NASD Charges Former Analyst At Merrill Over Tyco Research Securities regulators charged a former Merrill Lynch & Co. stock analyst with issuing misleading research, saying his relationship with Tyco International Ltd. was too close and some of his bullish reports didn't reflect his private doubts about the company.

In a civil disciplinary proceeding, the National Association of Securities Dealers painted an unusually vivid picture of the chummy ties that sometimes developed between stock-research analysts and the companies they covered during the 1990s market bubble, underpinned by lucrative investment-banking fees received by the analysts' firms and the hefty paychecks received by the analysts who were paid from those fees.

In this case, the former analyst, Phua K. Young, received a guaranteed annual minimum pay package of $4.5 million in 1999 and 2000 after being recruited by Merrill from Lehman Brothers Holdings Inc. in mid-1999. In an e-mail to a senior Tyco official, Mr. Young candidly said: "I am paid indirectly by Tyco." Merrill led four different Tyco debt issues that generated $20.2 million in fees between 1999 and 2001, according to Thomson Financial, which tracks securities issues.

The NASD charged Mr. Young, 48 years old, with sharing unpublished research reports and ratings with the company, improperly disseminating nonpublic information about an acquisition, and with publishing misleading research that didn't reflect his own doubts about the company's strategy.

The NASD also accused Mr. Young of violating a $100-a-year gift limit by giving a $4,500 case of wine to Tyco's then-Chief Executive Officer Dennis Kozlowski as a wedding gift. (He also allegedly received a $3,500 case of champagne from Mr. Kozlowski for his own wedding.) He flew on one of Tyco's corporate jets, solicited tickets to the U.S. Open tennis tournament from Tyco for his brother-in-law, and obtained information about "a personal friend" through a Tyco-commissioned report from a private-investigation service, the NASD said. And the NASD alleged that Mr. Young skipped a required compliance meeting held in 2001 by Merrill, and asked that a subordinate falsify his signature stating that he did attend.

A lawyer for Mr. Young, Christopher Wilson of Hughes Hubbard & Reed LLP, said Mr. Young was being made a "scapegoat" in the charges, which he is contesting, and was only trying to obtain information about the company when he sent investor-relations officials provocative e-mails describing himself as a "LOYAL TYCO EMPLOYEE," or describing doubts he had about a planned split-up of the company in 2002.

Mr. Wilson said the charges were brought based on Mr. Young's high profile at Merrill, where he was the No. 1-ranked analyst covering multi-industry companies, and his work with Tyco, two of whose former executives led by Mr. Kozlowski were charged last September by the Manhattan district attorney with grand larceny for selling $400 million in stock without disclosing information about executive compensation and loans.

Merrill, which declined to comment Wednesday, fired Mr. Young in April 2002 for "violating firm policy and regulatory standards related to the proper distribution of research reports and their release without prior approval." At the time, Merrill was in the process of settling charges brought by New York Attorney General Eliot Spitzer that its Internet analysts were privately disparaging stocks that they were publicly recommending in hopes of winning investment-banking fees. Merrill eventually paid $200 million to settle fraud charges with regulators in a global research-conflicts settlement.

The case against Mr. Young is the first of an expected series to be brought by regulators against individual analysts, their supervisors and possibly higher-ranking officials in the wake of the $1.4 billion research settlement against 10 major securities firms. At a May 7 hearing, several senators pressed regulators to pursue charges against individuals responsible further up the chain of command at the firms.

"The conduct of this analyst, 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," said Mary L. Schapiro, NASD vice chairman and president of regulatory policy and oversight. She added that the facts alleged in the case could help some individual investors who followed Mr. Young's advice pursue arbitration claims to recover losses on Tyco stock from Merrill.

In the most substantial charges, the NASD alleged that Mr. Young published five research reports in February, March and April 2002 that contained "exaggerated and unwarranted claims [and] misleading statements" about Tyco's plan to sell its CIT Group commercial lending unit. In the reports beginning on Feb. 14, Mr. Young assumed CIT would be sold for $7 billion to $8 billion, and set a price target of $65 for the stock. (Tyco traded at $18.23 a share in 4 p.m. New York Stock Exchange composite trading Wednesday.)

But in a series of e-mails to the Tyco investor-relations officials, the NASD alleged, Mr. Young said the CIT unit wasn't worth "anything near $8B," that the company's fundamentals were weak because of its debt, and that the stock was overvalued. In one typical e-mail with the stock in the mid-30s, Mr. Young said on March 7, 2002: "I am waiting for 10 after tyco announces the inability to sell cit for anything near $8B. Liquidity crunch, more distractions, the debt bomb starts to TICK, TICK, TICK." CIT was eventually sold for just $4.6 billion in July 2002.

After being recruited from Lehman in mid-1999, Mr. Young reinitiated coverage of Tyco that Sept. 7 with a 1-1 rating, then Merrill's highest, and improperly told some clients beforehand of his plans to do so, according to the NASD. The NASD also accused Mr. Young of routinely sending drafts of his reports and ratings to the company.

The NASD charges also accuse Mr. Young of helping hedge-fund customers ferret out nonpublic information. In September 1999, the NASD said, certain clients told Mr. Young they had heard that Tyco was planning to buy a connector unit of Siemens AG. On Sept. 23, Mr. Young e-mailed Tyco staffers asking about the purchase, and two days later sent them a draft report on the acquisition, asking them to "help fill in the blanks."

Without informing Merrill's compliance department, as required, Mr. Young on Sept. 27 told certain clients about the $1.1 billion purchase, which was announced on Sept. 28. The NASD said such "selective disclosure" violated the NASD's requirement to observe "just and equitable principles of trade."