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SEC Chief Lashes Out at Morgan CEO

William Donaldson cites a 'troubling lack of contrition' by Philip Purcell over alleged misconduct by analysts.

May 02, 2003|Walter Hamilton | Times Staff Writer

NEW YORK — In a sharply worded letter released Thursday, Securities and Exchange Commission Chairman William Donaldson rebuked the head of Morgan Stanley for suggesting that small investors should not be troubled by alleged wrongdoing by the brokerage firm detailed in this week's $1.4-billion stock analyst settlement.

The settlement, which was finalized Monday, accused Morgan and nine other firms of committing widespread transgress- ions during the late 1990s bull market.

Regulators alleged that, among other things, Morgan secretly paid $2.7 million to about 25 other firms to publish research on its corporate clients. As is common in settlements, the firm neither admitted nor denied guilt. But Morgan was barred from denying the charges publicly.

A day after the settlement was announced, Morgan Chief Executive Philip J. Purcell told a conference of institutional investors that "I don't see anything in the settlement that will concern the retail investor about Morgan Stanley."

The comment, which was quoted by the New York Times, sparked the ire of the SEC.

Purcell showed a "troubling lack of contrition" over actions that were "extremely serious," Donaldson said in his letter to the Morgan executive.

"Your statements reflect a disturbing and misguided perspective on Morgan Stanley's alleged misconduct," he wrote.

Purcell's comments were "an attempt by a CEO to put the best public relations spin on what happened," said David Ruder, a former SEC chairman who now teaches securities law at Northwestern University. "I don't doubt for a minute that [the SEC] was upset. This was a big deal."

In a letter responding to Donaldson on Thursday, Purcell seemed to backtrack from his statements.

"I deeply regret any public impression that the commission's complaint was not a matter of concern to retail investors," Purcell wrote. "Morgan Stanley views seriously the allegations that the SEC and other regulators have made."

Both men declined to comment further.

To some critics, the episode underscores a deeper problem in which Wall Street has not accepted responsibility for its bull market sins.

"There are any number of incidents lately that have led us to believe that this disdain for retail investors is pervasive throughout the industry and hasn't changed because of this settlement," said Barbara Roper of the Consumer Federation of America.

She cited the attempted nomination of Sanford I. Weill, the chief executive of Citigroup Inc., which paid the largest fine in the settlement, to be a "public representative" on the board of the New York Stock Exchange. Weill withdrew his name amid an ensuing uproar.

She also cited an op-ed piece in last week's Wall Street Journal by Merrill Lynch & Co. Chief Executive E. Stanley O'Neal that some took as a swipe at the Wall Street crackdown. A company spokesman declined to comment Thursday, although O'Neal acknowledged Monday that the firm is "not perfect."

Purcell's portrayal of his firm's actions has previously sparked controversy. In a shareholder letter in Morgan's 2002 annual report, Purcell said his firm "positively differentiated ourselves from our major competitors" in the regulatory probes.

He wrote that Morgan paid the "lowest fine" and that "the disclosures at several of our competitors kept them in the headlines for most of the year."

In the final settlement, Morgan paid the same fine -- $25 million -- as five other firms. Its total payment -- $125 million -- topped that of six other firms.

"It's a shameful period for the industry," a person at a rival investment bank said Thursday. "How you can try to claim the moral high ground in this situation is beyond me."

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