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Analysts to blame for investment losses?

Lawyer Jacob Zamansky may have opened the floodgates for investors to get retribution against brokerages and Wall Street analysts who touted dot-com stocks as they plummeted.


Analysts to blame for investment losses?
By Tiffany Kary
Special to CNET
July 20, 2001, 12:30 p.m. PT

New York lawyer Jacob Zamansky may have just opened the floodgates for money-losing investors to get retribution against brokerages and Wall Street analysts who touted dot-com stocks as they plummeted.

Zamansky, of Zamansky & Associates, was the lawyer behind a high-profile, four-month arbitration case that prompted Merrill Lynch to pay a former client $400,000 to end the case and the bad publicity that came with it.

The client, Debasis Kanjilal, a New York pediatrician, complained that he lost $500,000 for following Internet analyst Henry Blodget's bullish advice on InfoSpace. Zamansky initially sought $10 million in punitive damages "to get their attention" and $800,000 in losses from InfoSpace ($500,000) and JDS Uniphase ($300,000).

The $400,000 settlement focuses on the InfoSpace losses, Zamansky said, since JDS Uniphase "wasn't something Blodget had recommended."

Merrill paid the money to Kanjilal without admitting or denying wrongdoing and may have set a precedent Wall Street will rue. Arbitration hearings don't set legal precedent, but Zamansky made it clear he has other Wall Street analysts--notably Morgan Stanley's Mary Meeker and Salomon Smith Barney's Jack Grubman--in his sights.

"This has established a principal: that where an investor relies upon an analyst who has failed to disclose a conflict of interest, the firm will be held responsible," he said.

For some reason, I seem to be the only one going after the analysts. But I'm sure other people will follow suit given the result. Zamansky, 47, argues that analysts have a responsibility to disclose various conflicts and to work in the best interest of individual investors. While applauding congressional hearings, Securities and Exchange Commission statements and industry attempts to clean up Wall Street research, Zamansky said more can be done--notably, financial penalties.

A Merrill Lynch spokesman said the brokerage settled the Kanjilal case to avoid "further distraction and expense of a protracted litigation." Zamansky said that if the case hadn't been settled, the arbitration would have been heard in March 2002. Morgan Stanley and Salomon Smith Barney, two firms that are likely to hear from Zamansky, wouldn't comment.

In a recent interview, Zamansky discussed how he thinks claims against analysts may evolve and how actions such as his could affect the way analysts issue predictions.

Q: Have you filed similar claims against other brokerages yet?
A: No, this is the first of its kind. It's a groundbreaking case--to hold an analyst personally responsible. We're looking at other cases, against Mary Meeker at Morgan Stanley for her e-tailer picks, specifically and, and Jack Grubman at Smith Barney for his AT&T Wireless reversal. And also for Blodget on ICGE (Internet Capital Group), an Internet incubator.

How many clients do you have?
I'm looking at 20 to 30 cases right now.

Are clients approaching you or are you soliciting them?
No, I'm getting a lot of calls from people who have read about this in the paper, that have seen this on television.

Are there any other law firms targeting analysts?
For some reason, I seem to be the only one going after the analysts. But I'm sure other people will follow suit given the result.

Do you think this could evolve into claims against other analysts?
I do. Analysts need to disclose specifically conflicts of interest--the financial interest that their firms have in the stocks that they're recommending. It's widespread. I believe that for many years the analysts were disregarding rules, and now they've been held accountable.

What do you think of the changes the SEC is making regarding disclosure of conflicts of interest?
I believe that for many years the analysts were disregarding rules, and now they've been held accountable. Well, there are proposals at the SEC and, as you may know, the congressional committee is thinking of changing the rules. So I believe the changes are in the offing right now.

Will the changes prevent this kind of thing from happening again?
I would hope so. My proposal, which I have given to Congressman Baker (U.S. Rep. Richard H. Baker, R-La.), is that analysts be required to disclose the specific financial interest that their firm has in the stock that they're recommending in the beginning of the research report--and also to disclose how the analyst is compensated. Is his or her bonus tied to the amount of revenue their picks generate for the investment department? I think that's wrong, but that should be disclosed to the public.

When did you make this proposal?
I made the proposal June 14 in connection with the hearings that Baker is holding.

Could these analyst cases evolve into a class-action lawsuit?
It could evolve into a class action. What I believe should be done is that there should be a seminar or symposium of regulators, members of the industry, and representatives of the public. I believe that these investment banking firms should voluntarily pool money to compensate victims who relied on these Internet picks.

Do you think that could ever happen?
I don't know. I mean, that's what I think a responsible firm should do. They made fortunes when they moved these tech stocks, particularly the Nasdaq, up to 5,000. Now it's down to 2,000, and millions of people have lost their life savings and retirement funds and are in desperate shape.

Have you been criticized for this suit, the way class-action lawyers often are?
I do not do class actions--I deal with individual people in individual circumstances.

A lot of class-action lawyers are criticized because they make more money than investors do on the lawsuits. Do you anticipate being criticized in a similar way?
Anybody can criticize anybody. It's a free country. I am doing the right thing. I'm doing this to help a man out who lost his children's education fund, and I worked very hard on it. I turn down most of the cases that people call me with. But I spend time with everybody to at least explain to them my views. So if people want to criticize me, that's fine. I make a living the old-fashioned way: I earn it.

How do you charge for your services?
I do this on a contingent fee. I take a third of whatever I recover. I put out a lot of time and effort, and that's the way I work. I have the same interest in the client in succeeding.

Do you think this case is going to change the way analysts make predictions?
I certainly hope so. I hope that they begin to disclose specific conflicts of interest, and I hope that they begin to use standard valuation methods for new companies like Internet stocks. I'm attacking their valuation criteria--that they basically made up new criteria that weren't justified by industry standards.

So you don't think analysts will just make the disclosure and continue to make the same kind of predictions?
No, I think they have to look long and hard. When they give a $150 price target to a company that has no earnings, modest revenues and no great prospects for the future--give it a $13 billion dollar market cap--that cannot be justified. And they need to go back to price-to-earnings, which people understand--not visits to a Web site.

Do you think Henry Blodget or any other analyst could have foreseen what happened with a company like InfoSpace?
Foreseen it? Yeah, I do. I think they should have done more homework, and that these analysts' recommendations should have been more scrutinized.

Did you ever invest in Internet stocks? Or did you predict the dot-com crash?
I'm not going to discuss my personal holdings, but I'm a very conservative investor.

Did you think Internet stocks were overvalued before the crash?
I certainly did. There's a new's fascinating. But I was very dubious, and I just thought that this would eventually happen, and it has.  

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