The integrity of Merrill Lynch’s stock research and investment-banking practices is likely to come under fire again this week.
Already suspected of helping Enron inflate its profits and tipping off Martha Stewart in the ImClone Systems inside-trading scandal, the USA’s largest broker now finds itself tainted by the Tyco scandal.
In a 95-page indictment released last week against former Tyco CEO Dennis Kozlowski and two other former top executives, Manhattan prosecutors allege Kozlowski and a former research analyst exchanged ”presents worth thousands of dollars” in a bid to ensure favorable Tyco coverage.
Prosecutors stopped short of naming either the firm or the analyst. But people familiar with the investigation say the analyst is Phua Young, at the time one of Wall Street’s biggest and most consistent Tyco enthusiasts.
At the request of Kozlowski, Merrill lured Young away from rival Lehman Bros. in 1999 with a multimillion-dollar pay package, people close to the matter say. Kozlowski held sway because Merrill made millions in investment-banking fees from the acquisitive Tyco.
Young, ranked highly by institutional investors for his insider knowledge of Tyco, sent vintage wine to Kozlowski to thank him for helping land the Merrill job, people close to the situation say. In return, Kozlowski sent a congratulatory gift of champagne to Young. Young was fired by Merrill in April for issuing Tyco reports without the brokerage’s approval.
Neither Young nor Merrill returned calls for comment. Young’s lawyer, Edward Little, confirmed that the indictment referred to Young.
”The idea that he was compromised because he received champagne is ludicrous,” said Little, representing Young in a dispute over the financial terms of his dismissal.
”The real story is that Merrill was no longer interested in covering Tyco, they were hysterical about the (New York Attorney General Eliot) Spitzer investigation, and they owed my client millions of dollars in deferred compensation. So they decided to fire him on a technicality.”
The incident represents another blow to Merrill’s research department. In April, Merrill agreed to pay $100 million to settle Spitzer’s charges that the firm’s analysts hyped stocks for investment-banking business. Last month, Merrill was ordered to pay a Pennsylvania couple $7.7 million in one of the largest awards to retail investors for giving bad advice. Hundreds of similar lawsuits are pending.
”Merrill seems to be the focal point of all the trouble right now because it is the biggest firm,” says securities lawyer J. Boyd Page, who is suing Merrill and other firms on behalf of small investors.