Morgan Stanley Background Information

Morgan Stanley began in 1935 as a separate entity from JP Morgan, following enactment of the Glass-Steagall Act which required separation of banks and securities firms. Henry Morgan, grandson of J.P. Morgan, and Harold Stanley formed the new investment banking firm, which was an instant investment powerhouse and has remained a top tier firm since its inception. It became publicly listed in 1986.

Dean Witter, founded 1924, was a respected firm for decades and acquired Reynolds Securities in 1978 to become Dean Witter Reynolds. In 1981, it was bought by Sears which, being highly successful in its credit division, looked to expand into the financial world. Sears then attempted a broker-in-a-box plan for Dean Witter representatives in each retail store. The plan was not successful and tarnished the image of the firm. As credit experts, Sears launched its Discover Card in 1986, which was highly successful.

In 1997, the Morgan Stanley bought the Dean Witter and Discover Card Divisions from Sears to become “Morgan Stanley Dean Witter Discover”, and soon “Morgan Stanley Dean Witter.” The combination irked many at Morgan Stanley, who believed it cheapened their brand. The firm returned to the name “Morgan Stanley” in 2001.

Yet, the internal feud went beyond a name change, with CEO Phillip Purcell at the center of the firestorm. In 2005, dissidents known as the “Group of Eight” announced a plan to split Morgan Stanley into a retail firm (Dean Witter) and an institutional firm (Morgan Stanley) publicly stating the merger had been a flop. Morgan Stanley was also besieged by widespread scandals on Wall Street plus others unique to Morgan Stanley. High level defections were occurring, earnings suffered and its stock price lagged.

In June 2005, Purcell relented and announced his retirement in 9 months, which drew additional ire over the timing as did later his $113 million severance package. He was replaced by former President John Mack, who passed on a $25 million salary for performance incentives. In late 2006, Morgan Stanley announced it would spin off of the Discover unit.

Under the Morgan Stanley and VanKampen American Capital brands, the firm operates worldwide from its New York headquarter providing a full range of brokerage, investment banking and other financial services. The firm claims $717 billion under management and over 58,000 employees in 600 offices in 32 companies. For fiscal 2006, Morgan Stanley reported revenues of $33.9 billion, net income of $7.49 billion and total capital of $162.1 billion. Mack received incentive income that year of $40 million.

Additional Information on Morgan Stanley
Morgan Stanley Fined $125 Mil. in Research Scandal

In perhaps the largest scandal to ever hit Wall Street, Morgan Stanley and other huge firms were investigated, charged and fined record sums. Blatant conflicts of interest occurred as the firms established recommendations whether to buy, sell or hold stocks to get and keep investment banking clients rather than financial forecasts. As the SEC and FINRA looked the other way, New York Attorney General Elliott Spitzer and other states’ regulators began the attack to sanction and fine firms for such practices.

One infamous subject of the scandal was Morgan Stanley’s top Internet analyst, Mary Meeker, who assisted Morgan Stanley in deciding which companies’ IPOs it would underwrite. The “Queen of the Net” of research analysts, she maintained buy ratings on Internet shares even as the companies were on the brink of insolvency.

During the investigation it was learned that Morgan Stanley and others were bargaining with firms to handle IPO’s and other stock and debt offerings, promising to furnish favorable ratings on their shares.

Morgan Stanley Settles Sex Bias Suit for $54 Million

Morgan Stanley agreed to settle a class-action sexual bias suit brought by thousands of its female advisers. The suit, originally filed by six former female brokers, grew an estimated 3,000 who worked for the firm after August, 2003.

The suit alleged that Morgan Stanley discriminated against female brokers in training, account assignments and taking part in company-approved partnership arrangements with other brokers. Some claim they were fired based on their gender during a downsizing in 2005. It was alleged that Morgan Stanley had a “glass ceiling” for women, even though many were more qualified and had better performance reviews than men being promoted.

Morgan Stanley Pays $50 Mil in Mutual Fund Scandal

Morgan Stanley was ordered to pay $50 million for steering customers into mutual funds to make extra secret commissions. The firm neither admitted nor denied the charges.

The sanctions came after investigation of widespread fraud involving mutual fund fraud sales by both the Securities and Exchange Commission and Financial Industry Regulatory Authority. The regulators said that Morgan Stanley failed to tell investors about hidden compensation it received for selling certain mutual funds.

The arrangement constituted a “firm-wide failure” in Morgan Stanley’s disclosure practices, according to the SEC’s director division of enforcement, adding that Morgan Stanley’s “conduct here clearly crossed the line.”

The probe of the $7 trillion mutual fund industry was also expanded to include late trading of shares after market close and soft dollar payments and mutual fund fees. At least one states’ attorney general joined in the investigation.

Morgan Stanley Hit Again Over Missing E-Mails

Morgan Stanley has offered to pay the Securities and Exchange Commission $15m to settle an investigation that it failed produce email evidence during legal disputes.

Meanwhile, a class action lawsuit was filed in Florida alleging that Morgan Stanley committed violations of discovery rules in as many as 1,000 securities arbitration cases filed by its clients across the country. The claim states that Morgan Stanley told the investor’s attorneys it was unable to locate and/or could not produce e-mails as required.

Morgan Stanley was previously hit with a tough sanction by the judge in a Florida court in a large civil suit. The judge ruled that the firm had violated her discovery orders and issued a judgment that the firm could no longer defend its position.

Morgan Stanley Fined Over “Choice” Accounts

The FINRA fined Morgan Stanley $1.5 million and ordered the firm to pay more than $4.6 million in restitution for failing to adequately supervise its fee-based brokerage business. More than 3,500 Morgan Stanley customers will receive restitution.

Morgan Stanley offered its customers a fee-based program, called “Choice”, charging these accounts fees based on size, but with a minimum annual fee of $1,000. By 2003, the firm had had 176,274 Choice accounts with $30.6 billion in assets.

The FINRA found that the firm failed to monitor these accounts as customers were being charged for unknown services. Meanwhile, over 2,000 accounts had no trades in for two consecutive years while almost 2,000 had assets below $25,000 for at least one full year, thus paying over 4%.

“Fee-based accounts can be appropriate for a wide range of customers,” said the FINRA’s Vice Chairman, “but firms have an obligation to their customers to periodically reassess whether a fee-based account, like that offered by Morgan Stanley, remains appropriate. Firms must have systems and procedures in place that adequately evaluate the continued appropriateness of these accounts for their customers.”

Morgan Stanley’s Recent Insider Trading Woes

In June of 2007, a former vice-president in the valuation review group of Morgan Stanley’s finance department and her husband were arrested and charged with insider trading after allegedly netting nearly $600,000 of illicit profits from shares they bought in a takeover target. Her husband was a senior hedge fund analyst at another financial firm.

Only months earlier, federal authorities arrested another husband and wife team in a different insider trading case involving Morgan Stanley. In that sting, a former Morgan Stanley rules compliance officer, and her husband pleaded guilty in a Manhattan federal court for their role in a $15 million insider trading ring, which prosecutors say is the biggest since the deal boom of the 1980s.

The director of the enforcement division of the SEC said in a statement that the arrests reflected the regulator’s “continuing crackdown”. “The commission simply will not allow industry professionals to illegally profit from their access to non-public information.”

About Shepherd Smith Edwards & Kantas LTD LLP Law Firm
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Our law firm represents institutional and individual investors nationwide who have lost a substantial portion of their retirement or other assets. Our attorneys and staff have more than 100 years of combined experience in the securities industry and in securities law. Several of our lawyers and staff members served for years as a Vice President or Compliance Officer of major brokerage firms.

Each lawyer and staff person at our firm is devoted to assisting investors to recover losses caused by unsuitability, over-concentration, fraud, misrepresentation, self-dealing, unauthorized trades or other wrongful acts, whether intentional or negligent. We have handled thousands of cases against hundreds of large and small investment firms, including claims against firms such as Morgan Stanley.

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