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Technology > Tech Biz
Don't let history repeat
A judge ruled that investors, not banks, are to blame for losses. Remember that this time around.
July 2, 2003: 2:12 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - The next time an Internet stock you bought for more than 100 times earnings plunges, it's your fault, not Wall Street's. The same goes for that hot tech fund -- you can't blame the manager.

That, at least, is the opinion of Milton Pollack, a federal judge for the Southern District of New York. And it's an important one.

On Monday, Judge Pollack threw out a case filed against Merrill Lynch and its former Internet analyst Henry Blodget by investors who lost money in two Internet stocks that Blodget recommended: online marketing company 24/7 Media and Web hosting firm Interliant.

24/7 Media (TFSM: Research, Estimates), which traded as high as $62.25 in December 1999, is now worth only 86 cents a share. Interliant (INIT: Research, Estimates) peaked at $54.44 in March 2000 and now trades for just less than a penny.

And on Wednesday, Pollack dismissed a case filed by an investor in the Merrill Lynch Global Technology fund. The suit charged that performance suffered because the fund invested in companies that were banking clients of Merrill. The fund, which soared 88 percent in 1999, plunged 34 percent in 2000, 44 percent in 2001 and 45 percent last year.

In tossing both suits, Judge Pollack basically said that -- conflicts aside -- Merrill is not responsible. And I couldn't agree more.

Feel bad, but...

It is unfortunate that investors lost a lot of money.

But let's be perfectly honest. Investors got caught up in the hype and ignored that most Net stocks were losing money hand over foot and that the few which were profitable were ludicrously overvalued.

Analysts like Blodget certainly deserve to be castigated for being more than willing to shill for investment banking deals. But that wasn't exactly a huge secret.

The judge said as much in Wednesday's decision. "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," he wrote.

(Pollack threw out a similar lawsuit against Morgan Stanley and its star analyst Mary Meeker in 2001 and called the allegations in that suit "gross and unrestrained.")

For more about Internet stocks, click here

There's a huge difference between touting a stock because the company was a banking client and recommending a stock based on financial statements that were wrong.

That distinction played a key role in Judge Pollack's rulings.

"Plaintiffs make no allegation that any of the company-related information relied on by the analysts in preparing the reports was in any way false, nor do they allege that the analysts made up facts or misrepresented facts about any of the companies in any of the reports," the judge wrote in Monday's decision.

There are still several shareholder lawsuits pending against Merrill Lynch and other investment banks regarding other Internet stocks. Based on Judge Pollack's decisions, it's not looking good for disgruntled owners of other dot-bombs.

If it happens again...

The Merrill Lynch Global Technology fund, for example, is up 25.5 percent so far this year. And even though 24/7 Media is a penny stock, it has surged nearly 275 percent this year.

People are starting to drink the tech Kool-Aid again, which is why they should take the following words of Judge Pollack to heart.

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"Plaintiffs brought their own losses upon themselves when they knowingly spun an extremely high-risk, high-stakes wheel of fortune," he wrote in Monday's ruling.

It makes you wonder...have Pat Sajak and Vanna White ever rung the opening bell at the New York Stock Exchange? If not, they should because when it comes to many tech stocks, it's just one big game right now.

The only difference is that nobody sues Pat and Vanna for buying the wrong vowel.

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