British investors in dot.com companies are joining disgruntled American shareholders to launch a legal action against the star investment analysts they hold responsible for fuelling the tech stock boom which crashed so spectacularly last year.
The case is the first time that British investors have become directly involved in moves to seek compensation from Wall Street bankers for giving biased advice. American shareholders have launched a number of legal actions, spurred on by recent six-figure payouts from two leading US banks.
British shareholders in US-listed internet companies are understood to be among the litigants in a case organised by New York law firm Beatie and Osborn, which alleges that Morgan Stanley Dean Witter and its star internet analyst Mary Meeker failed to protect small investors when tech stocks started to slide.
Morgan Stanley is just one of a number of big investment banks facing a winter of discontent as law suits flood in. Several east coast law firms have started class action suits, inspired by recent compensation awards by Goldman Sachs and Merrill Lynch.
Merrill Lynch last month paid $400,000 to a New York doctor who had bought shares in tech company InfoSpace on the strength of a recommendation from the bank's analyst Henry Blodget, one of the most high-profile evangelists for dot.com companies.
Although the bank admitted no wrongdoing in the settlement, lawyers believe the pay-out to investor Debases Kanjilal set a dangerous precedent.
Last week the National Association of Securities Dealers forced Goldman Sachs to pay $400,000 compensation to Texan billionaires, the Hunt family, who had bought shares in funeral home operator Loewen after a recommendation from the bank, which was also investment banker for the company. Loewen went bust a year later and the Hunt family claimed $5m damages.
Although the charges against the analyst in question were dismissed, subsequently Goldman Sachs has ruled that its analysts must disclose whether they have shares in the companies they are analysing. Similar rulings on analysts' share dealings have been made by Merrill Lynch and Credit Suisse First Boston.
Beatie and Osborn has five cases running against investment banks including Merrill Lynch and CSFB. However, while some recent class action suits in the US have accused investment bankers of fraud, which demands a trial in a federal court under SEC rules, Beatie and Osborn is concentrating on the refusal of analysts to issue sell recommendations even when stocks were sporting dramatic losses.
Daniel Osborn, one of the lawyers leading the British case said he hopes to have it heard in a state court to speed up matters. "Our theory is clearly that the analysts in these investment banks breached their fiduciary duty to retail customers by failing to issue sell recommendations," he said.
MSDW declined to comment.
