Thursday, September 27, 2007
FINRA today announced a settlement with Morgan Stanley & Co. to resolve charges that the firm's former affiliate, Morgan Stanley DW, Inc. (MSDW), failed on numerous occasions to provide emails to claimants in arbitration proceedings as well as to regulators - while representing that the destruction of the firm's email servers in the Sept. 11, 2001 terrorist attacks on New York's World Trade Center resulted in the loss of all pre-9/11 email. In fact, the firm had millions of pre-9/11 emails that had been restored to the firm's active email system using back-up tapes that had been stored in another location.
The settlement also resolves additional charges relating to the firm's failure to provide required supervisory materials to numerous arbitration claimants. The settlement announced today is the first of its kind - in that it provides for distribution of $9.5 million to two groups of customers who had arbitration claims against the firm. FINRA estimates that several thousand customers may be eligible to receive payments. FINRA also imposed a $3 million fine on the firm for its failure to provide pre-9/11 emails and updates to a supervisory manual.
Under the terms of the settlement, Morgan Stanley will deposit $9.5 million into a fund to pay arbitration claimants for the discovery failures. All fund expenses, as well as the cost of hiring and compensating a fund administrator acceptable to FINRA, will be borne by the firm. The fund administrator will identify and notify potentially eligible arbitration claimants. Eligible claimants in the email aspect of the case can elect to receive a standard payment estimated to be between $3,000 and $5,000, or may choose to require Morgan Stanley to produce relevant emails still in its possession. A claimant who demands email production can decide to accept the standard payment - or waive that payment and have the fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000.
Eligible claimants who were denied the required supervisory materials will receive payments expected to be between $1,500 and $2,500. Some claimants may be eligible for payments as to both the pre-9/11 email and the failure to receive supervisory materials.
Detailed information about which arbitration claimants are eligible for fund payments, and about the claims process itself, can be found on the Arbitration Discovery Fund page of FINRA's Web site.
FINRA found that MSDW failed to provide pre-9/11 emails to claimants in numerous arbitration proceedings and in response to three regulatory inquiries during the period from October 2001 through March 2005. FINRA found that MSDW made statements in numerous arbitration proceedings and to the former NASD, New York Stock Exchange Regulation and the Massachusetts Securities Division that those emails had been destroyed. Those statements were not true. In fact, MSDW possessed millions of pre-9/11 emails that had been restored to the firm's system shortly after Sept.11, 2001 using backup tapes. Many other emails were maintained on individual users' computers and had not been affected by the events of 9/11. Among the matters where MSDW failed to produce e-mail was an NASD investigation that resulted in an August 2005 settlement with the firm.
FINRA also found that MSDW later destroyed many of the pre-9/11 emails it did possess. The firm did so in two ways - by overwriting backup tapes that had been used to restore the emails from 11 of its 12 servers to the firm's system, and by allowing users of the firm's email system to permanently delete the emails over an extended period of time. As a result, between September 2001 and March 2005, MSDW deleted millions of pre-9/11 emails from the firm's systems.
In addition, FINRA found that MSDW failed to provide updates to the firm's supervisory manual for branch office managers to claimants in numerous arbitration proceedings over a period of years. The Branch Manager's Manual was issued in 1994 and was subsequently supplemented with numerous updates. FINRA found, however, that MSDW repeatedly failed to provide updates to the manual in discovery in numerous arbitration proceedings from late 1999 through the end of 2005.
In settling this matter, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA's findings.