may have hoped a $100 million settlement would end persistent questions about the integrity and independence of its stock research. But concerns nonetheless resurfaced this week amid the escalating scandal at
, one of Merrill's investment banking clients.
Thursday's indictment of former Tyco chief Dennis Kozlowski included allegations that Kozlowski pressured a large brokerage firm to hire a research analyst more to his liking. Specifically, the indictment said Kozlowski "sought to persuade a large securities broker to replace an analyst who regularly reported on Tyco with an individual whom defendant Kozlowski viewed as more friendly to Tyco." The indictment also said the analyst and the CEO exchanged gifts -- a no-no because it suggests possible influence by a company on its ratings.
The indictment never mentions Merrill Lynch. And officials there declined to comment.
But it's now known that the analyst who was allegedly handpicked -- and rewarded -- by Kozlowski was Phua Young. Young was more bullish on Tyco than his predecessor -- that is, until Merrill terminated him in April, less than three years after his arrival.
Edward Little, an attorney for Young, fiercely defended his client. While Little acknowledged that Young had accepted gifts from Kozlowski, he insisted the gifts didn't affect Young's coverage of the company.
But it's clear that Merrill did in fact reshuffle the duties of one of its top analysts to make room for an outsider with more bullish views on investment banking client Tyco.
In August 1999, Merrill Lynch hired Young to head up a newly established multi-industry unit dominated by Tyco. The arrangement cut into the territory of Jeanne G. Terrile, a 29-year Merrill Lynch veteran described by her own firm in a 1998 press release as a "top-ranked analyst."
"She was a senior analyst covering one of the most important companies in America," one critic marveled. "And Merrill Lynch pushes her aside for someone like Phua Young."
Terrile published her final research report on Tyco within days of Young assuming coverage of the company. Her title was upbeat -- "Higher 2000 Estimates" -- but her accumulate recommendation would prove lukewarm in comparison to the raves that soon followed.
Even after she was relieved of her Tyco coverage, Terrile continued to analyze
, an even larger conglomerate that would have also qualified as a multi-industry company in Young's new unit. (Terrile didn't return a phone message.)
News of Merrill's moves won't ease the siege mentality on Wall Street after a year of controversy about research analysts' compensation, disclosure and conflicts of interest. In May, Merrill agreed to pay $100 million to settle claims by New York Attorney General Eliot Spitzer that it had provided overly rosy research to win investment banking business.
"It's ridiculous to suggest that they had any effect on my client's professional reporting of Tyco," Little said. "The way these people are compensated, it's hard to imagine that getting champagne for your wedding will affect you one way or another."
Rolling the Tice?
Young came to Merrill Lynch from
, where his coverage was consistently pro-Tyco even when analysts at other firms raised criticisms. Within two months of joining Merrill Lynch, he found himself defending Tyco against one of its fiercest attacks ever, when Dallas fund manager David Tice first attacked Tyco's accounting and almost single-handedly triggered a $20 billion plummet in Tyco's market capitalization.
Within weeks of the attack, Young rushed to Tyco's rescue with a rosy endorsement that excluded specific details about the firm's banking relationship with the company. In recent years, Merrill Lynch had managed at least four major securities offerings for Tyco, including a private bond offering three months earlier.
Young predicted that Tyco's stock, which had slipped below $50 on a split-adjusted basis, would rally to hit $75 within the next year. Although the stock fared well during the bull market, it has since collapsed amid accounting scandals and criminal indictments against its former top executives. The stock fell 92 cents to $16.88 Friday.
A year before joining Merrill Lynch, Young snagged the top spot on Institutional Investor's All-American Research Team, a prize that can sometimes add a cool $1 million to analysts' pay. The same prize helped push the salary of former telecommunications analyst Jack Grubman -- now under fire for his bull-market touts -- to $20 million. That sum is quadruple the average pay for senior analysts at Wall Street's largest firms.
Not everyone is impressed with Institutional Investor's influential rankings, however. Even the fund managers and industry experts who cast their votes for the winners admitted, by a 2-to-1 margin, that they don't trust sell-side analysts. In a poll conducted by Institutional Investor, the money experts said they rewarded analysts for such characteristics as accessibility and responsiveness. They regarded an analyst's ability to pick stocks and estimate earnings -- often crucial to the average investor -- as relatively unimportant.
Young had been a regular star on the All-American Research Team before joining Merrill Lynch. However, Merrill Lynch finally punished him for being too cozy with clients after he shared unauthorized information with Tyco. He was fired from the firm in April, less than three years after his arrival.
Matthew Goldstein contributed to this report.