“It may not be so easy for investors to reap big bucks from brokerage firms for their market-bubble losses after all,” writes Randall Smith in today’s Wall Street Journal.

“Federal Judge Milton Pollack in New York Tuesday dismissed class-action claims brought against Merrill Lynch & Co. and its former star Internet-stock analyst Henry Blodget by investors in two Internet stocks that collapsed when the market bubble burst, saying they failed to show they were defrauded by Merrill’s stock research.”

“The decision was a breakthrough victory for Wall Street, whose largest firms have been pounded for the past 15 months by regulators and investors for allegedly using tainted research to boost the investment-banking business they get from corporations. Not only is Judge Pollack presiding over additional Merrill cases, other judges may follow his reasoning in similar cases.”

“In a scathingly critical ruling, the 96-year-old senior judge — who has a long history of presiding over major securities-law cases — said investors who brought the suits were ‘high risk speculators,’ who knew or should have known ‘the unjustifiable risks they were undertaking in the extremely volatile and untested stocks at issue, [and now] hope to twist the federal securities laws into a scheme of cost-free speculators’ insurance.’ “

“Judge Pollack added: The plaintiffs ‘would have this court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a handful of lucky winners.’ He repeatedly attributed their losses to the bursting of the Internet stock bubble, and said he was ‘utterly unconvinced’ that Merrill intended to defraud them.”

“The plaintiffs had invested in 24/7 Real Media Inc. and Interliant Inc. 24/7 Real Media, which once traded at more than $60, now trades for less than $1. Interliant rose above $16 in its first day of trading in 1999 and now trades for pennies. Investors filed similar suits against Merrill over 25 other stocks that soared and plunged.”

“Judge Pollack, who is also considering the cases involving the other 25 stocks, stayed those cases pending the resolution of the legal issues in Tuesday’s decision. Judge Pollack said he would ‘determine at the appropriate time the applicability’ of Tuesday’s ruling to those other cases.”

“One lawyer for the plaintiffs, Seven J. Toll, said, ‘We obviously think he’s wrong. We have to discuss whether to move to reconsider or appeal.’ Although Judge Pollack noted at a hearing June 16 that the lead-plaintiff investors in both companies made millions when the stocks were going up, and thus could just as easily have reaped huge profits, Mr. Toll disputed the judge’s characterization of them as speculators. In both cases, he contended, the shareholders had sold businesses they owned to the Internet companies, and were restricted from selling their stock by terms of the acquisitions. Those plaintiffs also didn’t buy their stock through Merrill.”