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COMPLIANCE WATCH: States To Look At Morgan Stanley Email January 3, 2007

Posted by notapundit in Economic News.

NEW YORK (Dow Jones)–State regulators are looking into Morgan Stanley’s (MS) failure to produce emails during investigations into research conflicts, months after the firm reached a settlement on the issue with federal and industry regulators.

Joe Borg, president of the North American Securities Administrators Association and head of Alabama’s securities commission, said he is reviewing a $15 million settlement that Morgan Stanley struck with the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange in May 2006. The settlement in part addressed Morgan Stanley’s failure to produce emails during investigations into conflicts of interest between its research and investment-banking sides.

Borg said he would be asking the SEC and Morgan Stanley to provide more information about emails that were either destroyed by the firm or were only recently discovered.

If it turns out that those emails would have been relevant to the states’ investigations into the research-analyst scandal, Borg said, the states might pursue a settlement or file charges.

“We’re still looking at this,” Borg said in an interview. “We’re not sure what we’re going to do yet.”

In a statement, Morgan Stanley said: “We believe this matter was settled and settled equitably. We have cooperated and will continue to cooperate with any regulators who have further questions on this matter.”

Morgan Stanley was one of 10 firms that paid a total of $1.4 billion in 2003 to settle charges by federal, state and industry regulators that the firms issued biased stock research to win investment-banking business. Morgan Stanley’s share of the massive settlement was $125 million, which included $50 million of fines and disgorgement; $25 million of that went to state regulators.

During investigations of the industrywide research scandal, regulators dug up egregious emails at several firms, but Morgan Stanley claimed not to have emails from the time period being investigated. Since then, the firm has uncovered millions of emails from that time and has admitted that others existed but have been destroyed.

The May 2006 settlement with the SEC, NASD and NYSE covered the time from Dec. 11, 2000, until at least July 2005. It also encompassed Morgan Stanley’s failure to produce emails during investigations into its initial-public-offering allocation practices.

A person familiar with Morgan Stanley’s position told Dow Jones Newswires the firm started producing relevant emails to the SEC in early 2005 and continued production on a rolling basis over about a year.

The SEC “did not conclude there was evidence that would have resulted in a higher fine,” the person said, adding that the emails were offered to New York state regulators, who didn’t respond to the offer. A spokesman from the New York attorney general’s office didn’t have any immediate comment.

Borg said that if he discovers Morgan Stanley failed to provide states with relevant email evidence, and state regulators don’t pursue it, they would be giving the firm a pass.

“That’s not investor protection. That’s robbing the bank, getting caught and giving the money back,” he said. “At that point, hiding emails becomes a cost of doing business.”

The SEC’s May 2006 complaint against Morgan Stanley said that, during both the IPO and research-analyst investigations, the firm failed to “search diligently” for backup tapes containing more than 14 million emails. The firm couldn’t produce other emails because it overwrote backup tapes, the complaint said.

The SEC also said Morgan Stanley “made numerous misstatements” about the completeness of its email production and the unavailability of some documents. The result, the SEC said, is that Morgan Stanley’s practices deprived regulators of evidence, in some cases “permanently.”

In its settlement, Morgan Stanley neither admitted nor denied the allegations.

The firm is also facing unrelated charges from the NASD, which in December alleged Morgan Stanley’s brokerage arm withheld email evidence in arbitration cases involving individual investors, falsely claiming millions of its emails were destroyed in the Sept. 11, 2001, terrorist attacks on the World Trade Center. Morgan Stanley is fighting the charges.

By Jaime Levy Pessin, Dow Jones Newswires


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