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Lentell v. Merrill Lynch & Co.

United States Court of Appeals for the Second Circuit

August 12, 2004, Argued ; January 20, 2005, Decided

Docket No. 03-7948

Opinion

 [*164]  DENNIS JACOBS, Circuit Judge:

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 [**4]  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.

BACKGROUND 

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 [**5]  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  [*165]  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.

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396 F.3d 161 *; 2005 U.S. App. LEXIS 1016 **; Fed. Sec. L. Rep. (CCH) P93,077

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.

Subsequent History: US Supreme Court certiorari denied by Lentell v. Merrill Lynch & Co., 126 S. Ct. 421, 163 L. Ed. 2d 321, 2005 U.S. LEXIS 7318 (U.S., Oct. 11, 2005)

Prior History:  [**1]  John Kilgour Lentell and Brett and Juliet Raynes, as lead plaintiffs for a putative class of 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 Henry M. Blodget. Plaintiffs' core allegation is that Merrill Lynch, through Blodget and other research analysts, recommended that investors purchase certain publicly traded stocks even though they did not then believe that the issuing companies were a good investment. Among other grounds cited for dismissal, the district court ruled that the complaints were time-barred and (even if not time-barred) that they fail to plead loss causation as required by the decisions of this Court. We conclude that the underlying complaints were timely filed, but we affirm the dismissal because the complaints fail to plead that the alleged misrepresentations and omissions caused the losses claimed.

In re Merrill Lynch & Co. Research Reports Sec. Litig., 273 F. Supp. 2d 351, 2003 U.S. Dist. LEXIS 11005 (S.D.N.Y., 2003)

Disposition: Judgment affirmed in part and reversed in part.

CORE TERMS

Media, recommendations, omissions, ratings, analysts, buy, causation, complaints, stock, Internet, concealed, accumulate, investor, misrepresentations, district court, misstatements, allegations, appreciation, inquiry notice, issuer, foreseeable, losses, cases, false and misleading, articles, fraudulent, putative class, investment-banking, consolidated, materialized

Civil Procedure, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Appeals, Standards of Review, De Novo Review, Dismissal, Involuntary Dismissals, Failure to State Claims, Governments, Legislation, Statute of Limitations, Time Limitations, Securities Law, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Deceptive & Manipulative Devices, Types of Securities, Investment Contracts, Joint Ventures & Partnerships, Criminal Law & Procedure, Fraud, Securities Fraud, Elements, Securities Act Actions, Civil Liability, General Overview, Responses, Motions to Dismiss, Pleadings, Heightened Pleading Requirements, Fraud Claims, Civil Liability Considerations, Securities Litigation Reform & Standards, Postoffering & Secondary Distributions, Heightened Pleading Requirements, Business & Corporate Law, Management Duties & Liabilities, Causes of Action, Fraud & Misrepresentation, Discovery, Methods of Discovery, Inspection & Production Requests, Blue Sky Laws, Offers & Sales, Misconduct During Discovery, Motions to Compel, Express Liabilities, Price Manipulation, Disclosures, Bespeaks Caution Doctrine, Contracts Law, Consideration, Enforcement of Promises, Antitrust & Trade Law, Sherman Act, Claims, Torts, Causation, Proximate Cause, Foreseeability of Harm, Elements, Intervening Causation, Online Transactions