Prominent Securities Fraud Cases

24/7 Media

24/7 Media was described by Henry Blodget as a "piece of s---" in an October 10, 2000 email that was uncovered during Eliot Spitzer's investigation. Despite internal misgivings over 24/7 Media's value, Merrill Lynch analysts continued to rate the company at 'accumulate/accumulate.' On October 10, 2000 the shares were already trading at six dollars, down from forty dollars just a year before. When Merrill Lynch finally lowered its 'accumulate' rating to 'neutral/neutral' (November 9, 2000), shares were trading at $2.94 each. 24/7 Media continues to offer Internet marketing advising services to marketers and publishers.

Adelphia Communications Co.

Adelphia Communications Co., the country's sixth largest cable television provider, filed for bankruptcy on June 25, 2002. On July 24, 2002, the SEC filed fraud charges against members of the Rigas family (which founded the company), and several of its directors. The SEC charged that the company "excluded billions of dollars in liabilities from its consolidated financial statements," "falsified operations statistics and inflated earnings to meet Wall Street's expectations," and "concealed rampant self-dealing by the Rigas family." Timothy Werth, the company's former director of accounting, pled guilty to fraud and conspiracy on January 10, 2003. Adelphia's former directors, primarily the members of the Rigas family (John, Timothy, Michael and James Rigas), will face trial on January 5, 2004.

Aether Systems, Inc.

Aether Systems Inc. specializes in wireless communication. The company went public in October of 1999 with Merrill Lynch as its lead underwriter. Merrill Lynch is firmly suspected of having issued biased research reports in favor of Aether between November of 1999, and February of 2002. The following email, written near the end of 2000 by Henry Blodget, Merrill Lynch's lead analyst, reveals such a conflict of interest regarding Aether: "If there are no new email forthcoming from Andy [Melnick] on how the instructions below should be applied to sensitive banking clients/relations, we are going to just start calling the stocks including AETH, like we see them, no matter what the ancillary business consequences are."
In addition to acting as an IPO underwriter for Aether (and bringing in a fee upwards of $40 million), Merrill Lynch performed two other Aether stock offerings. The brokerage firm paid a $100 million settlement in May of 2002 following investigations into its underwriting and advising procedures, but was not required to admit guilt. In the April 2003 settlement by the SEC and other regulators, Merrill Lynch was required to pay an additional $100 million.


Etoys, which went public in May of 1999, made excessive gains on its opening day. The company has accused Goldman Sachs, the lead underwriter in its IPO, of intentionally setting the value of its stock low. The company claims that Goldman Sachs undervalued its shares in order to offer easy profit to its investment banking clients. These clients reaped the benefits when eToys' stock jumped from $20 a share to $76.56 a share its first day of public trading. IPO investors, according to eToys, gave Goldman Sachs commission kickbacks and underwriting deals in return for the quick profits made on their IPO holdings.
Etoys claims that its bankruptcy was, in part, a result of not having enough in initial funds to run its quickly expanding business. The business, eToys states, could have survived longer if it had had a more accurate initial appraisal and thus more funds upfront. On March 7, 2001, the company filed for bankruptcy and between January and April of 2001 it laid off its employees. The securities fraud lawsuit against Goldman Sachs was filed in May of 2002. As of early 2003, no settlement had been reached.


Merrill Lynch's ratings of excite@home are under investigation. Evidence has shown that Merrill Lynch analysts were influenced by the firm's desire to hold on to its investment banking clients, one of which was excite@home. E-mail correspondence that Eliot Sptizer (New York's Attorney General) gathered records internal communication between Merrill Lynch analysts about excite@home stock:

  • December 27, 1999 - "we are neutral on the stock"
  • December 29, 1999 - "Six month outlook is 'flat,' without any 'real catalysts' for improvement seen.
  • June 3, 2000 - "such a piece of crap."

Although the analysts were disparaging of the company's prospects privately, they continued to give it 2-1 ratings (accumulate to buy). Shareholders, trusting the research of the analysts, held their stock, and by the time excite@home filed for bankruptcy (September 28, 2001) had lost billions of dollars.

FLAG Telecom Holdings, Ltd.

The April 2002 bankruptcy of Flag Telecom resulted in major losses for shareholders. The company's Chapter 11 reorganization continued these losses. As part of the restructuring proposal (approved September 26, 2002), FLAG Telecom's creditors accepted an exchange of debt for new securities and promissory notes. The issuing of new securities drops the value of current securities, rendering them nearly worthless.

Focal Communications

Salomon Smith Barney, the investment banking division of Citigroup, gave Focal Communications Corporation high ratings even after its lead analyst, Jack Grubman, privately acknowledged that the company was losing value. An e-mail written by Grubman on February 21, 2001 shows that he and other Smith Barney analysts were aware that their ratings did not correspond to the actual value of the stock. Grubman states in the e-mail, "If I so much as hear one more f------ peep out of them [Focal] we will put the proper rating (i.e. 4 not even 3) on this stock which every single smart buysider feels is going to zero."
This e-mail, which was written after Focal had raised complaints over report ratings, was reviewed in the September 2002 suit Eliot Spitzer brought against directors of five telecom companies. Smith Barney did not lower its 'buy' rating of Focal until August of 2001, when the company was trading at $1.24 a share (down from its February 2001 rate of about $15 as share).

Global Crossing

On December 31, 2002, Gary Winnick, founder and chairman of Global Crossing, resigned. Winnick's resignation came approximately a year after the company filed for Chapter 11 bankruptcy. Winnick, among other Global Crossing executives, is being investigated for pulling his stock weeks before the company began its decline. Winnick sold ten percent of his holdings for $123 million in May of 2001, but has maintained that he did not know the company's financial condition when he sold the stock. Global Crossing is being investigated by the SEC and is facing multiple lawsuits from investors. The company's reorganization plan, approved in December by a federal bankruptcy judge in New York, gave investors no compensation for their losses., which is now operating under the name and URL ',' did its investment banking through Merrill Lynch. The company's shareholders filed a class action suit against the firm on May 20, 2002, arguing that Merrill Lynch's ratings of its stock violated sections 10(b) and 20(a) of the 1934 Securities Exchange Act. Section 10(b) states that using a "manipulative or deceptive device" or scheme against the rules and regulations of the commission in connection with the purchase or sale of a security is unlawful. Section 20(a) states that a person who controls another person (who is liable to the provisions of the Securities Exchange Act) will be responsible, to an extent, for the effect of the controlled person's actions on any person toward whom he or she had a responsibility. For instance, if Alex controls Dorothy, and Dorothy is subject to Securities Exchange Act regulations, then Alex will (to an extent), be responsible for the effect of Dorothy's actions on Debbie, her client.
According to the suit, Merrill Lynch gave favorable coverage in an effort to win its investment banking business. The high public ratings contradicted the internal dialogue between Merrill Lynch analysts about's prospects. Henry Blodget, Merrill Lynch's lead Internet analyst responded to an email asking "what's so interesting about GOTO except banking fees?" with a curt "nothin." And Kirsten Campbell, another Merrill Lynch analyst wrote of GoTo stock, "I don't think it deserved a 3-1 [short term neutral, long term buy]." In addition to keeping's ratings inaccurately high, Merrill Lynch lowered ratings on its competitor. And when channeled its investment banking business to another firm, Merrill Lynch dropped GoTo's high ratings.


InfoSpace runs its operations on three fronts: online advertising, wireless data services and wireline services. The company is expected to continue operations despite damages incurred by the telecom bust and recent lawsuits. InfoSpace has stayed afloat because it is free of debt and has money enough to continue until the expected resurgence in wireless business occurs.
Naveen Jain, founder of InfoSpace, was removed from his position as Chairman and CEO in December of 2002. He has been replaced by Jim Voelker, the company's director. Jain, in addition to cashing out $406 million dollars in company stock during the telecom bust, lured a number of highly qualified employees with huge equity packages, only to fire them within months. The employees lost their shares because they had been set up in a 'cliff vesting' plan. Under such a plan, an employee cannot claim equity until he or she has been employed for a specified amount of time. The specified period, according to Jain, was one year. Jain offered Robert Hoffer, the former Vice President of Sales, three hundred thousand shares at ten cents apiece. Kent Plunkett joined on two million shares at a penny apiece. And Mark Kaleem was offered five hundred thousand shares at a penny a piece. The three employees, and others, were offered the packages as long-term benefits, then fired shortly thereafter. InfoSpace settled with Hoffer (undisclosed sum) in January 2001, with Plunkett in 1999 ($10.5 million), and with Kaleem in 1999 ($4.5 million). InfoSpace and Jain face continuing securities fraud investigations.

Internet Capital Group

On May 10, 2002, a class action suit was filed by the Emerson firm on behalf of individuals who invested in Internet Capital Group under misleading information from Merrill Lynch and Merrill Lynch's top Internet analyst, Henry Blodget. The suit claims that Merrill Lynch provided investors with analysis that was unreasonable and removed from the reality of the company's standing. Furthermore it alleges that Merrill Lynch advised out of a conflict of interest and failed to disclose the influence of Internet Capital Group's investment banking business on its analysts. Blodget gave Internet Capital Group high public reviews, while in internal emails he called it "a disaster," stating, "there really is no floor to the stock." Internet Capital Group specializes in business-to-business e-commerce. It has not declared bankruptcy, though it has faced steady declines as an effect of the Internet bust and resulting cuts in customer spending.


Henry Blodget's ratings of iVillage, the online women's resource center, remained high until August of 2000. The company's shares fell from the mid-fifty dollar range (July 1999) to just above six dollars (August 2000) before he dropped his 'accumulate/buy' rating to a still zealous 'accumulate/accumulate.' Merrill Lynch and Blodget (the firm's lead Internet analyst) face continuing allegations from shareholders of iVillage and various other deteriorating companies. These allegations claim that Blodget and other Merrill Lynch analysts knowingly gave biased investment advice in an effort to secure investment banking clients and lucrative underwriting deals for Merrill Lynch.

Level 3 Communications, Inc.

Records uncovered by the U.S. House Financial Services Committee in August of 2002 list Level 3 Communications' CEO, James Crowe as one of the executives Salomon Smith Barney frequently offered IPO shares to. Level 3's chairman, Walter Scott Jr., also received lucrative IPO shares, notably 100,000 shares of Rhythms NetConnections, 250,000 shares of Qwest, and 100,000 shares of Juno. Smith Barney is suspected of having offered IPO shares to its investment banking clients in an attempt to lure their business (and banking fees). Its shady IPO deals and questionable analyst ratings have been the subject of recent investigations.
Smith Barney's ratings of Level 3 may have been compromised by the $136 million in investment banking fees it obtained from the company before April of 2001. Level 3's shares, which were valued at $130 at their height (March 10, 2000), slumped to $13 (April 2001) before Smith Barney's Jack Grubman dropped his expected value estimate from $130 to $20 per share.

McLeodUSA, Inc.

Clark McLeod, the former CEO of McLeodUSA (the telecommunications provider) was one of five corporate CEOs sued for "profiteering in IPOs and phony stock ratings" by N.Y. Attorney General Eliot Spitzer on September 30, 2002. Each of the five executives indicted received IPOs from Salomon Smith Barney (allegedly) in return for their company's investment banking business. Clark McLeod made nearly nine and a half million dollars in the thirty-two IPOs he took part in. McLeodUSA paid Smith Barney $49 million in investment banking fees. The other four executives sued were Chairman Philip Anschultz and CEO Joseph Nacchio of Qwest Communications, CEO Bernard Ebbers of WorldCom, and Chairman Stephen Garofalo of Metromedia Fiber Network.
McLeodUSA declared bankruptcy in January of 2002 and received approval for its reorganization plan on February 28, 2002. Chris Davis has stepped in as McLeod's CEO and has instated a company wide focus on high customer service.

Metromedia Fibre Network

The SEC began investigating Metromedia's accounting practices in June of 2002. The company went bankrupt May 20, 2002 after defaulting on payments to Nortel Networks ($8.1 million) and deferring payments to Verizon ($30 million). Metromedia's executives earned $209 million while the company was collapsing. On April 1, 2002 the company announced that it would replace Mark Spagnolo, CEO, and Randall Lay, CFO, with John Gerdelman and Robert Doherty in an effort to manage restructuring changes. As part of the investigation, the SEC will review the company's 2001 quarterly statements (which Metromedia made a preliminary restatement of in April, 2002). The company's Chapter 11 bankruptcy aims to restructure the company, reducing unprofitable operations and maintaining business to restore lost funds.

Peregrine Systems

On February 28, 2003 the software maker Peregrine Systems disclosed that its losses (previously reported at $1.54 billion) were understated. The company's losses between 2000 and 2002 totaled $4.09 billion. Peregrine filed for Chapter 11 bankruptcy on September 22, 2002.
Peregrine covered its extensive debt in part by manipulating accounts receivable balances and recording non-existent revenue. Since May of 2002 the company has had to restate its losses multiple times. After firing its accounting firm, Arthur Andersen, in April of 2002, Peregrine hired KPMG to audit its books; soon after KPMG disclosed the company's fraud to the SEC. went public on February 10, 2000 bringing in $82.5 million on its IPO. The company's shares opened at $11 and reached a height of $14. However,'s success was short-lived; the company shut down on November 7, 2000, after just nine months of public trading. ultimately failed because there was little incentive for pet owners to buy pet food, toys and supplies online when they were readily available at grocery stores and local shops (without the wait). The company ran on a negative gross margin for months before it closed. In a respectable move, the company sold its assets and shut down in order to return whatever it could raise to shareholders.
After April, shares stayed under five dollars. Merrill Lynch's Henry Blodget, however, kept his ratings high. He did not drop his buy/buy rating to accumulate/accumulate until August. Merrill Lynch earned over $5 million in investment banking fees from before it collapsed.

Quokka Sports

Quokka showed 'extreme,' sports and other sporting events that had received little media coverage in the past, over the Internet. The company provided the Internet coverage for the 2000 Olympics in Sydney and ran such sites as,, and It filed for Chapter 11 bankruptcy in April of 2001.
The Chapter 11 filing was disputed by investors who saw it as a manipulation of legal options. Under a Chapter 11 bankruptcy a company reorganizes its business operations and restructures its debt in an attempt to recover financial standing and, effectively, have another go. In comparison, under a Chapter 7 bankruptcy a company liquidates its business, selling assets to return money to creditors and shareholders. Investors are left with nearly worthless stock after Chapter 11 bankruptcies.
Investors who lost because of Quokka's bankruptcy are questioning Merrill Lynch, whose analyst, Henry Blodget didn't downgrade Quokka (a Merrill Lynch client) from 'accumulate' to 'neutral' until January 9, 2001. By this time the company's shares were already trading below one dollar.


Webvan, the online grocer, has faced accusations of allegedly violating SEC fair dealing standards. The company's IPO registration did not include information about extra commissions investors paid to Webvan's underwriters. Goldman Sachs, Merrill Lynch, Robertson Stephens, Bear Stearns, and Smith Barney underwrote the company's IPO, setting its initial offering price at $15 a share. Select investors paid the firm high commissions to take part in the IPO. These commissions were above the $.90 per share that was disclosed in Webvan's prospectus.
In addition to paying these commissions, the investors agreed to buy Webvan shares at a specified price a precise time after the company had been trading publicly. These tailored investments would artificially raise the price value of the company's stock. Webvan filed for bankruptcy in July of 2001 after having attempted to expand beyond what its revenue would allow.

Williams Communications Group

Williams Communications Group is a spin off of its parent company, Williams Companies Inc. Williams Communications Group began operating independently in April of 2001. After one year, its debt stood at $7.15 billion, $1.16 billion more than its assets. Investors purchased shares of the broadband provider, trusting in the Williams name and the continued assurances of the company's executives. Williams Communications Group filed for Chapter 11 bankruptcy on April 22, 2002 and began its reorganization plan in early October.
The restructuring of the company rendered 490 million outstanding common shares nearly valueless. It gave unsecured creditors a fifty-four percent holding in the company (now operating as WilTel Communications Group) and Williams Cos. forty-eight percent of the new equity. Two percent of the new equity was set aside for investors who lost because of the reorganization. After assisting the company in reorganizing, CEO Howard Janzen resigned. Jeffrey Storey took his place on October 31, 2002.

Winstar Communications

A complaint was brought against Winstar Communications in April of 2001, claiming the company intentionally misrepresented itself before investors by exaggerating its revenues and assets. In an unexpected turn, the company, which had reassured investors that it was growing and anticipated continued growth into 2002, laid off over two thousand employees (April 2001). It filed for Chapter 11 bankruptcy shortly thereafter. In August Winstar laid off an additional 950 employees, citing the necessity of downsizing and limiting costs. Winstar was bought out of bankruptcy by IDT for $42.5 million that December. Less than a year before its bankruptcy, Winstar's stock market value had been assessed at over $10 billion.
The National Association of Securities Dealers (NASD) began looking into Jack Grubman's ratings of Winstar in July of 2002. Smith Barney's Grubman had kept his ratings of Winstar at "buy" until April 17, 2001, the day before the company filed for bankruptcy. By this time Winstar stock had already dropped to fourteen cents a share. Between February of 1999 and July of 2001, Smith Barney received $24 million in banking fees from Winstar. The company also advised Winstar on April 2nd (two weeks before it filed for bankruptcy) about debtor-in-possession (DIP) financing.

XO Communications Group

A number of suits have been brought against Salomon Smith Barney and its lead analyst Jack Grubman on account of inaccurate market recommendations about XO communications. XO is a local exchange carrier that has recently emerged from Chapter 11 bankruptcy (January 16, 2003). The company's reorganization has allowed it to drop its debt load from $5.1 billion to $554 million. Carl Icahn took over a large portion of XO communication's debt in exchange for an 80% holding in the company's shares. The company declared bankruptcy on June 18, 2002, noting that it had "too much debt, given the current and projected level of business operations." Smith Barney's 'buy' rating was not dropped until November 1, 2001, when shares were valued at just 85 cents a share. Smith Barney has been accused of setting XO's target prices at inflated levels in order to keep its investment banking business. By April of 2001 Smith Barney had earned over $60 million in investment banking fees from XO. Smith Barney did not disclose its conflict of interest to investors.

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