NASD Prepares to Take Action Against Henry Blodget

NEW YORK -- The regulatory arm of the National Association of Securities Dealers is preparing to take formal regulatory action against former Merrill Lynch & Co. (MER) analyst Henry Blodget for some of his research calls during the stock-market bubble that initially made him one of Wall Street's most popular analysts, according to people close to the matter.

The NASD recently disclosed its intentions to Blodget through a so-called Wells Notice, which gives the analyst the chance to refute the claims before the self-regulatory agency decides to take action.

The move marks the second major crackdown against a securities analyst during the NASD's recent investigation of conflicts of interest involving Wall Street research. In July, the NASD notified former Salomon Smith Barney analyst Jack Grubman that he could be facing charges for his research involving a small telecommunications company, Winstar Communications Inc., a former Wall Street darling that filed for bankruptcy protection in April 2001. Grubman kept a buy rating on the company and a $50 price target on the stock almost until the company filed for bankruptcy protection.

Grubman recently settled with securities regulators investigating his research calls, agreeing to a deal that includes a $15 million fine and a bar from the securities industry.

Blodget, who declined to comment about the NASD's action, also faces action over some of his research calls, these people say. At issue: Whether Blodget skewed his research with overly optimistic ratings to help his firm win banking deals.

In May New York Attorney General Eliot Spitzer reached a $100 million settlement with Merrill over charges that analysts like Blodget, who ran the firm's Internet research group, hyped stocks to win banking assignments. The settlement covered any action against Blodget by Spitzer's office.

But the settlement didn't cover action from the NASD, the securities industry's front-line regulatory agency. For the past six months or so regulators have been looking at evidence involving Blodget, and other analysts, and they are likely to announce any charges sometime before the end of the month. Last month, after regulators including the NASD reached a global settlement with top Wall Street firms over research conflicts, they turned their full attention to individual analysts at the center of their probes.

The most pressing case involves Blodget, who left Merrill in late 2001, just a few months after Spitzer launched his investigation. The attorney general ultimately uncovered damaging e-mails in which Blodget denigrated stocks, often in graphic terms, that the firm publicly was recommending to investors. As reported in The Wall Street Journal, the NASD is nearing the conclusion of its investigation into whether Blodget misled small investors with faulty research, according to people close to the inquiry. The NASD investigation also centers on e-mails, and investigators are seeking evidence that would show conflicts involving his research, the people say. Among the penalties available to the NASD would be suspensions and bans from the securities business.

A spokeswoman for the NASD declined to comment on the matter.