Morgan Stanley, Meet the Irate Investor

Business Week

December 1, 2003

When the Securities & Exchange Commission and NASD settled charges against Morgan Stanley (MWD ) on Nov. 17 for rewarding brokers to push certain mutual funds and failing to tell clients, Jeryl Blasco suddenly felt she understood how she had lost $285,000 of her $650,000 nest egg. In 1999, Blasco’s Morgan Stanley broker invested her money in the firm’s own junk bond fund after the 49-year-old Boca Raton (Fla.) widow had requested conservative investments. “All I knew was that I was losing money drastically, and every time I went to the broker, he’d say: ‘Don’t worry, everything is under control,”‘ she says.

Blasco is emblematic of a new wave of litigation breaking over Wall Street. In an arbitration case, due to be heard in January, she alleges her broker failed to disclose both the risky nature of the junk bond fund and the bigger commission he would receive. Morgan Stanley declines to comment. Thousands of investors are likely to follow suit. “My clients are bouncing off the wall,” says Plantation (Fla.) securities lawyer Darren C. Blum, who represents Blasco.

The litigation will likely engulf more Wall Street firms. The SEC says it’s investigating 15 others for similar failures to disclose fund sales incentives. But the number of clients affected at Morgan Stanley alone is striking. In SEC filings, the firm estimates that 8,000 people bought its funds in the 2 1/2 years covered in the Nov. 17 settlement. In this settlement, regulators charged Morgan Stanley with selling funds from up to 16 fund families in return for bigger commissions. In September, the NASD fined the firm $2 million for awarding resort trips and Britney Spears concert tickets to employees who promoted its funds between October, 1999, and December, 2002. Morgan Stanley didn’t admit or deny the charges.

The ultimate legal bill won’t make a big dent in brokerages’ earnings. Morgan Stanley, which racks up roughly $14 million in net profits daily, is paying $50 million in civil penalties to settle regulators’ most recent charges. Analysts estimate that Morgan Stanley clients will be able to prove they lost only tens of millions of dollars in total. “At the end of the day, the company can still argue that it didn’t admit or deny anything and that it wasn’t charged with fraud,” says New York securities lawyer Bill Singer. Chairman and CEO Philip J. Purcell said in a statement that he regretted that “some” of the firm’s sales and disclosure practices have “been found inadequate.”

Still, something is better than nothing. And if Blasco is any indication, Wall Street faces a bigger penalty than fines: Blasco no longer trusts the Street’s brokers. She says the little money she has left is in annuities at an insurance company.