By Philip Mattera
Although it was forced to adopt the technical structure of a bank holding company during the 2008 financial crisis, Morgan Stanley is still primarily an investment house, a leading player on Wall Street for the past 75 years. The firm was spun off from J.P. Morgan’s financial empire in 1935 after the Glass-Steagall Act mandated the separation of commercial banking and investment banking in an effort to end the abuses that led to the stock market crash and the Great Depression.
For decades, the firm focused on large stock issues by major corporations and refused to participate in a syndication unless it was the lead manager. Morgan avoided the mergers & acquisitions business until the 1970s, but by the late 1980s it was heavily involved in leveraged buyouts both as an advisor and as an investor. This led to a series of investor lawsuits charging the firm with conflicts of interest.
In 1992 a jury in West Virginia ordered Morgan to pay $36 million (later increased to $56 million) in damages for having put public funds in risky investments that violated state investment guidelines and ultimately resulted in some $280 million in losses. Faced with similar charges connected to investments that contributed to the bankruptcy of California’s Orange County in 1994, Morgan agreed in 1998 to pay $69.6 million to settle the matter.
The Dean Witter Merger
In 1997 Morgan went outside its comfort zone of serving large corporations and wealthy individuals by agreeing to merge with the retail brokerage Dean Witter, Discover and Company to form Morgan Stanley Dean Witter. Founded in the 1920s, Dean Witter had been owned by retailer Sears Roebuck for about a dozen years beginning in the early 1980s.
In 1998 industry regulator NASD (now FINRA) fined Morgan $1 million for manipulating the Nasdaq 100-stock index by artificially inflating the prices of underlying shares; two years later, it imposed another fine of $495,000. In 2000 NASD took the unusual step of suing Morgan’s Dean Witter unit for misleading thousands of investors into buying risky bond mutual funds that resulted in losses of $65 million (the case was later dismissed by NASD’S National Adjudicatory Council).
In 2003 Morgan was one of ten major investment firms that agreed to pay a total of $1.4 billion in penalties, disgorgement and investor education spending to settle federal and state charges involving conflicts of interest between their research and investment banking activities. Morgan’s share was $125 million.
Also in 2003, NASD fined Morgan $2 million for conducting prohibited sales contests for brokers and managers. Later that year, NASD and the SEC reached a $50 million agreement with Morgan to settle charges that it improperly gave preferential treatment to certain mutual fund products in return for millions of dollars in brokerage commissions. The following year, Morgan was fined $5.4 million by NASD for violating initial public offering allocation rules.
In 2004 NASD fined Morgan $250,000 for failing to comply with its discovery obligations in arbitration cases and then $2.2 million for failing to submit data on customer complaints and broker disciplinary actions in a timely manner. Around the same time, Morgan agreed to pay $200,000 and change its business practices to settle charges by state regulators in Washington that the firm gave unsuitable investment advice to employees of Microsoft.
In 2005 the New York Stock Exchange fined Morgan $13 million in connection with charges that it failed to send prospectuses to investors. That same year, the SEC announced that Morgan would pay $40 million to settlement allegations of violating rules relating to initial public offerings. That year also saw more NASD fines, including $150,000 (plus $2.5 million in disgorgements) for improper sales of restricted securities in lock-up agreements and $1.5 million (plus $4.6 million in restitution) for failing to properly supervise its fee-based brokerage business.
In 2005 Morgan was also hit with a jury verdict requiring it to pay $1.45 billion in damages to financier Ronald Perelman, who had sued the firm in connection with its role in advising him on the sale of his stake in camping gear maker Coleman to the consumer appliance manufacturer Sunbeam in 1998. Amid revelations of accounting fraud, Sunbeam collapsed, making worthless the shares with which Perelman had been paid. Morgan later won its appeal in the case.
In 2006 the SEC announced that Morgan would pay $15 million to settle charges that it failed to produce tens of thousands of e-mail messages during the commission’s investigation of research analysts. The following month, the SEC announced that Morgan would pay $10 million to settle charges that it failed to maintain and enforce adequate written policies and procedures to prevent misuse of inside information.
There were also more NASD fines in 2006: $200,000 for analyst conflict of interest violations; $2.9 million for widespread reporting violations; and $100,000 for supervisory failures. Failing to supervise was also at the center of a $1 million settlement Morgan reached in 2006 with the New York attorney general concerning the defrauding of customers by one of its brokers.
In 2007 Morgan agreed to pay $7.9 million to settle SEC fraud charges relating to its failure to get retail investors the best prices possible on more than 1 million over-the-counter transactions. It then agreed to pay $4.4 million to settle a class action lawsuit charging that it deceived investors who had purchased precious metals and paid storage fees. Also that year, FINRA fined Morgan $1.5 million and ordered $4.6 million in restitution for selling corporate bonds to retail customers at excessive prices. The following month, the regulator imposed a $3 million fine and ordered payments of $9.5 million to customers for failing to provide e-mail records during arbitration proceedings.
Surviving the Meltdown
During the financial meltdown in 2008, Morgan converted into a bank holding company to qualify for a federal infusion of $10 billion from the Troubled Assets Relief Program (TARP). It also sold a 21 percent stake in itself to Japan’s Mitsubishi UFJ Financial Group for $9 billion. The TARP aid was repaid in 2009.
Morgan’s regulatory and legal problems continued. In 2008 it was sued by a group of institutional investors charging that it negilgently conveyed ratings from agencies such as S&P and Moody's that were invalid. The agencies were also charged in the case, which is pending.
In 2009 it was fined $3 million by FINRA and ordered to pay more than $4.2 million in restitution to resolve charges that its brokers persuaded employees of Eastman Kodak and Xerox to take early retirement based on unrealistic promises of consistently high investment returns and for recommending unsuitable investment strategies. That same year, the SEC announced that Morgan would pay $500,000 to settle charges that its office in Nashville steered customers to money managers who had not been subjected to a due diligence review.
In 2010 FINRA fined Morgan $800,000 for violating the 2003 research analyst settlement by failing to disclose to customers the availability of the independent research made possible by the settlement. In 2011 Morgan’s Saxon Mortgage Services subsidiary agreed to pay $2.35 million to settle federal charges that it violated the Servicemembers Civil Relief Act by foreclosing on the homes of active duty military personnel without first obtaining required court orders. That same year, the Federal Housing Finance Agency (FHFA) sued Morgan and other firms for abuses in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac. In addition, Morgan agreed to pay $4.8 million to settle federal charges that it violated antitrust laws by entering into a financial derivative agreement with KeySpan Corporation that retrained competition in the New York City electricity market. Finally that year, FINRA fined Morgan $1 million for excessive markups and markdowns charged to customers on bond transactions.
In 2012, Morgan was fined $1.75 million by FINRA for abuses relating to exchange-traded funds and $647,700 for using fees from municipal bond offerings to pay for lobbying. It was also hit with a $5 million fine by Massachusetts securities regulators for its role in managing the problem-plagued Facebook initial public offering. Moreover, a former Morgan real estate executive in China pleaded guilty to violations of the U.S. Foreign Corrupt Practices Act.
In 2013 the Federal Reserve announced that Morgan would pay $227 million to settle charges of loan servicing and foreclosure abuses by its former subsidiary Saxon Mortgage Services.
Around the same time, ProPublica reported that documents made public as part of a lawsuit filed by a Taiwanese bank against Morgan revealed that during the lead-up to the financial meltdown Morgan employees exchanged e-mails in which they joked that a collateralized debt obligation they were selling should be named things such as “Subprime Meltdown” and “Nuclear Holocaust.”
In February 2014 the FHFA announced that Morgan Stanley had agreed to pay $1.25 billion to settle the charges the agency had brought relating to Fannie Mae and Freddie Mac.
In July 2014 the SEC announced that Morgan Stanley would pay $275 million to settle charges that three of its units mislead investors in the sale of residential mortgage-backed securities.
In December 2014 FINRA fined Morgan Stanley $4 million as part of a case against ten investment banks for allowing their stock analysts to solicit business and offer favorable research coverage in connection with a planned initial public offering of Toys R Us in 2010.
In February 2015 Morgan Stanley disclosed that it had consented to pay $2.6 billion to settle Justice Department allegations concerning the sale of what turned out to be toxic securities in the run-up to the financial meltdown. The settlement was finalized in February 2016, at which time Morgan also agreed to pay $550 million to New York State and $22.5 million to Illinois.
In January 2017 the SEC announced that Morgan Stanley had agreed to pay a $13 million penalty to settle allegations that it overbilled investment advisory clients due to coding and other billing system errors.
Starting in the 1990s, Morgan began to be hit with a series of lawsuits charging it with racial and gender discrimination. Initially, the firm vigorously fought the suits. In one instance, the company’s hard-line approach backfired. In 1999 it came to light that officials at Morgan had paid $10,000 to someone to discredit former employee Christian Curry who was preparing to file a suit charging that his dismissal from the firm was linked to his race and the fact that a photograph of him had appeared in a magazine for gay men. The payment was apparently linked to a sting operation in which Curry was arrested for trying to plant a racist e-mail message in Morgan computers. The scandal led to the resignation of Morgan’s chief legal officer. Morgan later settled Curry’s discrimination charges for an undisclosed amount.
Also in 1999, the U.S. Equal Employment Opportunity Commission began an investigation of sex discrimination at Morgan in connection with a lawsuit filed by Allison Schieffelin. In 2001 the commission determined that Morgan’s decision to fire Schieffelin was done in retaliation for filing the suit and subsequently filed its own lawsuit against Morgan. In 2004 Morgan agreed to pay $54 million to settle the case. In 2007 Morgan agreed to pay at least $46 million to settle another sex discrimination case brought by a group of current and former brokers who alleged that they had been discriminated against in the way they were trained, promoted and compensated.
In 2007 it was reported that Morgan had settled a class-action suit accusing it of treating black and Latino employees unfairly, but the amount was not disclosed.
In 2012 the American Civil Liberties Union sued Morgan for racial discrimination in helping push African-American homeowners into subprime predatory loans through its dealings with the now-defunct New Century Mortgage Corp. The case is pending.
In 1992, after Morgan let it be known that it was considering moving its headquarters from Manhattan to Stamford, Connecticut, New York City officials offered the firm about $39.6 million in tax credits and other subsidies to stay put.
In 2006 Morgan received a $54 million utility rate subsidy from the New York City Industrial Development Agency.
Other Information Sources
Violation Tracker summary page
Watchdog Groups and Campaigns
Key Books and Reports
Cracks in the Pipeline: Restoring Efficiency to Wall Street and Value to Main Street by Wallace C. Turbeville (Demos, December 2012).
Dirty Money: U.S. Banks at the Bottom of the Class (Rainforest Action Network, BankTrack and Sierra Club, 2012.
Dividend Tax Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends (Senate Permanent Subcommittee on Investigations, September 2008).
F.I.A.S.C.O.: Blood in the Water on Wall Street by Frank Partnoy (Norton, 1997).
The Predators’ Creditors: How the Biggest Banks are Bankrolling the Payday Loan Industry by Kevin Connor and Matthew Skomarovsky (National People’s Action and Public Accountability Initiative, September 2010).
Last updated February 4, 2017