Morgan Stanley Background Information

In perhaps the largest scandal to ever hit Wall Street, Morgan Stanley and other huge firms were investigated, charged and fined record sums. Blatant conflicts of interest occurred as the firms established recommendations whether to buy, sell or hold stocks to get and keep investment banking clients rather than financial forecasts. As the SEC and FINRA looked the other way, New York Attorney General Elliott Spitzer and other states’ regulators began the attack to sanction and fine firms for such practices.

One infamous subject of the scandal was Morgan Stanley’s top Internet analyst, Mary Meeker, who assisted Morgan Stanley in deciding which companies’ IPOs it would underwrite. The “Queen of the Net” of research analysts, she maintained buy ratings on Internet shares even as the companies were on the brink of insolvency.

During the investigation it was learned that Morgan Stanley and others were bargaining with firms to handle IPO’s and other stock and debt offerings, promising to furnish favorable ratings on their shares.

Morgan Stanley agreed to settle a class-action sexual bias suit brought by thousands of its female advisers. The suit, originally filed by six former female brokers, grew an estimated 3,000 who worked for the firm after August, 2003.

The suit alleged that Morgan Stanley discriminated against female brokers in training, account assignments and taking part in company-approved partnership arrangements with other brokers. Some claim they were fired based on their gender during a downsizing in 2005. It was alleged that Morgan Stanley had a “glass ceiling” for women, even though many were more qualified and had better performance reviews than men being promoted.

Morgan Stanley was ordered to pay $50 million for steering customers into mutual funds to make extra secret commissions. The firm neither admitted nor denied the charges.

The sanctions came after investigation of widespread fraud involving mutual fund fraud sales by both the Securities and Exchange Commission and Financial Industry Regulatory Authority. The regulators said that Morgan Stanley failed to tell investors about hidden compensation it received for selling certain mutual funds.

The arrangement constituted a “firm-wide failure” in Morgan Stanley’s disclosure practices, according to the SEC’s director division of enforcement, adding that Morgan Stanley’s “conduct here clearly crossed the line.”

The probe of the $7 trillion mutual fund industry was also expanded to include late trading of shares after market close and soft dollar payments and mutual fund fees. At least one states’ attorney general joined in the investigation.

Morgan Stanley has offered to pay the Securities and Exchange Commission $15m to settle an investigation that it failed produce email evidence during legal disputes.

Meanwhile, a class action lawsuit was filed in Florida alleging that Morgan Stanley committed violations of discovery rules in as many as 1,000 securities arbitration cases filed by its clients across the country. The claim states that Morgan Stanley told the investor’s attorneys it was unable to locate and/or could not produce e-mails as required.

Morgan Stanley was previously hit with a tough sanction by the judge in a Florida court in a large civil suit. The judge ruled that the firm had violated her discovery orders and issued a judgment that the firm could no longer defend its position.

The FINRA fined Morgan Stanley $1.5 million and ordered the firm to pay more than $4.6 million in restitution for failing to adequately supervise its fee-based brokerage business. More than 3,500 Morgan Stanley customers will receive restitution.

Morgan Stanley offered its customers a fee-based program, called “Choice”, charging these accounts fees based on size, but with a minimum annual fee of $1,000. By 2003, the firm had had 176,274 Choice accounts with $30.6 billion in assets.

The FINRA found that the firm failed to monitor these accounts as customers were being charged for unknown services. Meanwhile, over 2,000 accounts had no trades in for two consecutive years while almost 2,000 had assets below $25,000 for at least one full year, thus paying over 4%.

“Fee-based accounts can be appropriate for a wide range of customers,” said the FINRA’s Vice Chairman, “but firms have an obligation to their customers to periodically reassess whether a fee-based account, like that offered by Morgan Stanley, remains appropriate. Firms must have systems and procedures in place that adequately evaluate the continued appropriateness of these accounts for their customers.”

In June of 2007, a former vice-president in the valuation review group of Morgan Stanley’s finance department and her husband were arrested and charged with insider trading after allegedly netting nearly $600,000 of illicit profits from shares they bought in a takeover target. Her husband was a senior hedge fund analyst at another financial firm.

Only months earlier, federal authorities arrested another husband and wife team in a different insider trading case involving Morgan Stanley. In that sting, a former Morgan Stanley rules compliance officer, and her husband pleaded guilty in a Manhattan federal court for their role in a $15 million insider trading ring, which prosecutors say is the biggest since the deal boom of the 1980s.

The director of the enforcement division of the SEC said in a statement that the arrests reflected the regulator’s “continuing crackdown”. “The commission simply will not allow industry professionals to illegally profit from their access to non-public information.”