NASD: Morgan Stanley hid trove of e-mail

NASD: Morgan Stanley hid trove of e-mail

Posted 12/20/2006 2:13 AM ET

By Greg Farrell, USA TODAY

Once again, an old e-mail issue is coming back to haunt Morgan Stanley. For the second time this year, a national regulator has accused Morgan Stanley (MS) of stonewalling requests for documents and withholding crucial e-mails from investigators.

The NASD claimed Tuesday that Morgan Stanley hid the existence of millions of e-mails from customers of its Dean Witter brokerage. According to an NASD complaint, executives at Morgan Stanley used the terrorist attacks of Sept. 11, 2001, as an alibi for their inability to produce a massive trove of e-mails sought by customers who felt they'd been burned by bad advice from Dean Witter brokers.

The firm's e-mail servers were, in fact, destroyed in those attacks, the NASD acknowledged. But by Sept. 17, 2001, the company was able to use emergency backup tapes to restore all e-email through Aug. 30, 2001, to the Morgan Stanley internal database.

Nevertheless, from October 2001 through March 2005, Morgan Stanley executives rebuffed requests from customers and regulators for internal e-mails predating the attacks, claiming they had been destroyed. The NASD alleged Morgan Stanley compounded that error by allowing the pre-Sept. 11 e-mails to be gradually overwritten on the company's internal system and lost forever.

The Securities and Exchange Commission settled a similar matter with Morgan Stanley in May, extracting a $15 million fine. But the SEC settlement only involved the firm's failure to provide documents to regulators. It didn't address the alleged harm done to customers who had filed arbitration claims against Dean Witter.

The NASD action specifically charges that Morgan Stanley hurt retail investors who filed arbitration claims against the brokerage firm. By denying those investors access to e-mails in the years leading up to September 2001, Morgan Stanley made it nearly impossible for its customers to present evidence on their own behalf.

In March 2005, during a civil trial brought against it in Florida, Morgan Stanley admitted the existence of the pre-Sept. 11 e-mails. Since then, the firm has pledged to cooperate with regulators.

But in a statement Tuesday, Morgan Stanley said it would fight the NASD's action. "Current management has made extensive efforts to reach a fair and appropriate settlement of this matter, but the NASD's disproportionate and unprecedented demands leave us no choice but to litigate. We look forward to having this issue heard by an impartial hearing panel."

Morgan Stanley reported fiscal 2006 earnings up 44% to $7.5 billion on Tuesday.