Morgan Stanley Dean Witter will pay $12.5-million to resolve new charges that it destroyed email evidence and that it failed to produce email messages that may have helped thousands of customers in arbitration cases were filed against the firm over three years. Morgan Stanley has had many problems with email and has already agreed to pay to more than $29 million to resolve three email related regulatory probes.
This settlement was announced in a press release yesterday by FINRA, the Financial Industry Regulatory Authority, which was created by combining National Association of Securities Dealers (NASD) and New York Stock Exchange Member Regulation.
Morgan Stanley routinely failed to provide email messages to aggrieved customers who had filed arbitration cases. The company represented 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, according to the FINRA release.
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. In addition, many other of the firm’s email messages were maintained on individual users’ computers and therefore were not affected by the attacks, the regulators said. Yet, Morgan Stanley often failed to search those computers when responding to document requests.
FINRA also said that Morgan Stanley failed to produce email that was the subject of regulatory requests. For instance, in an investigation by NASD into the firm’s fee-based brokerage practices, Morgan Stanley falsely claimed that it did not have pre-October 2001 email and failed to produce over 12,000 email messages and attachments that NASD had requested, the regulator said, according to the New York Times.
If this isn't enough, FINRA also found that Morgan Stanley 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, the company deleted millions of pre-9/11 emails from the firm's systems.
"Morgan Stanley Dean Witter's attempt to use the terrorist attacks on 9/11 to conceal documents and avoid its discovery obligations to its customers is morally and ethically depraved," said Steven Caruso, president of the Public Investors Arbitration Bar Association, according to Reuters.
"The failure to produce e-mails was a huge problem," Susan Merrill, FINRA's chief of enforcement, said in an interview with Reuters. "We didn't find evidence that Morgan Stanley intended to hold back e-mails, but it was a case of one hand not knowing what the other was doing."
“We think what happened here was unprecedented,” said James S. Shorris, head of enforcement at NASD. “The firm’s actions undermined the integrity of the regulatory and arbitration processes, potentially leaving in question the validity of the outcomes in hundreds of cases.”
The settlement announced today is the first of its kind, according to FINRA. Rather than ask that Morgan Stanley pay a fine to settle the case, NASD has asked that it be required to provide relief to arbitration claimants whose cases might have been helped by the email that was missing or not produced. 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.
Morgan Stanley has a long history of email related problems. Here is what Reuters reported:
Morgan Stanley agreed in February 2006 to pay $15 million to resolve U.S. Securities and Exchange Commission charges it failed to produce e-mails needed for probes into initial public offerings and analyst research.
In December 2002, regulators fined Morgan Stanley and four other firms $1.65 million each for destroying e-mails.
Sloppy document handling came back to haunt the brokerage in 2005, when a Florida state court jury ordered Morgan Stanley to pay $1.58 billion to billionaire Ronald Perelman over a failed 1998 merger. A key ruling by the trial judge, over supposedly missing e-mails that then reappeared, shifted the burden of proof against the firm.
A state appeals court threw out the award on other grounds. Perelman is appealing the reversal.
(Thank you to Andrew Lampert of the CSIRO ICT Centre in Australia for alerting me to this story.)
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