Morgan Stanley

Morgan Stanley recently finalized two settlements with regulators of the securities industry. In December of 2002 Morgan Stanley was fined $1.65 million, and in April of 2003 it agreed to a separate $125 million securities fraud settlement. The firm is also working through a lawsuit (to which it has issued a counter suit) filed by LVMH (Moët Hennessy Louis Vuitton).

Morgan Stanley Leaders

The following individuals have been key players at Morgan Stanley. Each has faced (and continues to face) investigations:

  • Philip J. Purcell – Chairman and Chief Executive Officer
  • Robert G. Scott – President and Chief Operating Officer
  • Claire Kent – Luxury Goods Analyst
  • Mary Meeker – Senior Internet Analyst

The LVMH Suit

Moët Hennessy Louis Vuitton and Gucci, major competitors in the luxury fashion industry, have a history of rivalry. Most notably, Gucci was nearly taken over in early 1999 by LVMH. Morgan Stanley advised Gucci to turn down the $91 per share bid that would have given LVMH control of the company. Gucci instead accepted Pinault Printemps-Redoute’s three billion dollar bid for 42% of the company’s shares. The move nearly guaranteed that Gucci would be secure against a public takeover.

In November of 2002, LVMH filed a suit against Morgan Stanley for allegedly giving biased favorable coverage to Gucci. The suit alleged that Morgan Stanley wrote “unfair” research reports. Morgan Stanley was an underwriter for Gucci’s 1995 IPO, and has assisted in transforming the company into a corporate conglomerate. LVMH’s suit focused on the ratings published by Morgan Stanley’s luxury goods analyst, Claire Kent. Kent had dropped her “outperform” rating of LVMH to “neutral” in May of 2000. Meanwhile, her ratings of Gucci stayed at “outperform.” Morgan Stanley has counter-sued LVMH for what it calls “vexatious” allegations. The hearing began on March 3, 2003.

Failure to Maintain Required Records

Morgan Stanley was one of five firms recently penalized by an NASAA task force for failing to maintain back dated e-mail records. The task force was developed following the Merrill Lynch fraud investigations in order to inspect additional firms whose Internet stock ratings seemed to reflect a conflict of interest. During these investigations it was discovered that the following five firms had failed to meet SEC record-keeping standards:

On December 4, 2002, each of these companies was fined $1.65 million for failing to keep e-mail correspondence records that related to business for the required two- to three-year holding period. In addition, they were required to submit proof within a ninety-day period that they had implemented procedures to keep their records in accordance with e-mail retention laws.

Task Force Investigations

Morgan Stanley’s correspondence records were scrutinized during the 2002 investigations for evidence of conflict of interest. During the telecom bust, Mary Meeker (Morgan Stanley’s lead telecom analyst), had published ratings that, according to the task force, were influenced by her role in Morgan Stanley’s banking business.

Meeker became involved in evaluating the potential of investment banking clients who wanted Morgan Stanley to underwrite their IPOs during the telecom boom. As an Internet analyst Meeker had a strong grasp of which companies would succeed in the quickly expanding market. Her approval dictated which companies Morgan Stanley would take on as investment banking clients.

Companies that wanted to offer stock publicly desired Meeker’s approval because of the reputation of her analysis. However, as the boom grew, her approval became less exclusive. Eventually she began co-authoring research reports with colleagues so that Morgan Stanley could offer the weight of her approving signature more frequently to potential investment banking clients.

Meeker’s ratings remained high through the boom and late into the bust. She refused to downgrade stocks that were taking great losses. The investigators reviewing the nature of her high ratings wanted to determine if she had legitimately believed the stocks were bound for recovery, or if she simply kept ratings high for the benefit of Morgan Stanley’s investment banking clients.

The 2002 investigations (which were conducted by the SEC, New York Attorney General, NASD, NYSE, and NASAA) were finalized on April 28, 2003. Morgan Stanley’s $125 million fine composed just part of the total $1.4 billion required by the regulators. The central focus of the task force and federal regulators had been to uncover conflicts of interest that had compromised the integrity of the securities industry and, through their exposure, move the industry toward internal reform. A central finding of the investigations was that investment advice was frequently compromised because of analyst involvement with investment banking clients.

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Keyword Tags: securities fraud, white collar crimes

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