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SEC Rebukes Morgan Stanley Chief

May 2, 2003 | FT.COM

US regulators have taken the extraordinary step of reprimanding Morgan Stanley's chief executive for public comments about the global settlement over conflicts of interest on Wall Street.

William Donaldson, chairman of the Securities and Exchange Commission, wrote to Philip Purcell, Morgan Stanley's chairman and CEO, after he was reported as saying the investment bank's $125m settlement, announced on Monday, was not a matter of concern to retail investors.

"Your statements reflect a disturbing and misguided perspective on Morgan Stanley's alleged misconduct," Mr Donaldson wrote. "Your reported comments evidence a troubling lack of contrition and lead me to wonder about Morgan Stanley's commitment to compliance with the letter and spirit of the law and the high standards of conduct all investors have a right to expect from their brokerage firms."

Mr Donaldson's blistering attack follows separate criticism of Stan O'Neal, Merrill Lynch's chief executive, by Eliot Spitzer, the New York attorney-general.

Ten of Wall Street's largest biggest investment banks on Monday signed a landmark settlement with US securities regulators, hoping to draw a line under the worst financial scandal in a generation.

The final settlement deal included findings of fraud against three banks - Citigroup's Salomon Smith Barney unit, Credit Suisse First Boston and Merrill Lynch. The regulators also released new evidence showing alleged conflicts of interest at other leading banks including Goldman Sachs and Morgan Stanley. None of the banks admitted or denied wrongdoing.

As part of the settlement announced on Monday, Morgan Stanley acknowledged it had "engaged in acts and practice that created conflicts of interest for its research analysts with respect to investment banking".

Mr Donaldson's letter states that the SEC's division of enforcement also has looked at Mr Purcell's comments. It cautions Morgan Stanley not to breach the settlement by denying the allegations.

"I caution you that the Commission would regard a violation of that obligation as seriously as a failure to comply with any other term of the settlement." Mr Donaldson writes.

"Please let me or our Director of Enforcement know if you would like to discuss these matters further."

Mr Donaldson's letter comes after Eliot Spitzer, New York attorney-general, on Monday reprimanded Mr O'Neal though he did not mention him by name.

Although Mr Spitzer did not specifically target Mr O'Neal, he criticised a chief executive who authored an editorial in a major publication last week. Mr O'Neal wrote an opinion piece for last Thursday's Wall Street Journal.

"I saw last week an article in one of the major publications where one of the CEOs said this (settlement) is merely an effort to eliminate risk from the marketplace," Mr Spitzer said.

"Risk is inherent in the markets. We all understand that and we thrive on it. What is not tolerated however, is fraud," Mr Spitzer said. "So, Mr CEO, and I read your article carefully, if I were you I would reflect. What your company did, and what we have alleged about your company, is that you committed fraud."

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