National Investigation Sheds Light On InfoSpace Stock Drop, Merrill Lynch Involvement

Market Wire, 20050229

Redmond-based InfoSpace is again the target of shareholder legal action, this time fueled by an investigation led by New York attorney general Eliot Spitzer on the role of investment banks and their use of high-profile stock spokespeople.

The new information, included in an amendment to a securities suit previously filed by attorney Steve Berman of Hagens Berman, adds investment banking giant Merrill Lynch (NYSE:MER) as a defendant to the complaint, alleging that InfoSpace and Merrill Lynch touted InfoSpace stock with information both organizations knew was false in an attempt to jack up stock prices while InfoSpace president Naveen Jain and others sold their holdings.

The amended complaint was filed late last week in U.S. District Court in Seattle.

According to Berman, documents uncovered in an investigation led by Spitzer along with investigations by Hagens Berman show that Merrill Lynch's high-profile analyst Henry Blodget issued overwhelmingly positive reports to investors and maintained a 'buy' rating for InfoSpace through December of 2000, while at the same time characterizing the Internet stock in internal documents as a "powder keg" and a "piece of junk."

Blodget also wrote in recently disclosed internal documents that the InfoSpace stock had "bad smell comments" from several financial institutions, the suit alleges.

According to Berman, Merrill Lynch analysts knew InfoSpace stock was overvalued, but issued glowing reports to help sell millions of dollars worth of investment banking work to InfoSpace.

"We intend to show that Merrill Lynch and InfoSpace were frantically inflating InfoSpace stock, each for their own reasons," Berman said. "Jain's motivation was to swell the stock price so he could sell his holdings, while Merrill Lynch simply wanted to secure more InfoSpace business.

"It is this sort of hot air that led to the InfoSpace bubble bursting," Berman added.

Berman stated that InfoSpace's Jain threatened to withhold fees owed to Merrill Lynch unless Blodget wrote glowing - and factually dubious - reports regarding InfoSpace.

The suit is the first to detail the role Merrill Lynch analysts played in allegedly duping investors during the stock's dizzying ride from a high of $138.50 to a low of $1.06.

"Investors were forced to look at InfoSpace stock through almost opaque glasses," said Berman. "We intend to prove both InfoSpace and Merrill Lynch participated in schemes to hide losses and hoodwink investors, with little regard for investors or the law."

The suit also claims Merrill Lynch used its InfoSpace influence to collect huge investment banking fees from other companies. During the merger of InfoSpace and Go2Net , Merrill Lynch acted as a financial advisor for Go2Net while providing analyst reports for InfoSpace. According to the complaint, Merrill Lynch used false analyst reports to keep InfoSpace's market price strong until the deal was completed, ensuring the collection of hundreds of thousands of dollars worth of investment banking fees from Go2Net.

"The Internet bubble was pumped full of air, and eventually burst, as the result of illicit collaborations such as the one between InfoSpace and Merrill Lynch," Berman said.

"The temptation of releasing false reports was too great for both companies," he continued. "InfoSpace benefited from higher stock prices, and Merrill Lynch received lucrative banking fees, all at a tremendous cost to the investor."

Illuminating the relationship between investment bankers and research analysts, the complaint also notes that Merrill Lynch took surveys on the amount of ancillary business analyst coverage brought to the firm. In one such report, Blodget noted that his group had been involved in 52 investment-banking transactions during the fall of 2000 and the completed transactions had earned $115 million for the firm, the suit states.

The suit also makes several claims against InfoSpace, stating that during the class period of January 26, 2000 to January 30, 2001, InfoSpace released several strong statements about the performance of the company during investor conference calls and one-on-one calls with analysts. InfoSpace touted the company's high-flying performance throughout the period, claiming record operating results for the year, and revenue growth of more than 250 percent, according to the suit.

However, following the surprise replacement of InfoSpace's senior management team earlier this year, InfoSpace disclosed that revenues would actually sink into the red for the 2001 fiscal year, and the company would post a serious loss for the year, the suit states. The lawsuit seeks compensatory damages for the money lost by stockholders.

About Hagens Berman

Steve Berman is managing partner of Hagens Berman in Seattle. Recently named co-lead counsel in litigation to recover losses from Enron employees' retirement funds, Berman is a nationally recognized expert in class action litigation. Berman represented Washington State and 12 other states in lawsuits against the tobacco industry that resulted in the largest settlement in the history of litigation. Berman also served as counsel in several other high-profile cases including the Washington Public Power Supply litigation, which resulted in a settlement of more than $850 million, and the $92.5 million settlement of The Boeing Company litigation. Other cases include litigation involving the Exxon Valdez oil spill; Louisiana Pacific Siding; Morrison Knudsen; Piper Jaffrey; Nordstrom; Boston Chicken; and Noah's Bagels.