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IN RE MERRILL LYNCH & CO.

March 27, 2003

IN RE: MERRILL LYNCH & CO., INC., RESEARCH REPORTS SECURITIES LITIGATION IN RE: INFOSPACE, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: Milton Pollack, Senior United States District Judge

ORDER SEVERING CORPORATE CLAIMS AGAINST INFOSPACE, INC. AND SUGGESTING REMAND TO THE WESTERN DISTRICT OF WASHINGTON
Defendants InfoSpace, Inc. and its CEO Naveen Jain and CFO Tammy Halstead ("InfoSpace defendants") move for severance of the corporate claims against them from the omnibus Merrill Lynch research reports litigation, and remand of those claims to the United States District Court for the Western District of Washington. The InfoSpace plaintiffs oppose the motion. Defendant Merrill Lynch does not oppose severance and remand, provided that only the corporate claims against InfoSpace go to Washington while the research reports claims against Merrill Lynch (relating to InfoSpace stock) remain before this Court. For the reasons set forth below, the severance motion is granted. The Court will recommend to the Judicial Panel on Multidistrict Litigation remand of the InfoSpace corporate claims to the Western District of Washington.

Factual Background

The InfoSpace plaintiffs filed their first complaint on June 19, 2001 in the Western District of Washington.*fn1 That 23-page document asserted, in the main, a Rule 10b-5 cause of action for fraud against the InfoSpace defendants (hereinafter "corporate claims").*fn2 Plaintiffs alleged that Defendants knowingly (or with reckless disregard) misrepresented, through the media and in SEC filings, the company's (1) earnings for fiscal years 1999 and 2000; and (2) expected earnings — allegedly projected by Defendants to exceed $300 million — for 2001. Plaintiffs further alleged in their amended complaint that Defendant Jain reaped, during the class period, over $192 million in illegal insider trading profits from selling 3 million shares of InfoSpace stock. Defendant Halstead was alleged to have made nearly $17 million from insider trading.

The original InfoSpace complaint involved essentially a standard pump-and-dump stock fraud and insider trading gain and these claims were asserted solely with respect to the InfoSpace corporation and certain of its officers. The original complaint did not assert any claims against Merrill Lynch and its former star internet analyst, Henry Blodget, and they were not named as defendants; they were added as defendants in the amended complaint.

In April 2002, Eliot Spitzer, the New York State Attorney General, issued a press release reporting the results of an investigation by his office into the stock ratings system employed by Merrill Lynch. The investigation "concluded that the firm's supposedly independent and objective investment advice was tainted and biased by the desire to aid Merrill Lynch's investment banking business." On the heels of this investigation, scores of private securities fraud actions were filed against Merrill Lynch and Henry Blodget (the "Merrill Lynch defendants") around the country. These actions asserted, in essence, that alleged conflicts of interest within Merrill Lynch led to questionable "buy" recommendations by its research division — primarily dealing with internet stocks — broadcast supposedly in order to attract and keep business (from the internet companies covered by the firm's research analysts) for the firm's investment banking division. (These cases are hereinafter referred to as the analyst cases.)

On May 9, 2002, approximately one month after Attorney General Spitzer issued his press release, the InfoSpace plaintiffs filed their first consolidated amended complaint in the Western District of Washington. That 103-page document asserted the same claims as their original 23-page complaint, adding, however, new analyst claims against Merrill Lynch and Blodget relating to their research coverage of InfoSpace stock. According to the InfoSpace plaintiffs, the complaint further alleged a presumed conspiracy between the Merrill Lynch defendants and the InfoSpace defendants to defraud them.

In an October 11, 2002 Transfer Order, the Judicial Panel on Multidistrict Litigation (MDL Panel) centralized all of the analyst cases against Merrill Lynch and Blodget for coordinated or consolidated pretrial proceedings before this Court. The case was given a multidistrict docket number (02-MDL-1484) and the caption In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation. (The term "research reports litigation" is used synonymously with the analyst cases.) The new analyst claims in the InfoSpace plaintiffs' first consolidated amended complaint closely tracked the claims asserted against the Merrill Lynch defendants in the other analyst cases filed around the country. The Merrill Lynch defendants moved the MDL Panel to centralize the Washington InfoSpace action with the other analyst cases that had been filed against the Merrill Lynch defendants. The Panel did so, and the Washington InfoSpace action was brought before this Court with the other analyst cases.

At the hearing before the MDL Panel, the InfoSpace defendants (and certain other parties) moved the Panel to sever and remand to the Western District of Washington the corporate claims against the InfoSpace defendants, and to leave the analyst claims newly asserted by the InfoSpace plaintiffs against the Merrill Lynch defendants centralized in New York with the other analyst cases. The InfoSpace plaintiffs opposed that disposition. They asserted that the first consolidated amended complaint now included allegations that the InfoSpace defendants conspired with the Merrill Lynch defendants to mislead purchasers — and therefore that severance was inappropriate.

The MDL Panel centralized all of the analyst cases before this Court on October 11, 2002, including the Washington InfoSpace action. With respect to the Washington case, the Panel concluded as follows:

The presence of conspiracy allegations in InfoSpace is debatable and we are reluctant, on the record now before us, to make a determination that claims in InfoSpace are severable. It may be, on further refinement of the issues and close scrutiny by Judge Milton Pollack, that claims against the InfoSpace defendants can be remanded to the Western District of Washington for further proceedings in advance of claims against the Merrill Lynch defendants.*fn3
The InfoSpace defendants have now moved this Court for remand to Washington of the corporate claims as asserted in the original Washington InfoSpace complaint and severance thereof from the analyst claims.

Legal Considerations

Severance. The text of Rule 21 of the Federal Rules of Civil Procedure reads as follows:

Misjoinder and Non-Joinder of Parties Misjoinder of parties is not ground for dismissal of an action. Parties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just. Any claim against a party may be severed and proceeded with separately.
The caselaw of this Circuit has established that "Rule 21 permits a court to add or drop parties to an action when doing so would serve the ends of justice and further the prompt and efficient disposition of the litigation."*fn4 Specifically, a court considering a severance motion should weigh the following factors in making its determination:
(1) whether the claims arise out of the same transaction or occurrence; (2) whether the claims present some common questions of law or fact; (3) whether settlement of the claims or judicial economy would be facilitated; (4) whether prejudice would be avoided if severance were granted; and (5) whether different witnesses and documentary proof are required for the separate claims.*fn5
Further, "[t]he decision whether to ...

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