At the height of the late-1990s bull market, a Merrill Lynch & Co. stock analyst was wondering whether a research report he wrote on Tyco International Ltd. was sufficiently bullish.
“Did I not sound pumped up enough?” the analyst, Phua Young, asked a Tyco executive in an e-mail. The Tyco official assured him: “You always sound pumped.”
The exchange was disclosed Wednesday when securities regulators charged Young, since fired by Merrill, with a variety of infractions, including publishing misleading research and improperly sharing material nonpublic information with investors.
The administrative complaint by brokerage industry watchdog NASD, formerly known as the National Assn. of Securities Dealers, is one of several recent cases of securities regulators pursuing charges against individual analysts. Last month, major Wall Street firms agreed to pay $1.4 billion to settle allegations of wrongdoing by analysts during the 1990s bull market.
The complaint also appears to provide further evidence of extensive ties between some analysts and the companies they were supposed to be covering objectively for investors.
For example, at Young’s request Tyco hired a private investigator to do a background check on a friend, the complaint says. Another time, according to the NASD, Young asked the company for tickets to a major sporting event for his brother-in-law. And Young once described himself in an e-mail as a “loyal Tyco employee.”
Young’s conduct “amounted to a betrayal of objectivity and honesty in research,” NASD Vice Chairwoman Mary Schapiro said.
Young’s attorney said the incidents were taken out of context, and that Young was simply trying to stay on good terms with company management.
“He’s trying -- in a humorous way and an informal way -- to get information out of these guys,” said Christopher Wilson, the attorney. “It’s silly to think the guy signed ‘loyal Tyco employee’ and meant it.”
Wilson contended that his client is coming under scrutiny because he worked for Merrill, which agreed last year to pay $100 million to settle a probe of its stock analysts, and covered Tyco, which has been under a cloud after the indictment of its former chief executive.
“At best, this complaint is petty,” Wilson said. “At worst, it’s mean-spirited.”
The incidents cited in the complaint have harmless explanations, Wilson said. The sports tickets, for example, were regularly doled out to analysts, and when Young couldn’t attend he asked if his brother-in-law could, Wilson said. Young didn’t ask Tyco to hire a private investigator, Wilson said, but wouldn’t comment further.
Young has 28 days to file a response with the NASD. After that, a hearing would be held before an NASD administrative panel. Possible sanctions include a fine, suspension or expulsion from the securities industry.
Spokesmen for Merrill and Tyco declined to comment. Merrill fired Young last year for passing reports to investors before checking them with internal compliance. Young has filed a wrongful-termination complaint with the NASD against Merrill, seeking $60 million in actual damages and an undetermined amount in punitive damages.
The NASD complaint alleges that Young gave nonpublic information to some big investors. After being hired in 1999, Young told some investors he was about to launch coverage of Tyco with Merrill’s highest rating, the NASD claims.
After being queried by some hedge funds, Young asked Tyco when an expected purchase of a Siemens subsidiary would be announced and sought details about the deal, the NASD says. He funneled information to investors despite being told by Tyco that his knowledge made him an “insider” who should not discuss it with outsiders until the deal was announced.
Young’s attorney said the news about the Siemens acquisition wasn’t material and that no one traded on the information he supplied.
Young had a close relationship with L. Dennis Kozlowski, Tyco’s former CEO, and the men exchanged expensive gifts, the complaint says. It says that in violation of NASD rules, Young gave Kozlowski a $4,500 case of wine, and that the CEO gave Young $3,500 of champagne. An indictment accuses Kozlowski of looting Tyco of $600 million.
Reuters was used in compiling this report.