NASD Fines and Suspends Phua Young, Former Merrill Lynch Research Analyst
Washington, D.C.—NASD announced today that it has fined Phua Young, a former managing director at Merrill Lynch, $225,000 and suspended him from the industry for one year for a series of NASD rule violations relating to his activities as a research analyst.
The sanctions imposed stem from a complaint filed by NASD against Young in May 2003, focusing on his coverage of Tyco International Ltd. Today's settlement also resolves charges contained in an amended complaint filed by NASD in March 2004 relating to Young's coverage of Honeywell International Inc.
Young was the senior Merrill Lynch analyst providing research coverage of Tyco and Honeywell from 1999 through April 2002, when Merrill discharged him. During that time, he issued research on both companies that violated NASD rules, improperly shared research reports and selectively disclosed material nonpublic information.
"The conduct of this analyst amounted to a betrayal of the objectivity and honesty in research that investors are entitled to," said Barry R. Goldsmith, NASD Executive Vice President for Enforcement. "We will continue to hold analysts to high professional standards and appropriately sanction them for misleading and skewed research."
NASD found that Young issued a number of favorable Tyco research reports that violated NASD rules. In January 2002, Tyco announced that it would retire $11 billion in debt and spin off its CIT Group, a large commercial lender that Tyco had purchased for $10 billion. The sale of CIT was important for Tyco because the proceeds were to be used to repay some of Tyco's debt.
Young issued a series of favorable Tyco research reports assuming that Tyco would receive $8 billion for its CIT unit and assigning its stock a target price of $65.00 when it was trading in the $30.00 range. None of these reports disclosed Young's privately held views that the CIT unit was not worth "anything near $8B," that Tyco's fundamentals were weak because of its debt, and that Tyco's stock was overvalued. As early as February 26, 2002, Young noted his concern privately that CIT would be sold at a huge loss, writing in an e-mail:
"Dennis [Kozlowski] sounds down. He does not sound like he can sell CIT without a huge loss."
Young also privately expressed his negative view of Tyco's debt level, and that the stock would not reach its target price. For example, in another e-mail, Young stated:
"I am waiting for [a share price of] $10 after Tyco [sic] announces the inability to sell CIT [sic] for anything near $8B. Liquidity crunch, more distractions, the debt bomb starts to TICK, TICK, TICK . . ."
Young maintained a close relationship with Tyco, as evidenced by his own emails. For example, Young wrote to a senior employee in Tyco's Investor Relations Department, "I am indirectly paid by Tyco." The nature of Young's relationship with Tyco is also evident from favors he sought and/or received from the company. For example, at Young's request, Tyco retained a private investigator to prepare a background report on one of Young's personal friends and he subsequently received a comprehensive background report. For his part, Young improperly gave a gift - a case of wine, valued at over $4,500 - to Dennis Kozlowski, Tyco's then-CEO. NASD's gifts and gratuities rules prohibit a registered person from giving gifts valued at over $100 to any person where such payment is in relation to the business of the employer of the recipient.
On June 19, 2000, Honeywell announced lower than expected earnings. After this announcement, Young maintained 1-1- buy rating on Honeywell, the highest rating Merrill Lynch offered, and issued five favorable research reports on the company in June and July 2000. While Young continued to issue research recommending that investors buy the stock, NASD found that his research failed to reflect the negative views he expressed privately.
For example, in e-mails, Young characterized Honeywell as a "totally unmitigated disaster." Young derisively called Honeywell a "hondog" (sic) and described the shortfall as "the latest fiasco." Young further expressed his negative views, beliefs and opinion about the company in other emails, stating:
"[a] tough week today! No controls, no cushion, no credibility = no P/E. What a disaster!" "[the former Honeywell CEO] sold us a lemon. It would look like the cupboards are bare and that there is a lack of controls."
Advance Notice of Research and Ratings to Tyco and Institutional Investors; Dissemination of Material Nonpublic Information
NASD also found that Young, on a number of occasions, gave Tyco advance notice of research reports and ratings before releasing them to the public, solicited Tyco to make changes in the reports and generally followed Tyco's suggested edits. For example, in one e-mail, Young forwarded a draft report and proposed rating to Tyco's chief financial officer, stating:
"PLEASE REVIEW ASAP. I WILL NOT SEND OUT UNTIL I HEAR FROM YOU FIRST! LOYAL TYCO EMPLOYEE!"
Young agreed to the settlement without admitting or denying the allegations or findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by contacting NASD's BrokerCheck. NASD makes available BrokerCheck at no charge to the public. Investors can link directly to the program by going online to www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
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