When New York Attorney General Eliot Spitzer (right) released a trove of internal Merrill Lynch E-mails in April 2002, it seemed like the ultimate gift to trial lawyers. In a hearing last week, federal Judge Milton Pollack skewered attorneys for investors in a big class action suit against Blodget, Merrill Lynch, LookSmart, Lifeminders, and seven other firms whose stocks crashed and burned after Merrill touted them. Any recoveries are likely to be minuscule compared with investor losses–estimated to be as much as $200 billion in WorldCom alone.

In the missives, star analyst Henry Blodget and other stock pickers privately trashed stocks they were advising individual investors to buy. Blodget, for instance, called Lifeminders, an online marketing firm, a “POS” [piece of s- – -]–even though it carried one of Merrill’s highest ratings.

A Merrill banker trying to recruit Internet start-up LookSmart as a client argued that “we should aggressively link [stock] coverage with banking”–an arrangement that is now banned. The E-mails were considered so damning they have been reproduced verbatim in dozens of lawsuits by investors who lost millions on the fated stocks.

Of the analysts’ recommendations and the E-mails, Pollack said, “You’re not recommending these to anybody to whom you have a fiduciary duty. You’re just shooting your mouth off . . . are you telling me that all of the stocks that hit the sky were assisted with fraud?” Lawyers for both sides expect Pollack to dismiss the suit, as he did a related case against Merrill in June.

That may be just one of many disappointments for thousands of individual investors seeking payback after their portfolios collapsed during the market meltdown. For one thing, the bulk of payments made so far by offending firms often goes toward things other than repaying investors.

In the $1.4 billion “global settlement” negotiated by Spitzer and the Securities and Exchange Commission with 10 Wall Street firms over tainted stock research, only $399 million was set aside for investor restitution; the rest will go to the states, to an independent stock-research fund, and to other causes.

Overall, various settlements negotiated by Spitzer, the SEC, and other regulators have secured at least $1.5 billion to compensate defrocked investors. But that will ultimately be split among investors who could number in the hundreds of thousands. Beyond that, several high-profile civil suits are seeking billions in restitution for the free-fall of nearly 400 stocks, according to tracking firm Securities Class Action Services, that range from WorldCom and Enron to long-forgotten Internet firms.

Scroll to Top