A bloke called Blodget: what the analyst scandal still teaches investors today

Henry Blodget was, for a brief period at the very end of the 1990s, the most famous stock analyst in the world. He worked at Merrill Lynch, he covered internet stocks, and he was extraordinarily good at telling investors that prices were going up. He was right just often enough, and loudly enough, that ordinary savers came to know his name. Then his private emails were subpoenaed. The phrase that did the damage was “piece of junk”, written about a stock he was publicly recommending as a buy. He was charged with civil securities fraud, banned for life from the industry, and ordered to pay four million dollars. He was thirty-six.

That story is now a quarter of a century old. The dot-com bubble that produced it is a museum piece. Yet anyone investing through a UK broker today still lives with the rules that the Blodget scandal forced into existence, and still walks past the conflicts of interest those rules tried, with mixed success, to police. Reading the analyst notes that land in your inbox is not a different exercise to the one private investors were doing in 2001. It is the same exercise, conducted under a slightly tidier set of disclosures.

The original problem was structural rather than personal. Merrill Lynch, like every full-service investment bank, made money on two sides of the same wall. Its research department published opinions about listed companies. Its investment banking department was paid enormous fees by those same listed companies to underwrite share offerings, advise on takeovers and place new debt. A buy rating from a respected analyst helped the banking team win mandates. A sell rating made the next pitch awkward. Henry Blodget did not invent that conflict. He inherited it, internalised it, and got caught putting the awkward parts in writing.

Eliot Spitzer, then attorney general for New York, ran the investigation. He did not rest the case on a single bad call. He rested it on the gap between what analysts said in research notes and what they wrote in internal correspondence. There were stocks rated buy that were privately described in language not fit for a regulatory filing. The settlement that followed in 2003, known as the global research analyst settlement, hit ten Wall Street firms for around 1.4 billion dollars combined. It did three things that mattered. It separated research from investment banking by formal Chinese walls, it required disclosure of conflicts in every published note, and it funded a programme of independent research for retail investors.

The British equivalent did not arrive in one decisive law. It arrived in pieces. The Financial Services Authority, before it became the Financial Conduct Authority in 2013, had already tightened analyst conduct rules in the wake of Spitzer. The bigger shift came with MiFID II in January 2018. The provision investors should know about is the unbundling of research from execution. Before MiFID II, asset managers received broker research as part of the bundled commission they paid when they traded. The cost was hidden, the value was unmeasured, and the volume of research produced was vast because it was effectively free at the point of use. After MiFID II, fund managers had to pay for research in cash, on a separate invoice, and disclose that cost to their own clients.

That sounds like a back-office reform. It is not. The result was a sharp contraction in the analyst industry. Mid-tier brokers cut research staff. Coverage of small and mid-cap companies thinned out, particularly in the UK. The number of analysts following the average AIM-listed share fell, and on many smaller names it fell to zero. By the early 2020s, the FCA was openly worried that the rules had gone too far for smaller companies. The 2024 review of MiFID II investment research rules in the UK proposed allowing bundled payments again, with disclosure, and a new regime for research on smaller listed firms came into force in 2025. The pendulum has swung back, partially, but the broader principle that analyst research is a paid product with a price tag attached is now embedded.

What Blodget left behind, in other words, is a market where the paid-for nature of research is much more visible. That is good. It is also a market where two specific risks have not gone away, and a third has emerged.

The first risk, which the Spitzer settlement targeted directly, is the buy bias. Even after twenty years of reform, the distribution of analyst ratings on UK and US stocks still skews heavily toward buy and hold. Genuine sell ratings remain rare. The reasons are softer than they were in Blodget’s day, but they are still commercial. An analyst with a sell rating on a major listed company finds it harder to get the chief executive on the phone. A bank with a sell rating finds it harder to be in the next equity issue. None of that is illegal. It is simply the gravity of the relationship.

The second risk is sponsored research. When MiFID II made independent coverage uneconomic for small caps, a market emerged in which companies pay brokers directly to publish research about themselves. The notes are clearly labelled as sponsored or commissioned, and that disclosure is a real improvement on the Blodget era. But the economic incentive runs in only one direction. A company paying for research is not paying for a sell rating. Reading sponsored notes for facts and ignoring the recommendation is a sensible default.

The third risk is newer. Financial Twitter, now X, and the equivalent on YouTube, Reddit, Substack and TikTok, have created a parallel research industry that operates outside any regulator’s analyst rules. Some of it is excellent, careful and transparent about its biases. Some of it is the modern descendant of the bulletin-board ramper, with a larger audience and a faster reach. The Blodget settlement could not anticipate it. The FCA’s market abuse regime applies, but enforcement is slow and the volume is enormous. The protection MiFID II offers a UK investor when reading a Cazenove note offers nothing at all when reading an anonymous account on X claiming to have spoken to a board member.

The lesson the Blodget story still teaches is simple. Treat every recommendation as the output of a business model. Ask who pays for the note, who benefits if the rating is followed, and what the analyst loses if the rating is wrong. None of that requires you to ignore research. Most of it is useful, and the data inside a serious broker note often cannot be assembled by a private investor in any reasonable amount of time. It does require you to read the disclosure page rather than skipping it, and to weight a buy rating from a house that earns banking fees from the company differently to one from an independent shop.

The industry Blodget was thrown out of has reformed, partially. The conflict that produced the scandal has been disclosed, regulated, unbundled and watched. It has not been removed, and it cannot be. Knowing that is the start of being able to read an analyst note properly.

This post is drawn from The Street-Smart Trader by Ian Lyall. Republished with permission.

Street Smart is a series drawn from first-hand experience of the City of London, updated as each new chapter arrives.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.