comments of the gamblers in the world's gaming pits depending on the season. They come during the inevitable sequel after market boom periods. Opinions turned sour by uncontrollable tidal waves of the economic cycle are substituted for considered standards of conduct."

Allow me to translate: "If you allow yourself to be taken in by gossip and rumor during a market boom, you deserve what you get when it all crashes down."

I've got to admit, this is the type of case that I'd prefer nobody won. On the one hand, we've been saying for years that the worst-kept secret on Wall Street is that analysts do not work for the individual investor, and that their opinions must be taken with a grain of salt. (Better make it the whole shaker.)

So to see a wider recognition of the dangers of taking analyst comments at face value is somewhat gratifying. Last February Arthur Levitt, then chairman of the Securities and Exchange Commission (SEC), said, "a lot of analysts work for firms that have business relationships with the same companies these analysts cover. And sometimes analysts' paychecks are typically tied to the performance of their employers. You can imagine how unpopular an analyst would be who downgrades his firm's best client. Is it any wonder that today, a 'sell' recommendation from an analyst is as common as a Barbra Streisand concert?"

On the other hand, I don't have much sympathy for these plaintiffs either. To me, they're just calling foul after they risked their money relying upon the opinion of others. It's like buying the Barbara tickets without checking to see if it was really her performing -- or just Jay Leno impersonating her.

Unfortunately, it seems likely that we will be seeing more of these types of lawsuits, particularly following Merrill Lynch's (NYSE: MER) offer to settle a similar case in which an investor bought a large stake in Infospace (Nasdaq: INSP) based upon its recommendations. Additionally, the SEC and Congress have recently held hearings on the topic of analyst independence, and I doubt that the fact that such proceedings are taking place after investors lost billions of dollars is a coincidence.

"In the past year," said Warren Buffett at Berkshire Hathaway's (NYSE: BRK.A) 2000 annual meeting, "the ability to monetize shareholder ignorance has never been greater." He wasn't kidding. The stock market can be ruthless to those who do not take the time to learn the basics of valuing businesses. That Meeker had happy things to say about Amazon.com when it was bleeding money by the gallon is noteworthy, and that her employer generated millions in fees in investment banking from Amazon even more so. But in nearly every case, the ultimate responsibility falls with investors. 

Investing in equities implies a great deal of risk. It always has. Investing in speculative companies involves even more. Meeker and her ilk have every right to cover companies and be wrong: No one should ever expect her, or anyone else, to be perfect. Still, investment banks and the National Association of Securities Dealers (NASD) are learning the hard way that when the music stops, people start looking for someone to blame.

These companies made billions off of investment banking deals, initial public offerings, and the like during the late 1990s, and no one seemed to pay much attention because everyone was getting rich. In early 2000, I pointed out that individual investors should not take analyst ratings at face value, saying in part "the truth is that there is almost no way for the individual investor to see inside the tangled, conflicted world of the sell-side equity analyst. The average stock analyst has almost as much independence of thought as a North Korean journalist."

Yesterday a judge threw his voice into the ring, letting people know that it was their own avarice that really caused their losses. Analysts may act in a questionable manner, but their actions and words only hold sway in an environment in which people are willing to grant power to them.

Bill Mann's words barely hold sway with his 20-month-old daughter. At time of publishing, he owned shares of Berkshire Hathaway. The Motley Fool is investors writing for investors.

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