A former Merrill Lynch analyst who regulators said became a "cheerleader" for Tyco International and issued misleading research will pay $225,000 and accept a one-year suspension to settle allegations against him.
The National Association of Securities Dealers said Tuesday that Phua Young's coverage of Tyco and Honeywell International Inc. was biased, violated industry rules and hurt individual investors.
"The basic problem is that his research reports were quite positive. But in private e-mail he expressed negatives or problems relating to these companies," said Barry R. Goldsmith, executive vice president for enforcement for the NASD, the industry's self-policing group. "At the same time, he had a relationship, particularly with Tyco, that we feel compromised his objectivity. He took off his hat as a research analyst and became much more of a cheerleader of the company."
NASD released portions of several e-mails in announcing the settlement, under which Young neither admits nor denies wrongdoing.
In one e-mail to a Tyco employee, regulators said Young wrote, "I am indirectly paid by Tyco."
And, in a Feb. 23, 2001 e-mail to Tyco's chief financial officer, Young requested a review of an unpublished research report saying, "I WILL NOT SEND IT OUT UNTIL I HEAR FROM YOU FIRST! LOYAL TYCO EMPLOYEE!"
Young consented to the fine without admitting or denying guilt, NASD said. Edward Little, a lawyer for Young, declined to discuss the settlement other than to say, "We wanted a speedy resolution of this case, so that Phua could return to work as soon as possible."
Merrill Lynch, which fired Young for his conduct, said it would "continue to take a hard line on abuses like these."
Young, 48, covered Tyco and Honeywell International Inc. from 1999 through April 2002, when he was fired. A year later, in May 2003, the NASD filed a civil complaint against him, alleging he misled investors about Tyco's prospects.
Regulators said Tuesday that, during June and July 2000, Young issued five favorable research reports about Honeywell despite privately referring to the company as a "totally unmitigated disaster" and using an obscenity to describe the company's rationale for an earnings shortfall.
Young also issued a favorable assessment of Tyco's plans to sell its CIT unit but privately predicted the unit would be sold a huge loss, hurting Tyco's stock and debt levels.
According to the NASD, Merrill Lynch paid Young $4.5 million annually in 1999 and 2000. In 2001, he earned $2.5 million. Young sued Merrill Lynch for wrongful termination; Young's lawyer said that lawsuit is still pending.
Young came under scrutiny for giving former Tyco chief L. Dennis Kozlowski a case of wine, valued at more than $4,500 _ a move that violated NASD rules designed to prevent conflicts of interest. Kozlowski and former Tyco finance chief Mark H. Swartz, are accused of looting more than $600 million from the company. They are awaiting retrial; their first trial ended without a verdict after a juror received a threatening letter.
Revelations about Kozlowski and Swartz' alleged behavior sent Tyco stock sliding, and severely tarnished the company's reputation. Tyco has since hired a new management team.
Research analysts historically have had close relationships with the companies they cover, though that has changed in recent years because of concerns about conflicts of interest, said Jeffrey Rudman, chairman of the securities litigation group at Hale & Dorr. He questioned whether Young's actions would have attracted as much attention had he covered a less high-profile company.
"If this guy had written about IBM, nobody would be prosecuting him," Rudman said. "Tyco is one of those cases that if you stand near enough, you'll be sorry."
The settlement with Young is the latest in a series of actions by regulators to reign in what they viewed as excesses on Wall Street.
Last year, 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, including Merrill Lynch, over alleged deception of investors by issuing biased stock recommendations to lure investment-banking business.
As part of the settlement, formerly celebrated Merrill analyst, Internet stock expert Henry Blodget, agreed to pay $4 million in fines and penalties and to be banned permanently from the securities industry to settle fraud charges.
Another analyst who paid fines of $15 million in the settlement, telecommunications specialist Jack Grubman of Salomon Smith Barney, had close ties with WorldCom Inc. and consulted with former chief executive Bernard Ebbers on dozens of acquisitions.