All That Missing E-Mail ... It's Baaack

NY Times

Gretchen Morgenson

All That Missing E-Mail ... It's Baaack

Published: May 8, 2005

RONALD O. PERELMAN, the financier who is also chairman of Revlon, is not usually considered a friend to individual investors. But to anyone who has lost money as a client of Morgan Stanley in recent years, Mr. Perelman may turn out to be a true pal.

Why? Because e-mail messages that surfaced in his suit against the firm for its advice in his 1999 purchase of Sunbeam may force Morgan Stanley to defend itself against countless investor cases it had previously won.

Essentially, Morgan Stanley's document production in the Perelman case was so woeful and obstructionist that the judge in the case criticized it. After that, the firm decided to conduct a new search for any materials it might have overlooked.

The documents it unearthed may or may not have a bearing on arbitrations won by the firm, but if any do, decisions that supported the firm could be reversed.

In recent weeks, Morgan Stanley sent a letter to lawyers who represented clients in cases against the firm, alerting them to the e-mail trove. "Morgan Stanley DW Inc. has recently come to appreciate that there are additional sources that might contain additional responsive e-mail," the letter said. "Although there may or may not be material responsive in this matter, MSDW will make reasonable accommodations as appropriate."

Morgan Stanley had long argued that many of its documents were lost in the destruction of the World Trade Center, where it had offices. But the documents relevant to the Perelman case turned up in Brooklyn.

Fairness should certainly require that Morgan Stanley's former customers have a chance to decide if the e-mail messages support their arguments in the cases they lost. Andrea Slattery, a Morgan Stanley spokeswoman, declined to say who - the firm or investors' lawyers - would examine the documents to see if any were relevant to past cases.

Unfortunately, Morgan Stanley's past actions hardly inspire confidence that the firm can be relied upon to analyze the legal potential of the documents.

All Wall Street firms play hardball when clients bring arbitration cases. But Morgan Stanley is famous for its scorched-earth tactics. The firm often stonewalls routine requests for documents and stalls even when arbitration panelists order that materials be produced.

During an October 2003 arbitration, for example, Morgan Stanley was penalized $10,000 a day until it complied with an order that documents be produced. "Enough is enough," the arbitration panel wrote.

Morgan Stanley seems similarly obstructionist in its dealings with regulators. New Hampshire's securities department last month cited it for "improper and inadequate production of documents" in a case involving allegations of improper sales. Jeffrey Spill, deputy director of the state's Bureau of Securities Regulation, said in a statement: "What we have seen is a consistent pattern of delay and obfuscation in relation to document production, in addition to inadequate recordkeeping, both here in New Hampshire and in other jurisdictions." Morgan Stanley settled the case W.A.O.D.W. - without admitting or denying wrongdoing.

Elizabeth T. Maass, the circuit court judge overseeing the Perelman suit in West Palm Beach, Fla., wrote a blistering opinion about Morgan Stanley's tactics. "The conclusion is inescapable that MS & Co. sought to thwart discovery in this specific case," she noted.

Consider the arbitration against Morgan Stanley brought in 2003 by Robert Quintana, a Florida firefighter, and his wife, Alina. They contended that Morgan Stanley breached its fiduciary duties in recommending that they buy technology stocks on margin; they lost $150,000, their entire liquid net worth, their lawyer said.

IN arbitration, Morgan Stanley received a sanction for failing to provide discovery documents in a timely way and had to pay $400. The firm made an issue of the Quintanas's Internet use, calling it a sign of their technological savvy, said their lawyer, Darren C. Blum of Blum Law Group. The firm was given access to their computer and hired an expert to examine it.

The Quintanas lost the case, receiving only the $400.

Morgan Stanley still wasn't satisfied. It filed a lawsuit against the Quintanas to recover its attorneys' fees, a request it had made, unsuccessfully, to the arbitration panel. The case is pending in a Florida state court.

Last week, Mr. Blum filed a class-action suit against Morgan Stanley on behalf of the Quintanas and others who brought cases against the firm from January 1999 to April 2005. The suit contends that lapses in document production meant that arbitrations lost by Morgan Stanley clients may have been decided unfairly.

"It is clear that they violated discovery rules and there is a price to pay," Mr. Blum said.

Ms. Slattery called the suit meritless and said the firm expects it to be dismissed.

As for all the new documents, she said in a statement: "After identifying sources that could contain additional responsive e-mails, we alerted numerous regulators and litigants, including those involved in pending matters that could be affected. These sources are neither actively used for information retrieval nor readily searchable and it is unclear whether they will have additional e-mails relevant to any particular matter."

According to a person briefed on the matter, regulators at NASD have started an investigation into the substance of the newly recovered e-mail messages.

Eric R. Dinallo, head of regulatory matters at Morgan Stanley, said the firm has worked hard on regulatory issues. "We have invested significant resources, added significantly to staff, including a number of former regulators," he said, "and tried to improve the quality and frequency of our dialogue with regulators."

But Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels, said: "Our present era combines highly sophisticated electronic tools used to retain and produce corporate records with a deep judicial suspicion of the integrity of corporate management. Therefore firms that fail to respond to reasonable discovery requests may expose themselves to draconian penalties."