An NASD arbitration panel ordered Merrill Lynch & Co. and former stock analyst Phua Young to jointly pay almost $500,000 to a retired couple in Pennsylvania who bought shares of Tyco International Inc. on the analyst’s recommendation.
In a claim filed three years ago, James Lyons alleged that he lost more than $625,000 as a result of purchases between 1999 and 2002 for his IRA retirement accounts based on Young’s strong recommendations of Tyco. Lyons spoke daily with his Merrill broker about his investments and consulted the firm’s stock recommendations before making investment decisions, according to the arbitration claim.
The award was a rare victory for individual investors who have seen scores of research-related claims turned aside by arbitration panels and courts. The claims were made after 12 Wall Street firms, excluding Merrill, agreed to pay more than $1.4 billion in 2003 and 2004 for issuing biased research to win investment banking assignments.
Lyons and his wife alleged in part that Merrill was negligent, breached its fiduciary duty and failed to supervise its employees. Merrill denied the allegations, arguing fraud at Tyco caused the investors’ misfortune. The firm and Young also asserted that the couple’s negligence, agreement to assume risk and failure to mitigate damages barred their claim, according to the arbitration notice.
“The decision is an aberration,” Merrill spokesman Mark Herr wrote in an e-mailed comment. “Out of the five arbitrations decided on the basis of Phua Young’s Tyco research, it is the only case we have not prevailed in.”
A three-person NASD arbitration panel ordered Merrill and Young to together pay $240,000 in compensatory damages and $240,000 in punitive damages, plus $15,000 of expert witness costs and 6 percent interest. It denied the Lyons’ claim for attorneys’ fees.
“I think there is a glimmer of hope for investors who were victimized by similar conduct,” said Timothy Dennin, the lawyer in Northport, N.Y., who represented the Lyons family. “The significance of this case is that they awarded punitive damages against Merrill Lynch, a firm that is out there talking about its mission of trust.”
Last October, an NASD arbitration panel turned down a claim for $90 million from investors in Tennessee who invested through Merrill in Tyco.
Merrill is still battling a class-action suit filed in 2003 related to Tyco and Young. A federal court in the Southern District of New York dismissed the claim, but the decision is being appealed before the U.S. Court of Appeals for the Second Circuit.
Young, meanwhile, has filed an arbitration claim against Merrill for wrongful dismissal.
Herr declined to comment on the claim. Lawyers for Young and an outside lawyer for Merrill did not return calls for comment.
The NASD fined Young $225,000 in 2004 for, among other violations, giving Tyco Chief Executive Dennis Kozlowski a case of wine valued at more than $4,500 and receiving champagne from the CEO. Regulators also accused him of issuing gushing reports on Tyco’s strategies while privately disparaging many of them.
Kozlowski and Tyco’s former chief financial officer are serving prison sentences of eight to 25 years after convictions in 2005 for grand larceny, conspiracy and securities fraud during their tenure at the Bermuda-based conglomerate. Kozlowski also was ordered to pay about $167 million for looting the company.
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