There's nothing like a reformed sinner. Henry Blodgett, infamous for hyping technology stocks in the go-go 1990s along with pals Mary Meeker and Jack Grubman until the NASDAQ and DOW both imploded, taking trillions in investor value with it, is writing for Forbes , that venerable money mag.
For those with short memories, Blodgett was the Wunderkind Internet stock analyst at Merrill Lynch who was caught publicly promoting stocks to which his company had investment ties, while privately trashing those same stocks on email. He escaped regulatory action with a multi-million-dollar settlement, with no admission of wrongdoing.
Wall Street took a nosedive, mostly because Blodgett wasn't alone in offering misleading and/or fraudulent research reports. Dozens of other Wall Street investment banks also accepted payments from companies for favorable research or participated in the successful spins of initial public offerings of new-to-the-stock-exchange companies.
According to WhisperNumber.com, almost all the top investment firms were involved in some sort of cozy research/investment banking relationship that resulted in misinformation to investors including Citigroup's (NYSE: C) Salomon Smith Barney unit, Merrill Lynch (NYSE: MER), Credit Suisse Group's (NYSE: CSR) Credit Suisse First Boston, Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MWD), Bear Stearns (NYSE: BSC), J.P. Morgan Chase (NYSE: JPM), Lehman Brothers (NYSE: LEH), UBS Warburg, and U.S. Bancorp's (NYSE: USB) Piper Jaffray.
In April 2003, ten firms were fined $1.4 billion dollars by the SEC, and the analysts moved on to other offices, firms or careers. Blodgett went on to become a journalist, writing for Slate.com and Forbes on what else? Internet companies.
Blodgett appears on a mission about Google, according to articles and blogs he's written targeting the company. A perusal of his posts illustrates a range of topics that are unflattering to Google -- overpriced keyword revenue models, flimsy logic used by Google bulls, Google management's quotable gaffes, and praise for Google competitors like Yahoo!.
"Google's no-content strategy leaves it less able to exploit display advertising, rich media, member-based marketing, and other models that Yahoo! is building into real businesses," writes Blodgett.
Are his blogs and articles more biased research or is he on to something? Is he making up for possible past guilt, or is he secretly working for Yahoo! or some other Google competitor?
What raises the question is his reformist zeal in going after Google for its ... ahem ... lack of transparency, particularly after being hit with a $90 million fine for click-fraud. Not only will the company have to reimburse advertisers, it will have to keep investors informed of how the money will be accounted for. And it will have to prevent such lawsuits in the future.
"To make matters worse, the company released this news on its blog. A $90 million, precedent-setting payout on a critical issue at the forefront of every Google observer's mind, and the company has an anonymous associate general counsel type up a blog post. Google needs some new PR people, and it needs them now," writes an indignant Blodgett.
"After breezing through her "update," Nicole (a Google attorney) just assures us once again that 'we believe we manage the problem of invalid clicks very well. We have a large team of engineers and analysts devoted to it. By far, most invalid clicks are caught by our automatic filters and discarded *before* [sic] they reach an advertiser's bill. And for the clicks that are not caught in advance, advertisers can notify Google and ask for reimbursement.'"
Far from satisfied, Blodgett writes, "Then can we assume that, in the future, the tiny percentage of "invalid clicks" that slip past Google's rocket scientists and aren't reimbursed will be dealt with through the legal system? And, while we're getting updated, what should we assume is the percentage of clicks that the rocket-scientist team "discards" as a percentage of total clicks? Is this percentage increasing or decreasing? What about the percentage of Google-approved clicks that advertisers claim are invalid? Is that percentage increasing or decreasing? By the way, what percentage of revenue is Google "reimbursing" every quarter? (Sorry, now that we know the definition of "material" is somewhere north of $90 million, we have to ask). Is that percentage increasing or decreasing? And what should we assume will happen now that Google is shelling out money?
He goes ballistic when "Nicole" writes, "For the finance folks out there wondering how we'll account for this ... ."
"The "finance folks" out there?" he fumes. "Um, you mean the thousands of shareholders who have been and remain concerned about this issue? For the finance folks out there wondering how we'll account for this we can say that the attorneys' fees (which will be determined by the judge) will be charged as an expense, most likely in the first quarter, once the amount is determined. The credits will be recorded as a reduction to revenue in periods in which they are redeemed. So should we assume that most of that $90 million will hit revenue next quarter?"
Good points all! It would be nice to be able to trust Blodgett. Someone with his knowledge could be an invaluable ally in understanding Internet companies and how they work, if one could only forget that he probably wasn't so concerned about investors during his tenure at Merrill Lynch.
