Regulators Accuse Merrill Lynch AnalystMay 29, 2003 | AP
In a new case of alleged analyst misconduct, the National Association of Securities Dealers has accused a former Merrill Lynch analyst of issuing misleading reports on a company he covered, Tyco International Ltd., while conducting a too-close relationship with Tyco officials.
The analyst and managing director, Phua Young, gave a $4,500 case of wine to Tyco's former CEO, Dennis Kozlowski, and flew several times on one of Tyco's corporate jets for business trips, often accompanied by Kozlowski, the NASD said Wednesday in a civil complaint.
Young, 48, of Forest Hills, N.Y., could face a fine and suspension. He also could be barred permanently from the securities industry. His attorney, Christopher Wilson, said Young is disputing the accusations through the NASD's hearing process.
"We intend to fight this vigorously," Wilson said. "We think the complaint is without merit (and) reflects a fundamental misunderstanding of what a good analyst does in order to be effective."
Young gave Kozlowski the wine as a wedding present, and the Tyco CEO "flipped him back a case of Champagne" when Young married, Wilson said.
The action by the NASD, the industry's self-policing group, put a new twist on charges of deception and conflict of interest on Wall Street. Previous allegations have concerned the conflicted relationship between analysts and investment bankers in their Wall Street firms. In the Young case, it is the ties between the analyst and companies he researched that are said to have created the problem.
The action against Young comes a month after the Securities and Exchange Commission state securities regulators, the NASD and the New York Stock Exchange announced a record $1.4 billion settlement with 10 Wall Street brokerages over alleged deception of investors by issuing biased stock recommendations to lure investment-banking business.
Merrill Lynch, the nation's largest brokerage, is one of three investment houses at which the regulators found that stock research reports were not only misleading but also fraudulent. Merrill is paying a $100 million fine under the settlement and another $100 million to fund independent research and investor education programs.
A formerly celebrated Merrill analyst, Internet stock expert Henry Blodget, agreed under the settlement to pay $4 million in fines and penalties and to be banned permanently from the securities industry to settle the regulators' fraud charges. Blodget neither admitted to nor denied wrongdoing.
Another analyst who paid fines of $15 million in the settlement, telecommunications specialist Jack Grubman of Salomon Smith Barney, had close ties with now-bankrupt WorldCom Inc. and consulted with former chief executive Bernard Ebbers on dozens of acquisitions. Grubman also neither admitted nor denied wrongdoing.
The NASD said Young published research reports about Tyco that contained misleading statements and exaggerated claims that differed from his own views and opinions as he privately expressed them.
The analyst also gave advance notice of his proposed stock ratings to selected large investors, according to the NASD's complaint. It also alleged that Young "routinely" gave Tyco advance copies of his research reports and improperly gave the wine to Kozlowski.
The group cited e-mail messages to illustrate what it said was Young's unusually close relationship to Tyco, which now is embroiled in a multibillion-dollar accounting scandal. Kozlowski and other former executives are accused of stealing millions from the company and obtaining further millions through fraud. Kozlowski, who has pleaded innocent to criminal charges, also faces New York state charges of tax evasion on art purchases.
In one e-mail, according to the NASD, Young told a senior employee in Tyco's investor relations department: "I am indirectly paid by Tyco." In another message, Young referring to his voice mail message to large investors is said to have asked Tyco's investor relations people: "Did I not sound pumped up enough?" Tyco employees were said to have responded: "You always sound pumped."
Mary Schapiro, NASD's vice chairman and president of regulatory policy and oversight, said that Young's conduct, "as evidenced by his own e-mails, gifts to the CEO of Tyco, and favors he received from the company amounted to a betrayal of objectivity and honesty in research."
Mark Herr, a spokesman for New York-based Merrill Lynch, declined comment. The firm fired Young in April 2002. Wilson said Young had sued Merrill to recover $10 million for two years' compensation and damages for defamation.