Firm Accused Of Deleting Missing E-Mail

Morgan Stanley Said Files Were Lost After Sept. 11

Securities regulators charged Morgan Stanley DW Inc. with failing to hand over millions of e-mail messages to investigators and plaintiffs by falsely saying that the documents had been lost in the Sept. 11, 2001, terrorist attack on the World Trade Center, according to a complaint filed yesterday.

The NASD alleged that the retail brokerage destroyed nearly 8 million electronic messages between September 2001 and March 2005, a period when documents preserved on backup tapes and on the computers of individual employees were deleted during the normal course of business.

Morgan Stanley had told regulators and plaintiffs seeking to recover money lost in disputes with company brokers over investment strategy that its computer servers had fallen victim to terror attacks in New York. Documents dated before Sept. 11 were no longer available for review, the company said. In fact, the firm had backed up its systems as of Aug. 30, according to investigators.

"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," said James S. Shorris, head of enforcement at the NASD.

Investors have little hope of reopening their arbitration cases, however, because they are unlikely to meet the high standard for doing so, legal analysts said. To prevail, investors would need to prove that individual Morgan Stanley brokers intentionally withheld the e-mail messages or committed fraud -- accusations the NASD stopped short of making yesterday.

Settlement talks collapsed after the NASD sought to recover money for the arbitration plaintiffs, many of whom expressed little interest after they received notice of the e-mail breakdown in March 2005, according to Morgan Stanley officials.

"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," the firm said in a written statement.

In its complaint, the NASD said Morgan Stanley was able to rebuild its e-mail system and restore 11 of its 12 computer servers within days of the attack. Even more messages remained in the inboxes of individual employees, regulators said. But by last year millions of the pre-Sept. 11 e-mails had been deleted, leaving only 500,000 for regulators to examine.

The failure to hand over documents affected a since-settled NASD probe into fees Morgan Stanley had charged investors, as well as other requests by the New York Stock Exchange and the Massachusetts Securities Division.

"Arbitration lawyers have been complaining for years that Morgan Stanley was hiding the ball," said Jacob H. Zamansky, a lawyer who represents investors in arbitration cases.

It is not the company's first run-in with regulators. Earlier this year Morgan Stanley & Co., a separate unit for institutional clients, agreed to pay $15 million to settle Securities and Exchange Commission charges that it failed to produce documents related to a pair of enforcement probes. In March 2005, a judge in Florida criticized the same unit for withholding evidence in a case filed by financier Ronald O. Perelman.

Two years ago, Morgan Stanley's brokerage arm paid $250,000 to resolve separate NASD charges that it failed to comply with obligations to turn over papers in arbitration cases.