NEW YORK (Reuters) - Morgan Stanley MS.N will pay $12.5 million to resolve charges that it failed to produce e-mails in arbitration cases and falsely claimed the e-mails were lost in the September 11, 2001, attacks.
The settlement, announced Thursday by the Financial Industry Regulatory Authority, which regulates brokerages, calls for the brokerage firm to pay a $3 million fine and $9.5 million into a fund to compensate several thousand investors who filed arbitration complaints.
It also resolves charges that Morgan Stanley failed to provide other documents to arbitration claimants.
The bank will hire an independent consultant to ensure it provides materials to retail brokerage clients in arbitrations. It did not admit wrongdoing.
Morgan Stanley has faced many legal and regulatory problems for withholding e-mails. Since 2002, it has agreed to pay more than $29 million to resolve three regulatory probes.
The problems stemmed in part from the destruction of the firm’s New York City e-mail servers in the September 11 attacks. Morgan Stanley’s brokerage business had its headquarters in the World Trade Center.
Millions of e-mails were presumed lost. But it was later revealed they had been backed up on other servers or on individual employee computers. Last December, the National Association of Securities Dealers, a FINRA predecessor, accused Morgan Stanley in a disciplinary complaint of falsely claiming it could not turn over e-mails.
“The failure to produce e-mails was a huge problem,” Susan Merrill, FINRA’s chief of enforcement, said in an interview. “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.”
Jim Wiggins, a Morgan Stanley spokesman, said the company was pleased to settle and put the matter to rest.
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.
According to FINRA documents, Morgan Stanley falsely maintained to arbitration claimants and regulators until March 2005 that it had no e-mails predating October 2001.
But according to the documents, prior to March 2005, Morgan Stanley had not searched its restored e-mails. Until that date, it had destroyed millions of the e-mails by overwriting backup files or letting users delete them.
The settlement removes one more legal headache inherited by Chief Executive John Mack when he took over the firm in 2005.
That said, investor lawyers have argued that thousands of investors may not have received fair arbitration hearings because e-mails that could have helped them were reported destroyed.
“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.
Caruso added it was too soon to say whether investors will be able to or want to reopen closed cases.
FINRA, the industry’s self-regulatory body, is “focused” on e-mail retention practices, which remain a problem at other brokerages, Merrill said.
Additional reporting by Joe Giannone
Our Standards: The Thomson Reuters Trust Principles.