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Morgan Stanley Targeted In Mutual Funds Probe

Jul 14, 2003 | Morgan Stanley was targeted by New York and Massachusetts securities regulators on Monday for allegedly misleading customers who bought mutual funds from its brokers.

Eliot Spitzer, the New York attorney-general, and William Galvin, the Massachusetts secretary of state, said they were examining whether Morgan Stanley and other Wall Street banks pre ssed their brokers to sell proprietary mutual funds to investors when others might have been more appropriate.

As part of the probe, Mr Galvin's office filed a complaint against Morgan Stanley, alleging that it misled investigators when questioned about the matter.

The inquiry is a blow to Morgan Stanley, which had taken pride in avoiding much of the regulatory pain suffered recently by rivals such as Merrill Lynch and Salomon Smith Barney.

Philip Purcell, Morgan Stanley's chief executive, drew a harsh rebuke from William Donaldson, the chairman of the Securities and Exchange Commission, in April after he played down the severity of the $1.4bn settlement in which his bank had joined over Wall Street practices.

Morgan Stanley disclosed in regulatory filings on Friday that the SEC has been investigating its mutual fund sales practices since April. It also disclosed that it expected to be charged by the National Association of Securities Dealers, the industry's self-regulatory body, for taking excessive commissions from investors who received sought-after initial public offerings.

According to the complaint filed by Massachusetts yesterday, a Morgan Stanley executive admitted under oath the firm paid extra commissions to brokers who sold in-house mutual funds a fter the firm had denied this practice to regulators.

The investigation is likely to reignite the turf war between state and federal securities regulators. The two groups worked together on the settlement agreed in April by leading inves tment banks. But critics at the SEC and in Congress said Mr Spitzer had overstepped his bounds.

Richard Baker, Republican chairman of the House subcommittee on capital markets, on Friday proposed legislation that would bar state regulators imposing structural reforms on banks an d brokerages in settlement deals, leaving the job to the SEC.

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