Securities regulators who are investigating the practices of Wall Street analysts said that Morgan Stanley, the nation’s second-largest brokerage firm, failed to maintain internal e-mail records as required by securities laws. As a result, several investigators said, there are fewer Morgan Stanley documents to analyze than have been produced by some other firms.
The release of brokerage firm e-mail messages by various regulators examining Wall Street research has embarrassed Merrill Lynch, Salomon Smith Barney and Credit Suisse First Boston in recent months. Messages written by Henry Blodget, the former Merrill Lynch Internet stock analyst, were central to the case brought against that firm by Eliot Spitzer, the New York attorney general, last April. Those e-mail messages, as well as others written by colleagues at the firm, seemed to show that the firm’s analysts were deriding stocks in private that they were recommending to the public. Merrill paid $100 million to settle the case.
Morgan Stanley’s e-mail messages are of interest not only to regulators examining conflicts of interest among Wall Street firms’ research departments and their investment banking units, but also to investors who lost money after following the advice of the firm’s analysts.
During the stock market mania, perhaps the most famous of the firm’s analysts was Mary Meeker, who followed Internet stocks. Like other powerful analysts at major firms, Ms. Meeker helped attract securities deals for Morgan Stanley. But most of the stocks she recommended to investors plummeted when the Internet bubble burst in 2000.
“We believe we have fully satisfied the regulators, and ours has been a good-faith effort to cooperate with every aspect of this investigation,” said Diana Quintero, a Morgan Stanley spokeswoman. “We have produced close to 400,000 pages of documents of which more than 200,000 are e-mails and e-mail attachments. There are no outstanding requests for e-mails.”
Federal securities laws require brokerage firms to retain e-mail relating to the brokerage firm’s overall business for three years. The records must be preserved “in an accessible place” for two years after they are written. Prosecutors say that under New York state law, a firm that deleted e-mail messages that it was required to maintain could be found guilty of falsifying business records. If the destruction of the e-mail messages was found to be intentional, the firm could face a felony charge. Wall Street firms have complained for years about the law requiring e-mail message retention, arguing that such messages should not be considered the type of communication that must be preserved. The firms have also said that complying with the law is impractical and an onerous financial burden.
Regulators said they became aware that brokerage firm compliance with document retention rules was spotty when they started investigating analyst activities about one and a half years ago. Last November, the S.E.C. reiterated its view that e-mail messages are covered by the law and must be preserved.
Last May, regulators at NASD advised several Wall Street firms that their compliance with the rule on e-mail message retention was unsatisfactory and began investigating those policies. If the firms are found by regulators to have mistakenly deleted messages that they were supposed to keep, they could face fines extending into the high six figures. If the firms destroyed the messages purposefully, penalties are more significant, including suspension or expulsion from the securities industry.
Several securities regulators involved in the investigation said that bringing a case against a firm that did not retain all its e-mail messages would require a significant effort.
It is unclear why Morgan Stanley’s production of e-mail messages is viewed as unsatisfactory by regulators. But some regulators have expressed a desire to make evidence public so that disgruntled investors could use it for their own suits. Clients of Merrill Lynch and Salomon who lost money may have an easier time mounting civil cases to recover money because so many damaging e-mail messages from those firms have been made public by investigators.
Regulators are also concerned that the firms that adhered to the law will wind up being punished far more than firms that did not comply. One regulator, who declined to be identified, said, “There is some perversity in the fact that the firms that are getting hit pretty hard in the press and in terms of the sanctions are firms that had reasonably good record retention policies.”