The defendant brokerage firm in the landmark 1.45 billion dollar Coleman case is under attack again, this time by NASD (“National Association of Securities Dealers”), the private organization which regulates it dealer members. Morgan Stanley is accused of misrepresentations concerning the loss of all of its e-mail in the destruction of the World Trade Center on 9/11/2001. Upon request, NASD provided me with a full copy of the disciplinary Complaint No. 2005001449202.
I am defense oriented by nature and so I think it should be stressed that these are mere allegations, not adjudicated facts. The disciplinary complaint itself begins with this disclaimer:
The issuance of a disciplinary complaint represents the initiation of a formal proceeding by NASD Regulation in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, you may wish to contact the respondent before drawing any conclusions regarding the allegations in the complaint.
The first three paragraphs of the complaint summarize the allegations as follows:
1. For a three-and-a-half year period, from October 2001 through at least March 2005, respondent Morgan Stanley DW, Inc. (MSDW) routinely failed to provide e-mails to arbitration claimants and regulators in response to discovery obligations and regulatory inquiries. After the firm’s e-mail servers in New York City were destroyed on September 11, 2001, the firm restored millions of e-mails by using back-up tapes. Many other e-mails, moved from servers onto individual users’ computers, were not affected by the events of September 11. Nevertheless, MSDW routinely failed to provide pre-September 11, 2001 e-mail in numerous customer arbitration proceedings and in response to regulatory inquiries, falsely claiming that its pre-September 11, 2001 e-mail had been destroyed.
2. In addition to failing to produce e-mail in numerous arbitrations and regulatory matters, and falsely stating that such e-mail had been destroyed, MSDW later destroyed many of the same e-mails. Instead of preserving the e-mail back-up tapes that had been used to restore its servers, MSDW put those tapes back into use, overwriting and permanently erasing their contents. The firm also allowed the e-mails that had been restored to the firm’s servers to be permanently deleted by users of the firm’s e-mail system over an extended period of time. As a result, between September 2001 and March 2005, millions of pre-September 11, 2001 e-mails that had been available to the firm were lost.
3. By virtue of the conduct set forth herein, MSDW violated NASD rules by failing to comply with its obligations to produce documents both to claimants in discovery in arbitration proceedings and to regulators, and by falsely representing that documents in its possession did not exist. MSDW also violated the recordkeeping requirements of the federal securities laws and NASD rules by erasing millions of those same documents. MSDW also failed to establish and maintain systems and written procedures to supervise the activities of its employees and the types of business in which it engages, which were reasonably designed to ensure compliance with the recordkeeping requirements and with its obligations to respond completely and truthfully to regulatory requests and to discovery requests in arbitration proceedings.
The disciplinary complaint purports to state three causes of action. Count One alleges violations of NASD Conduct Rule 2110, Procedural Rule 8210, and IM-10100 under the Code of Arbitration Procedure. The violations are based on allegations that Morgan Stanley provided false information and failed to produce emails in response to requests from claimants and regulators.
Count Two alleges violation of section 17(a) of the Securities Exchange Act of 1934, Rule 17a-4 thereunder, and NASD Conduct Rules 2110 and 3110. The violations are based on alleged failures to preserve required books and records, namely e-mails.
Count Three alleges violations of Conduct Rules 2110 and 3010(a) and (b). The violations are based on allegations that Morgan Stanley failed to establish and maintain systems and written procedures reasonably designed to preserve required records and to ensure that Morgan Stanley conducted adequate searches in response to regulatory inquiries and discovery requests for e-mail.
POSTSCRIPT: September 27, 2007. The NASD announced a settlement with Morgan Stanley today wherein the disciplinary action was resolved for $12,500,000, with no admission of wrongdoing. As part of the settlement a $9.5 million fund will be established to pay certain arbitration claimants. According to news reports another $3 Million will be paid to NASD as a fine. Further, Morgan Stanley will be required to retain an independent consultant acceptable to NASD to review the firm’s procedures for complying with e-discovery requirements in arbitration proceedings relating to its retail brokerage operations. The NASD has, by the way, changed its name since this proceeding was commenced, and is now called FINRA, which stands for the Financial Industry Regulatory Authority.
