U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19693 / May 10, 2006
SEC v. Morgan Stanley & Co. Incorporated, Civil Action No. 06 CV 0882 (RCL) (D.D.C.)
Morgan Stanley Sued for Repeated E-Mail Production Failures; Morgan Stanley Agrees to Pay a $15 Million Penalty and Undertake Reforms in Settlement
The Securities and Exchange Commission announced the filing of a civil injunctive action against Morgan Stanley & Co. Incorporated (Morgan Stanley) for failing to produce tens of thousands of e-mails during the Commission's IPO and Research Analyst investigations from December 11, 2000 through at least July 2005. The Commission alleges in its complaint that Morgan Stanley did not diligently search for back-up tapes containing responsive e-mails until 2005. Morgan Stanley also failed to produce responsive e-mails because it over-wrote back-up tapes. The complaint further alleges that Morgan Stanley made numerous misstatements regarding the status and completeness of its productions; the unavailability of certain documents; and its efforts to preserve requested e-mail. The Commission charged Morgan Stanley with violating the provisions of the federal securities laws requiring Morgan Stanley, a regulated broker-dealer, to timely produce its records and documents to the Commission.
Morgan Stanley has agreed to settle this matter. Without admitting or denying the allegations of the complaint, Morgan Stanley has consented to a final judgment that permanently enjoins Morgan Stanley from violating Section 17(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 17a-4(j) and orders the firm to pay a $15 million civil penalty, $5 million of which will be paid to NASD and the New York Stock Exchange, Inc. in separate related proceedings. Morgan Stanley also has agreed to adopt and implement policies, procedures and training focused on the preservation and production of e-mail communications. It will also hire an independent consultant to review these reforms. The settlement terms are subject to court approval.
The Commission's complaint, filed in the United States District Court for the District of Columbia, includes the following allegations:
- Beginning in December 2000 and continuing through October 2004, the Commission issued subpoenas and document requests to Morgan Stanley for e-mails and back-up tapes containing e-mail in the IPO and Research Analyst investigations. The Commission sought e-mails from 1999 through 2002.
- Morgan Stanley did not search diligently for back-up tapes containing responsive e-mails until 2005. Consequently, Morgan Stanley failed to timely produce e-mails contained on thousands of back-up tapes that were readily accessible. These tapes have yielded tens of thousands of responsive e-mails.
- Despite Morgan Stanley's assertion in both the IPO and Research Analyst investigations that it had not retained any 1999 tapes that backed-up e-mail, numerous back-up tapes from 1999 existed and were located by Morgan Stanley beginning in May 2004. However, Morgan Stanley did not disclose its discovery of these tapes until late October 2004, after the Commission began investigating Morgan Stanley's e-mail production failures.
- Morgan Stanley also failed for months to produce e-mails sought in the Research Analyst investigation because it delayed loading millions of e-mails into its e-mail archive database (the E-Mail Archive) and searching them for responsive e-mails. In mid-2004, the firm had told the Commission staff that its e-mail productions were "complete." In fact, this process was not "complete," and Morgan Stanley made the loading of these e-mails into the E-Mail Archive a low priority.
- In addition, Morgan Stanley failed to produce responsive e-mails by over-writing back-up tapes after receiving Commission subpoenas and requests despite its repeated representations to the Commission and the staff that all over-writing had ceased in January 2001. Through at least December 2002, Morgan Stanley's continued over-writing destroyed at least two hundred thousand e-mails, including some e-mails which likely were responsive to the Commission's subpoenas and requests in the IPO and Research Analyst investigations.
- The Commission investigated Morgan Stanley's production failures after receiving an anonymous tip alleging that Morgan Stanley had destroyed e-mails and failed to produce e-mails in the IPO and Research Analyst investigations. According to the anonymous tip, Morgan Stanley had not disclosed to the Commission the existence of relevant e-mails.
- Morgan Stanley's repeated violations of its production obligations compromised the Commission's ability to effectively investigate and determine whether Morgan Stanley had complied with the federal securities laws. Morgan Stanley's conduct delayed the Research Analyst investigation and prejudiced both the IPO and Research Analyst investigations by depriving the Commission of evidence and potential sources of information relevant to those investigations for years, and in some cases, permanently.
SEC Complaint in this matter