Wednesday, May 10, 2006

Morgan Stanley Pays $15 Million Penalty for E-Mail Problems

Morgan Stanley & Co. has had more than its fair share of problems producing e-mails in civil litigation and to the SEC.  The company settled an SEC civil complaint (here) alleging that from 2001 to 2005 it failed to supply e-mails in Commission investigations into IPO distributions and conflicts involving research analysts.  According to the SEC Litigation Release (here):

The Commission alleges in its complaint that Morgan Stanley did not diligently search for back-up tapes containing responsive e-mails until 2005. Morgan Stanley also failed to produce responsive e-mails because it over-wrote back-up tapes. The complaint further alleges that Morgan Stanley made numerous misstatements regarding the status and completeness of its productions; the unavailability of certain documents; and its efforts to preserve requested e-mail. The Commission charged Morgan Stanley with violating the provisions of the federal securities laws requiring Morgan Stanley, a regulated broker-dealer, to timely produce its records and documents to the Commission.

$5 million of the penalty will be paid to the New York Stock Exchange and NASD, which were also involved in the investigations.  The $15 million pales in comparison to the $1.6 billion judgment won by Ronald Perlman in litigation over Morgan Stanley's role in the acquisition of Coleman Cos. by its client Sunbeam that was driven in part by the trial court's finding that the firm made intentional misstatements regarding the production of e-mail evidence.  That award included $850 million in punitive damages, and the judgment is on appeal.

While the dollar amount in the SEC case is not that significant, at least for a firm like Morgan Stanley, the long-term effect on its reputation with the regulators who oversee the firm may be more significant.  In the near-term, at least, the SEC and NASD are less likely to trust the firm on document production issues, and I think the agencies will inspect Morgan Stanley's responsiveness with a more critical eye.  The firm's "one free bite" is gone, and any failure to produce information, especially e-mails, will result in a much more severe punishment and possibly even a criminal investigation.  Private litigants are sure to keep a copy of the Commission's complaint close at hand, too.  The case is yet another example of the importance of managing e-mail when the government comes knocking with one of those pesky little subpoenas. (ph)

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Law Professor Peter Henning reports that Morgan Stanley could not locate emails requested by the SEC and has paid a fine of $15 million for their inability supply emails relating to IPO distributions and conflicts: "While the dollar amount in... [Read More]

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