Morgan Stanley used Sept. 11 to falsely claim records were destroyed
Morgan Stanley Fined Over Sept. 11 Lost E-Mail Claim (Update4)
By David Scheer
Sept. 27 (Bloomberg) -- Morgan Stanley, the second-largest securities firm, will pay $12.5 million to settle regulatory claims it wrongly withheld e-mails in arbitration cases by saying they were lost in the Sept. 11 attacks, the company's third sanction since 2002 for mishandling the records.
The firm's Morgan Stanley DW subsidiary failed on ``numerous occasions'' to produce e-mails for plaintiffs and regulators, the Financial Industry Regulatory Authority said in a statement today. The accord is the first of its kind, providing $9.5 million to claimants affected by the lapses, said Finra, the Washington-based brokerage regulator.
The government already sanctioned Morgan Stanley twice for mishandling electronic messages under former Chief Executive Officer Philip Purcell. Last year, it paid a record $15 million to settle a Securities and Exchange Commission probe of deficient e-mail preservation. In 2002, the SEC and other regulators faulted the New York-based firm for destroying e-mails and backup tapes.
``Hiding behind the events of Sept. 11 to avoid litigation obligations is unseemly,'' said Steven Caruso, president of the Public Investors Arbitration Bar Association and a partner at the New York office of Maddox Hargett & Caruso PC. ``This sets a new standard for how low a firm will go to take advantage of their clients.''
The settlement documents don't accuse the firm of withholding the e-mails intentionally, according to Finra spokesman Herb Perone.
`Legacy Legal Matters'
``That allegation is false. The minute that we discovered that we had these e-mails we notified regulators and began turning them over in arbitration discovery,'' said Jim Wiggins, a spokesman for Morgan Stanley. The company didn't admit or deny wrongdoing under the settlement.
Current CEO John Mack made improving the firm's standing with securities regulators a priority when he took the helm in June 2005. Today's accord resolves a claim filed in December by Finra's predecessor, NASD.
``We are pleased to have reached an agreement with Finra to resolve these legacy legal matters and put them behind the firm,'' Morgan Stanley said in an e-mailed statement.
Days after the terrorist attacks destroyed Morgan Stanley's 12 e-mail servers in New York, the company recovered millions of messages from backup tapes, Finra said. Additional data were stored on networks and individual computers throughout the firm.
Still, Morgan Stanley ``routinely'' claimed all e-mails before October 2001 were gone, the regulator said. The company later allowed much of the data to be erased.
Payments to Customers
``The integrity of our process demands that brokerage firms comply with their obligations to search diligently for'' e-mails and turn them over ``in a timely way,'' said Susan Merrill, Finra's enforcement chief.
The accord allows customers whose arbitration claims may have been affected to automatically receive payments of as much as $5,000. Many clients also have the right to obtain pre-Sept. 11 e-mails. Those people may then ask the fund's administrator for more money, up to $20,000, based on the facts of their case.
Accepting payments doesn't prevent clients from pressing their original claims in other venues, such as court, Finra's Perone said.
Finra was formed this year through the merger of the NASD brokerage regulator and the New York Stock Exchange's enforcement arm.
Morgan Stanley's shares rose 2.5 percent to $64.55 in composite trading on the New York Stock Exchange. The stock has slipped 4.5 percent this year.
To contact the reporter on this story: David Scheer in Washington at dscheer@bloomberg.net
Last Updated: September 27, 2007 17:52 EDT
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