Queen of the Net’ Mary Meeker Appears Before Boca Panel to Answer Complaint Filed by Investor

Daily Business Review

June 6, 2003

Fallout from the 2000 stock market collapse landed in Boca Raton Thursday as Mary Meeker, the Morgan Stanley stock analyst Barron’s called “Queen of the Net,” testified at an inquiry into alleged securities irregularities at her firm.

In what is believed to be her first such appearance, Meeker is a co-respondent in a National Association of Securities Dealers arbitration hearing. She, Wall Street giant Morgan Stanley Dean Witter, and Philip Berk, formerly a broker in Morgan Stanley’s Palm Beach office, are accused of conflict of interest, negligence and fraud for their advocacy – through thick and thin, thin, thinner – of Internet stocks that fueled the boom gone bust. Meeker’s appearance concluded the first phase of the arbitration, which started Monday. No date has been set for its resumption.

“About seven trillion dollars was lost in the stock market in the last 36 months,” said Plantation lawyer Darren Blum, who represents claimant Helen Weiss in the NASD proceeding. “A good part of that loss was due to misleading research reports by brokerage houses like Morgan Stanley.”

Weiss is a 74-year-old retired widow from Palm Beach Gardens. Her Morgan Stanley account allegedly suffered losses of about $1.2 million in 2000 and 2001 because Berk, on the advice of Meeker, and against Weiss’ express wishes, bought a portfolio of risky Internet stocks for Weiss and stuck with them as their values tumbled.

Weiss’ claim asks for compensatory damages equal to her losses plus interest and punitive damages of $3.6 million.

Blum is a former Wall Street pit trader whose four-lawyer firm, the Law Offices of Darren Blum, handles many suits by investors against their stockbrokers. Counsel for the respondents are William Pratt and Joe Serino, partners in the New York offices of Kirkland & Ellis.

Morgan Stanley media representatives declined to comment on Weiss’ claim.

The financial services giant was less publicity shy at the time of Meeker’s October 1999 visit to Boca Raton, when she moderated an Internet panel discussion at a gathering of the elite group of chief executive officers, the Business Council, at the exclusive Boca Raton Resort & Club. Part of Meeker’s function at Morgan Stanley at the height of her fame was to appear at “road shows” designed to attract investors.

On Wednesday morning, however, rather than return phone calls from the Daily Business Review, Morgan Stanley’s attorneys took the highly unusual step of asking the NASD arbitrators for a gag order on the proceedings, which the panel imposed over Blum’s objections.

Blum’s comments for this article came from interviews prior to the gag order.

Meeker started at Morgan Stanley in 1991 as a protege of legendary tech company banker Frank Quattrone, whom she later succeeded. An early advocate of companies such as eBay, Amazon.com, and Yahoo, her influence soared along with the bull market in tech stocks. At the height of the Internet frenzy her buy rating was a guarantee of investor interest in a company and a jump in its stock price.

Meeker, along with other Wall Street analysts such as Quattrone, Salomon Smith Barney’s Jack Grubman and Merrill Lynch’s Henry Blodgett, were transformed into media stars. Meeker was the subject of an admiring New Yorker profile; Fortune magazine called her “the unquestioned diva of the Internet Age.”

But after tech stocks collapsed in the spring of 2000, pulling the rest of the market down, critical eyes turned on the Wall Street analysts’ practices.

Particular scrutiny fell on the investment houses’ failure to separate their research and investment banking arms. Because the profits of the latter depended on participation in initial public offerings of the companies under review by the former, questions arose about possible bias in the analysts’ opinions.

The boil of suspicion was lanced by New York State Attorney General Eliot Spitzer, whose early 2001 probe of the investment houses grew into a joint investigation of Wall Street’s leading brokerages and their analysts by NASD, the Securities and Exchange Commission, and other securities regulators.

The investigations resulted this spring in the censure and barring for life from the securities business of Blodgett and Grubman, each of whom paid multimillion-dollar fines; Quattrone was charged in May by the NASD for violations related to research practices at his later job, at Credit Suisse First Boston.

In April, 10 investment firms under investigation reached a global settlement with the regulators. The firms neither admitted nor denied any wrongdoing but agreed to reform their stock research practices and paid a total of $1.4 billion in penalties and reimbursements. Morgan Stanley was assessed $125 million.

Weiss’ NASD claim draws heavily on information developed and made public by Spitzer – including Morgan Stanley internal documents, e-mails, and detailed annual self-evaluations of Meeker’s 1999 and 2000 performances.

The performance reviews include ample evidence of Meeker’s awareness of the connection between her research and Morgan Stanley’s IPO revenues.

“My highest and best use is to help [Morgan Stanley Dean Witter] win the best Internet IPO mandates,” she wrote in 1999, adding that “it was not unusual for Internet companies . to demand my research participation in order for us to garner acceptable deal terms.”

“A key area of focus for MSDW was to leverage the franchise we had built with our industry defining research report,” Meeker wrote in 2000. “The leverage is evident in the $569 million in Internet-related investment banking and private equity gains in 2000.”

It will take more than this suggestive evidence for Blum to prevail in the Weiss arbitration claim, however, according to attorney William Nortman, a shareholder in the securities litigation practice group of the Fort Lauderdale office of Akerman Senterfitt.

“It’s not a slam dunk where you can throw down the Spitzer report and say, ‘Pay me the money,’ ” Nortman said.

Nortman said Blum will need to demonstrate that Meeker influenced the actions of Berk on an individual basis – as opposed to all Morgan Stanley brokers as a whole. He compared the mass of evidence about the investment firm’s research to “a bunch of grapes you have to examine grape by grape.”

Blum said there is no “smoking gun” in the Weiss case but that the Spitzer documents and the testimony of Meeker and Berk would establish “a clear pattern of misconduct.”

Blum alleges that the investment house, Meeker and Berk were in breach of contract and fiduciary duty, and that they committed common law fraud. Weiss is barred from filing a civil suit because her broker’s agreement required that disputes be settled through arbitration.

According to Blum, Weiss took her $3 million investment account to Morgan Stanley when her Prudential Investments broker moved to a position there in 1996. The account was taken over by Berk when he started work at the firm’s Palm Beach office in 1997.

“She made it clear from the start that this was her nest egg, that she intended to live off it, and that she did not want to speculate with it whatsoever,” Blum said.

Beginning in 1998, Berk allegedly began touting technology stocks to Weiss. According to the complaint, Berk explained to her that Meeker was “one of the best [technology stock] analysts in the world” and that he “had frequent telephone conferences with [Meeker].”

Consequently, Weiss alleges, Berk and Morgan Stanley “implemented a speculative investment strategy involving a high use of margin and an overconcentration in technology stocks,” many of which, unknown to Weiss, were underwritten by Morgan Stanley.

According to Blum, because Weiss’s portfolio made up 10 percent of Berk’s business, the broker forwarded copies of Meeker’s research to her and spoke to her on the phone “three or four times a day” when he managed her Morgan Stanley account.

Weiss’ account grew in value initially, hitting $4 million in March 2000, Blum said. But when it fell back to $3 million in August 2000 and Weiss expressed concern to Berk, her fears were brushed aside.

“Based on Berk’s representations that he had a regular relationship with Mary Meeker, she let them continue to manage the account as they had,” Blum said. He added his client was 20 percent in tech stocks when she transferred to Morgan, and 80 percent by the time she took her business to another brokerage.

Blum said Weiss’ portfolio was heavy with stocks touted by Meeker even as they plummeted in value.

By March 2001, according to Blum, after Weiss’ account had fallen by about $1.5 million, she closed her Morgan Stanley account, took her business elsewhere and went looking for a lawyer.

“This is not a bandwagon suit,” Blum said, alluding to the flood of civil proceedings now flowing from the Spitzer findings. He points out that Weiss’ NASD claim was filed in March 2001, when the Spitzer investigation was just beginning.

“Morgan Stanley and its people never disclosed their conflicts of interest to my client or the risks associated with their investment practices,” Blum said. “Reimbursement and treble damages might deter future misconduct.”

Steve Ellman can be reached at sellman@floridabiz.com or at (561) 820-2071.