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In re Merrill Lynch & Co.

June 26, 2008


The opinion of the court was delivered by: John F. Keenan, United States District Judge


Before the Court is the motion of Terry Ray Morris ("Morris") to intervene as the lead plaintiff in this putative class action, made pursuant to Rule 24 of the Federal Rules of Civil Procedure. The present application follows the Court's Memorandum Opinion and Order of September 18, 2007, in which I denied the motion of the original class plaintiff, Shadi S. Dabit ("Dabit"), to join, or alternatively to substitute, the trustee of his estate in bankruptcy as lead plaintiff, on the ground that neither Dabit nor the trustee of his bankruptcy estate had standing. See Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (In re Merrill Lynch & Co. Research Reports Sec. Litig.), 375 B.R. 719 (S.D.N.Y. 2007). Although Dabit's complaint was dismissed, the Court retained jurisdiction of this action and permitted potential class members to file motions to intervene. This timely motion, which is the sole motion to be filed by a potential intervenor, ensued. For the reasons that follow, the motion is denied.


Like Dabit, Morris is a securities broker who was formerly employed by Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch," or "Defendant"). Morris' proposed Complaint in Intervention (the "Intervention Complaint") invokes the Court's diversity jurisdiction and asserts state law claims against Merrill Lynch for breach of fiduciary duty and breach of an implied covenant of good faith and fair dealing. The causes of action are asserted on behalf of Morris and numerous other Merrill Lynch securities brokers who, from December 1, 1999, through December 31, 2000, recommended that their clients purchase the stocks of various Internet-based companies that were the subjects of favorable research reports issued by Merrill Lynch. The Intervention Complaint alleges that the research analysts who wrote the reports bestowed falsely positive ratings on the subject stocks in order to inflate artificially the share prices of the stocks and thus obtain lucrative investment banking business for Merrill Lynch. Morris claims that, when Merrill Lynch's fraudulent conduct was revealed and the prices of the recommended stocks fell, the plaintiff-brokers were abandoned by their clients, resulting in plaintiffs' loss of future commissions. The complaint alleges that Defendant's fraudulent conduct constituted a breach of the fiduciary duty that Defendant owed to its employees, as well as a breach of the covenant of good faith and fair dealing that was implied in the plaintiff-brokers' employment contract with Merrill Lynch.

Procedural History

This action is one of many that followed in the wake of the announcement by the New York State Attorney General's Office (the "NYAG") of allegations against Merrill Lynch stemming from the company's issuance of allegedly fraudulent research reports. In April 2002, the NYAG filed an affidavit detailing its investigation into conflicts of interest between Merrill Lynch's Internet Group and its investment banking division (the "NYAG Affidavit"). Specifically, the NYAG Affidavit alleged that, in research reports published by Merrill Lynch, the company's analysts regularly gave highly positive ratings to certain Internet-based securities when, in fact, the analysts did not believe the securities deserved the ratings. The NYAG Affidavit asserted that the analysts were not objective in their assessments of the companies' stocks but rather published the falsely rosy reports in order to generate underwriting business for Merrill Lynch and to obtain large bonuses for themselves. The affidavit was offered in support of an application before the New York state courts for an order requiring Merrill Lynch employees to turn over documents and give testimony in the Attorney General's continuing investigation into whether Merrill Lynch violated New York state law. The NYAG's highly publicized investigation into Merrill Lynch's alleged conflicts of interest led to the filing of over one hundred class action complaints against the company in courts throughout the country.

Dabit filed the original class complaint in this action on April 26, 2002, in the United States District Court for the Western District of Oklahoma, asserting state law claims, in diversity, for breach of fiduciary duty and breach of an implied covenant of good faith and fair dealing. The original class complaint alleged that Dabit and members of the class suffered losses, in addition to lost future commissions, because they and their brokerage clients were induced by the fraudulently optimistic research reports issued by Merrill Lynch to purchase and/or retain securities whose prices were artificially inflated. The Western District of Oklahoma dismissed the original class complaint without prejudice on the ground that Dabit's claims were preempted by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), because the complaint alleged fraud in connection with the purchase or sale of nationally traded securities.

In an attempt to avoid SLUSA's preemptive scope, Dabit subsequently filed an amended complaint in which he alleged that the plaintiff-brokers and their clients "owned" or "held," rather than "purchased," the securities that were recommended by Merrill Lynch. Thus, Dabit's amended complaint alleged two categories of harm: first, that Defendant's conduct caused the class to suffer losses as a result of retaining artificially inflated securities (the "holding claims"); and second, that the fraudulent conduct caused the plaintiff-brokers to lose clients after the prices of the stocks dropped and Merrill Lynch's fraud was revealed (the "lost commissions claims").

On October 23, 2002, the Judicial Panel on Multidistrict Litigation transferred Dabit's action, along with all of the other actions filed nationwide relating to Merrill Lynch's allegedly fraudulent research reports, to the Southern District of New York for pre-trial consolidation, before the late Honorable Milton Pollack. On April 10, 2003, Judge Pollack dismissed Dabit's amended complaint in its entirety, with prejudice, on the grounds that all of Dabit's claims were preempted by SLUSA. See In re Merrill Lynch & Co. Reseacrh Reports Sec. Litig., No. 02 MDL 1484 (MP), 2003 U.S. Dist. LEXIS 5999, at *1-2 (S.D.N.Y. Apr. 10, 2003) ("Dabit I").

In January, 2005, the Second Circuit affirmed in part and vacated in part Judge Pollack's decision. See Dabit v. Merrill Lynch, Pierce, Fenner & Smith, 395 F.3d 25 (2d Cir. 2005) ("Dabit II"). The Court of Appeals concluded that, to the extent Dabit was able to plead that he and other members of the class had been fraudulently induced only to retain rather than purchase or sell securities, the holding claims were not preempted by SLUSA. Accordingly, the Second Circuit vacated the with-prejudice dismissal of the holding claims and remanded to this Court for those claims to be dismissed without prejudice to allow Dabit leave to replead. The circuit also vacated Judge Pollack's with-prejudice dismissal of the lost commissions claims, finding that those claims were not preempted by SLUSA.

In September, 2005, the Supreme Court granted Defendant's petition for a writ of certiorari for the sole purpose of reviewing the Second Circuit's disposition of the holding claims. In March, 2006, the Supreme Court vacated the judgment of the Second Circuit relating to Dabit's holding claims. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) ("Dabit III"). The Supreme Court held that, for the purpose of determining whether claims are preempted under SLUSA, the distinction between holders and purchasers of securities was irrelevant and that Dabit's allegations that Merrill Lynch's fraud induced the plaintiffs to retain securities were sufficient to trigger preemption under SLUSA. Thus, the Supreme Court reinstated Judge Pollack's dismissal-with-prejudice of Dabit's holding claims. The Supreme Court expressly stated, however, that it was not reviewing the Second Circuit's vacatur of Judge Pollack's dismissal of Dabit's lost commissions claims.

After the case was remanded to this Court following Dabit III, Dabit indicated that he wished to continue to prosecute his lost commissions claims. During the pendency of the extended appellate proceedings in this case, however, Dabit had filed for bankruptcy, thus raising a concern about his ability to continue as the lead plaintiff. In August, 2007, Dabit moved to join or, alternatively, to substitute as lead plaintiff, the trustee of his bankruptcy estate. On September 18, 2007, the Court denied Dabit's motion but permitted absent class members to file motions for intervention. The present motion followed.

The Intervention Complaint

The Intervention Complaint asserts the same state law causes of action as were asserted in Dabit's amended complaint and contains identical allegations relating to the Defendant's fraudulent conduct. The Intervention Complaint attaches as an exhibit a list of forty-eight publicly-traded Internet-based securities that were the subject of allegedly fraudulent Merrill Lynch-issued research reports (the "ML Stocks"). Morris and the class of plaintiff-brokers recommended the ML Stocks to their clients during the class period, which is defined as running from December 1, 1999 through December 31, 2000, in reliance on research reports issued by Merrill Lynch, in which Merrill Lynch's analysts bestowed optimistic price projections and "buy" recommendations on the stocks.

The Intervention Complaint alleges that "[d]uring 1999 and 2000, [Merrill Lynch] made materially false and misleading statements designed to encourage Plaintiff's clients to continue to hold the ML Stocks." (Intervention Compl. ¶ 31.) The Intervention Complaint asserts that the research reports were false because "throughout late 1999 and early 2000, [Merrill Lynch] knew that the financial condition and future business prospects of the corporations behind these stocks did not support [Merrill Lynch's] positive comments and buy recommendations, but [Merrill Lynch] nevertheless continued to issue positive research reports encouraging investors to hold the [Merrill Lynch-recommended] stocks." (Id. ¶ 32.) Although the Intervention Complaint does not identify which particular research reports, or which statements within the reports, were false, the complaint attaches as an exhibit the NYAG Affidavit and incorporates by reference all of the factual allegations contained in that document.

The issuance of the falsely optimistic research reports was allegedly designed to drive up the share prices of the ML Stocks and thus induce the subject companies to give Merrill Lynch valuable underwriting business. Merrill Lynch's analysts were encouraged to give the stocks positive ratings and optimistic price projections by the promise of large bonuses that were keyed to the amount of investment banking business that the positive reports generated. Plaintiffs, in alleged reliance on the advertised objectivity of the Defendant's reports and blithely unaware of the alleged conflicts of interest that motivated the issuance of the falsely rosy research, advised their retail clients to hold on to the ML Stocks. The Intervention Complaint alleges that, when the prices of the ML Stocks tumbled in the first quarter of 2000 and the conflict of interest ...

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