Morgan Stanley & Co. has elected to fight an NASD arbitration decision that found the firm liable to an investor because the firm participated in a $1.4 billion deal that ended several probes into allegations of biased research.
Last month, a panel of NASD arbitrators awarded $100,000 to Florida engineer Joseph Kenith, finding the firm liable for failing to properly supervise Kenith's broker and for issuing allegedly tainted research. The latter finding was based on the "global" settlement in April between state, federal and industry regulators and 10 of Wall Street's largest firms.
Morgan Stanley has accepted the NASD panel's decision that it failed to supervise the broker and has sent a $100,000 check, both sides said. But the firm's attorneys asked the three members to reconsider the second part of their ruling, that Morgan Stanley was liable because it signed the accord, which ended several investigations into allegations that Wall Street analysts promoted stocks they knew were weak to win investment-banking business.
The giant investment bank's decision to seek the modification is surprising because the arbitration panel awarded Kenith only a small fraction of the $3.3 million he sought, some arbitration experts said. The action, they said, indicates that investment banks intend to aggressively fight investor claims that biased research was responsible for the billions of dollars of equity value that evaporated when the 1990s bubble in technology stocks burst.
"Nobody's really defined what the global settlement is, what kind of liability it created," said investment professor Keith Black of the Illinois Institute of Technology's Center for Law and Financial Markets. Morgan Stanley "doesn't want to be the first ones to pay out under a new definition of liability."
Kenith's attorney, Darren C. Blum, said the case "just shows what Morgan Stanley's attitude is."
"The first award comes in, and they're crybabies. They forced us into this [arbitration] procedure, and now they don't want to deal with the result," Blum said.
A Morgan Stanley spokesman said the firm thinks the panel's decision is flawed because it goes beyond the evidence introduced in the case. "There was no claim ever made against Morgan Stanley for liability pursuant to the research settlement," he said.
NASD, an industry association that oversees the activities of brokers and securities firms, does not comment on specific arbitration cases.
Dozens of class-action lawsuits and hundreds of arbitration cases have been filed by investors who claim that they bought or held stocks because of rosy research reports written by analysts at investment banks. Two federal judges threw out three lawsuits last week. Many of the cases headed to arbitration are thought to be stronger because that is where the firms' retail clients must bring their claims.
Officially, arbitrators are not bound by what happens in other cases. But New York Law School professor Jeffrey J. Haas said Morgan Stanley is trying to prevent other plaintiffs' lawyers from using Kenith's case to strengthen their own arguments.
If the finding "is not taken out. . . . it'll be strict liability -- they've done this and they are liable on every claim," Haas said. "It could mean that Morgan Stanley would lose every arbitration claim" and would simply be arguing over how much money it owed.
An official at another large Wall Street firm said he was not surprised that Morgan Stanley had decided to fight the research finding: "When our lawyers heard about it, they said the award was out of line."
Morgan Stanley, Citigroup Inc. and Merrill Lynch & Co. have the most to lose from the coming wave of arbitration cases because they had high-profile analysts and a large group of retail customers who were compelled by their client agreements to take their cases to arbitration.
Morgan Stanley has been particularly aggressive in defending its research -- and has drawn regulatory criticism in the process. One day after the global settlement was announced in April, Morgan Stanley chief executive Philip J. Purcell told a conference of investment bankers that nothing in the settlement should trouble retail investors about his company. That remark and a phrase in the company's 2002 annual report, issued in February, saying that the firm's employees had survived the two-year probe "with their reputation for integrity intact," drew a critical letter from Securities and Exchange Commission Chairman William H. Donaldson.
Last month, a panel of NASD arbitrators awarded $100,000 to Florida engineer Joseph Kenith, finding the firm liable for failing to properly supervise Kenith's broker and for issuing allegedly tainted research. The latter finding was based on the "global" settlement in April between state, federal and industry regulators and 10 of Wall Street's largest firms.
Morgan Stanley has accepted the NASD panel's decision that it failed to supervise the broker and has sent a $100,000 check, both sides said. But the firm's attorneys asked the three members to reconsider the second part of their ruling, that Morgan Stanley was liable because it signed the accord, which ended several investigations into allegations that Wall Street analysts promoted stocks they knew were weak to win investment-banking business.
The giant investment bank's decision to seek the modification is surprising because the arbitration panel awarded Kenith only a small fraction of the $3.3 million he sought, some arbitration experts said. The action, they said, indicates that investment banks intend to aggressively fight investor claims that biased research was responsible for the billions of dollars of equity value that evaporated when the 1990s bubble in technology stocks burst.
"Nobody's really defined what the global settlement is, what kind of liability it created," said investment professor Keith Black of the Illinois Institute of Technology's Center for Law and Financial Markets. Morgan Stanley "doesn't want to be the first ones to pay out under a new definition of liability."
Kenith's attorney, Darren C. Blum, said the case "just shows what Morgan Stanley's attitude is."
"The first award comes in, and they're crybabies. They forced us into this [arbitration] procedure, and now they don't want to deal with the result," Blum said.
A Morgan Stanley spokesman said the firm thinks the panel's decision is flawed because it goes beyond the evidence introduced in the case. "There was no claim ever made against Morgan Stanley for liability pursuant to the research settlement," he said.
NASD, an industry association that oversees the activities of brokers and securities firms, does not comment on specific arbitration cases.
Dozens of class-action lawsuits and hundreds of arbitration cases have been filed by investors who claim that they bought or held stocks because of rosy research reports written by analysts at investment banks. Two federal judges threw out three lawsuits last week. Many of the cases headed to arbitration are thought to be stronger because that is where the firms' retail clients must bring their claims.
Officially, arbitrators are not bound by what happens in other cases. But New York Law School professor Jeffrey J. Haas said Morgan Stanley is trying to prevent other plaintiffs' lawyers from using Kenith's case to strengthen their own arguments.
If the finding "is not taken out. . . . it'll be strict liability -- they've done this and they are liable on every claim," Haas said. "It could mean that Morgan Stanley would lose every arbitration claim" and would simply be arguing over how much money it owed.
An official at another large Wall Street firm said he was not surprised that Morgan Stanley had decided to fight the research finding: "When our lawyers heard about it, they said the award was out of line."
Morgan Stanley, Citigroup Inc. and Merrill Lynch & Co. have the most to lose from the coming wave of arbitration cases because they had high-profile analysts and a large group of retail customers who were compelled by their client agreements to take their cases to arbitration.
Morgan Stanley has been particularly aggressive in defending its research -- and has drawn regulatory criticism in the process. One day after the global settlement was announced in April, Morgan Stanley chief executive Philip J. Purcell told a conference of investment bankers that nothing in the settlement should trouble retail investors about his company. That remark and a phrase in the company's 2002 annual report, issued in February, saying that the firm's employees had survived the two-year probe "with their reputation for integrity intact," drew a critical letter from Securities and Exchange Commission Chairman William H. Donaldson.
3287.99
1275.09