Until the last few years, there was little in the way of reported case law against investment banks, alleging false and misleading research reports by its analysts. Plaintiffs’ attorneys may have initially been dissuaded from bringing these kind of cases due to the elimination of aider and abetter liability after Central Bank.34 However, the volume of litigation and SRO arbitrations in this area has increased dramatically in the last year. Since 2001, a number of class actions have been brought against investment banking firms relating to alleged overly optimistic research reports by analysts of investment banks. Many fiduciary duty cases have been brought in state courts alleging that unreasonably optimistic research reports induced investors to purchase or hold the securities for which the “buy” recommendations were made. In several of these cases, the defendants have filed “removal” petitions to the federal district courts based on the Securities Litigation Uniform Standards Act (“SLUSA”).35 

A number of class actions have been brought under Section 10(b) and Rule 10b-5 of the 1934 Act in the United States District Court for the Southern District of New York. There are very few reported cases involving plaintiff class action attacks in the area of research reports under the federal securities laws.36 Most litigation of this ilk involves allegations that the underwriter knowingly issued false and misleading research reports or that the statements in the prospectuses of public offerings were misleading or inaccurate. Plaintiffs have been generally unsuccessful in proving intentional participation in fraudulent activity by the underwriters or analysts in connection with favorable research reports.37 By and large, these cases have failed due to the plaintiff’s inability to plead or allege that the analyst himself knew or was reckless in not knowing that the information in his reports was false. In In re Credit Suisse First Boston Corp. Securities Litigation, 1998 WL 734365 (SDNY 1998), however, the Court determined that the plaintiffs had adequately pleaded that the projections were published in bad faith in order to cause the stock price to decline so as to create a profit from an undisclosed short position.38 

While prior cases have by and large been unsuccessful due to a lack of scienter or reckless disregard of the facts, if the allegations made by the New York Attorney General and others are proven to be true with respect to certain brokerage firms, the number of successful claims and arbitration actions against brokerage firms may rise dramatically and cost the brokerage industry potentially billions of dollars in claims and lost revenue. The following legal theories are being utilized by the plaintiffs’ bar and regulators. 

32   See Stephen Labaton, S.E.C. Adopts New Rules For Analysts, The N.Y. Times, May 9, 2002.

33   See Securities and Exchange Commission Release 2002-63, supra note 30 at 2.

34   See Central Bank of Denver, N.A., v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). Also see Richard A. Rosen, Liability for Optimistic Research Analyst Reports; Key Issues and Emerging Trends, January 2002, at 3.

35   Id at 3. 

36   See Id. at 5.

37   See In re Verifone Sec. Litig., 784 F. Supp. 1471 (N.D. Cal. 1992); Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998); In re Stratosphere Corp. Sec. Litig., 1 F. Supp. 2d 1096 (D. Nev. 1998); McNamara v. Bre-X Minerals Ltd., No. 5:97-CV-159, 2001 WL 732017 (E.D. Tex. 2001); In re Credit Suisse First Boston Corp. Securities Litigation, 1998 WL 734365 (SDNY 1998); In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833 (N.D. Cal. 2000); Marks v. Simulation., 2000 WL 33115589 (C.D. Cal. Feb. 28, 2000). In In re Lloyd v. Morgan Stanley Dean Witter & Co., No. 01 Civ. 7265, 2001 WL 959190 (S.D.N.Y. August 21, 2001), involving claims against analyst Mary Meeker and Morgan Stanley, Judge Pollack dismissed the complaint sua sponte before any motion to dismiss had been made.

38   Rosen, supra note 34 at 6.