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NewsForge: Analysts and lawyers plaguing tech companies

Aug 24, 2001, 01:07 (7 Talkback[s])
(Other stories by Jack Bryar)
"Whatever the merits of the particular legal claims in the VA Linux case, there's blood in the water, and lawsuits are mounting against a host of Linux companies and dot-coms. As of last week there were &mode=nocommentnearly seven hundred lawsuits pending just in the U.S. District Court for the Southern District of New York. Lawsuits are being filed at the rate of over 50 a week. Suits typically name both investment houses and the firms they promoted, although in many cases companies were taken along for the ride, right along with stockholders.

Much of those stock run ups were driven by hilariously inaccurate "recommendations" generated by analysts who worked for investment banking companies underwriting stock or holding it in speculation. Toward the end of the stock bubble these recommendations had become an industry in of themselves. Analysts dominated cable shows. Services like First Call, which featured analyst speculation, became required reading among investors. Unfortunately, the advice these analysts gave was worse than valueless. Earlier this summer, four professors from the University of California's Haas School of Business studied "buy" and "sell" recommendations by analysts attached to U.S. investment banks like Goldman Sachs and Merrill Lynch . Their report, titled "Prophets and Losses," found that the average stock recommended by analysts fell over 30% below the market average. Stocks with sell or similarly negative recommendations outperformed the market by nearly 50%.

One major reason for these inaccuracies has been blatant conflict of interest. In a statement before the U.S. House, Rep. Edward Royce (R-Calif.) cited the example of Merrill Lynch's high profile "analyst" Henry Blodget. Blodget is best known for his nearly tireless promotion of Amazon.com, which sent the company's stock price soaring toward $400 per share until reality sunk in. According to Royce, Blodget should be better known for what he did to GoTo.com. During the period when Merrill Lynch and Credit Suisse First Boston (CSFB) were competing to be the chief underwriter of GoTo's stock, Blodget couldn't say enough good things about the company. Within two hours of CSFB winning the business instead of Merrill, Blodget downgraded the stock."

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