Morgan Stanley to Pay $12.5 Million to Resolve FINRA Charges that it Failed to Provide Documents to Arbitration Claimants, Regulators
Washington, D.C. —
The Financial Industry Regulatory Authority (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.
"The integrity of our process demands that brokerage firms comply with their obligations to search diligently for, and provide in a timely way, information and documents required in arbitration proceedings and regulatory investigations," said Susan Merrill, FINRA Executive Vice President and Chief of Enforcement. "The action announced today underscores FINRA's commitment to ensuring that firms live up to those obligations. We are particularly pleased that this unique settlement directs the bulk of the monetary sanction to the customers in arbitrations, to remedy MSDW's discovery failures."
MSDW was merged into Morgan Stanley & Co. in April of this year. The former NASD, which consolidated with the member regulation functions of New York Stock Exchange Regulation in July to form FINRA, issued formal charges against MSDW in a complaint filed in December 2006.
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, www.finra.org
Also as part of the settlement announced today, Morgan Stanley is required - again, at its own expense - to retain an independent consultant acceptable to FINRA to review the firm's procedures for complying with discovery requirements in arbitration proceedings relating to the firm's retail brokerage operations. The firm will be required to implement the independent consultant's recommendations for improving those procedures, or alternative improvements acceptable to the independent consultant.
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.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business - from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.
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