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Following the 2003 Global Settlement with FINRA and the Securities & Exchange Commission, were Morgan Stanley paid $125 million in fines, disgorgement, and “procurement of Independent Research,” it seems Morgan Stanley has been caught again publishing inaccurate and misleading investment research report, which fail to disclose Morgan Stanley?s financial interests, and conflicts of interest to customers with respect to the recommendation of securities.

After being caught, Morgan Stanley quickly and quietly settled a proposed FINRA enforcement action by entering into an Acceptance Waiver & Consent, paying a small fine ($800,000), and without admitting or denying the allegations, through a deal with FINRA (formerly the National Association of Securities Dealers, Inc.), a “self-regulatory organization” which Morgan Stanley is a member, allows Morgan Stanley to keep secret the identities of the issuers or securities which were the subject of these inaccurate and misleading investment research reports.

According to the AWC

Morgan Stanley issued equity research reports that failed to disclose the “relationships” Morgan Stanley, or its analysts, had with companies covered in its research reports. Overall, these inaccuracies resulted in approximately 6,836 deficient disclosures in about 6,632 equity research reports and 84 public appearances by research analysts.

The Deficient Disclosures

  • Morgan Stanley failed to disclose the receipt of investment banking and non-investment banking revenue from “subject” companies
  • Morgan Stanley failed to disclose its role as a underwriter, manager, or co-manager, of public offerings for the “subject” companies
  • Morgan Stanley failed to disclose that it acted as “market maker” for certain “subject” securities, sold as principal from proprietary firm accounts
  • Morgan Stanley failed to disclose in approximately 127,600 monthly account statements sent to customers from August 2007 to February 2008 that it had available independent, third-party research

The requirement to provide customers with this notification was part of the Securities and Exchange Commission’s final agreement with Morgan Stanley as part of the 2003 Research Analyst Settlement and was incorporated into a separate agreement with FINRA also in 2003.

Morgan Stanley’s investment research appears to remain tainted. The failure to disclose Morgan Stanley’s financial interest in promoting or recommending these securities to its customers in its analyst recommendations is a violation of the federal securities laws and the failure to disclose these conflicts of interest, is a breach of fiduciary duty.

If Morgan Stanley did not learn anything, after being fined $125 million in 2003, it is highly unlikely that paying $800,000 in 2010 will make a difference. Given the important information that was concealed, and the number of issuers where Morgan Stanley published inaccurate reports, 64, and the number of inaccurate reports actually published, 6,632, the $800,000 fine is paltry and is otherwise meaningless.

Also, settling the case with FINRA in advance of an enforcement action being filed allows Morgan Stanley to keep secret and conceal the identities of these securities and issuers where it received undisclosed compensation in connection with the publication of these tainted investment research recommendations, thereby saving, most likely, tens of millions of dollars, in customer claims, civil actions and arbitration claims against Morgan Stanley for fraud and the breach of fiduciary duty.

Guiliano Law Group

Our practice is limited to the representation of investors in claims, for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.