The Securities and Exchange Commission today filed a civil injunctive action against Morgan Stanley & Co. Incorporated for failing to produce tens of thousands of e-mails during the Commission's IPO and Research Analyst investigations from Dec. 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 permanent injunction and payment of 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 also will hire an independent consultant to review these reforms. The settlement terms are subject to court approval.
Linda Chatman Thomsen, Enforcement Division Director, said, "The laws requiring broker-dealers to provide documents to the Commission are essential to the Commission's ability to enforce the federal securities laws and protect investors. Today's action underscores the Commission's resolve to ensure the integrity of its investigative processes."
Antonia Chion, Associate Director of the SEC's Division of Enforcement, stated, "Morgan Stanley's repeated production failures and misstatements prejudiced two major investigations. This settlement will require Morgan Stanley to put into place reforms to prevent similar misconduct from recurring."
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. 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 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.