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Complaint Targets Morgan Stanley

Massachusetts accuses firm of failing to disclose sales incentives designed to get clients to buy its in-house mutual funds.

August 12, 2003|From Associated Press

Wall Street firm Morgan Stanley set up elaborate incentives encouraging its salespeople in the Northeast to push customers to buy the company's in-house mutual funds, and failed to disclose those measures to investors, Massachusetts authorities alleged Monday.

Secretary of State William Galvin, whose office filed the complaint, said the practice helped bring the firm $5 million to $8 million in commissions on mutual fund sales that probably amounted to tens of millions of dollars.

"There was a contempt for the customers here," Galvin said at a news conference.

"There was a recognition these people didn't know any better and were to be taken advantage of."

The allegations that Morgan Stanley failed to disclose such practices surfaced last month, but the latest filing provides further details, including an e-mail from Drew Hawkins, an associate regional director for the firm in the Northeast, warning a colleague, "Please DO NOT put anything in writing via e-mail or fax on the promotional part of our current campaign."

The complaint's focus is Morgan Stanley's former branch office in the Back Bay section of Boston, an operation Galvin said "seemed to be a place that was totally overrun by contests."

The filing describes Morgan Stanley channeling bonuses and travel expenses to reward sales of in-house funds, which Galvin said significantly underperformed the market.

One team of fund sellers, calling itself the Chowdaheads, won a $1,000 award for selling proprietary funds in the company's "Find the Right Fit" campaign and won $15,000 for winning a regional contest.

Pushing in-house funds does not violate Massachusetts laws, but Galvin's office believes such practices must be disclosed. He also said using deferred compensation to push in-house funds violated Morgan's own policies that stated non-cash compensation could be used to reward sales only of classes of products, not of specific products.

Morgan Stanley spokeswoman Andrea Slattery noted that the NASD, formerly known as the National Assn. of Securities Dealers, proposed requiring such disclosure only last week.

"We're not going to comment on the allegations made in today's press conference except in our formal response to regulators," she said.

Slattery said Hawkins would not be available for comment. The Back Bay office closed in May.

Galvin said his office would seek penalties, the right of investors to rescind their transactions and total disgorgement by Morgan Stanley of its proceeds from the sales in question.

Morgan shares fell 40 cents to $48.14 on the New York Stock Exchange.

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