- The Washington Times - Monday, November 17, 2003

NEW YORK (AP) — Morgan Stanley agreed to pay a $50 million fine yesterday to settle charges that it pushed investors toward certain mutual funds in order to gain millions more in commissions and did not disclose the incentives to clients.

Morgan Stanley is the second major financial company to settle with regulators in a widening mutual fund industry scandal that has stained a growing list of firms and dismayed many investors.

Charges leveled yesterday by the Securities and Exchange Commission and the National Association of Securities Dealers say Morgan Stanley steered clients toward “preferred” mutual funds in exchange for millions of dollars in commissions from those fund companies. Morgan Stanley did not tell investors about the practice or the higher fees.

The arrangement constituted a “firm-wide failure” in Morgan Stanley’s disclosure practices, according to the SEC.

“When customers purchase mutual funds, they should understand the nature and extent of any conflicts of interest that may affect the transaction,” said Stephen M. Cutler, the director of the SEC’s division of enforcement.

Mr. Cutler said during a news conference in Washington that Morgan Stanley’s “conduct here clearly crossed the line.” Asked whether the SEC was considering charges against specific company executives, he would say only that the investigation continues.

The government is conducting a broad probe of the $7 trillion mutual fund business that has already resulted in the departure of executives at several large firms, including Strong Capital Management and Putnam Investments.

Hundreds of subpoenas have been issued by federal, state and industry regulators, with civil charges filed against Putnam Investments and employees at Prudential Securities. Individual employees at Bank of America, Millennium Partners and Fred Alger & Co. also have been charged by the state of New York, with two guilty pleas so far.

Putnam, which has lost about $21 billion in assets under management since the scandal, agreed to a partial settlement with the SEC last week. The amount the company will be fined has yet to be determined; the company has already begun implementing reforms under the agreement.

Charges against many of the firms center on their use of market timing — selective quick trades that skim profits from long-term shareholders.

Morgan Stanley, charged instead with failure to disclose improper payments from mutual fund firms, agreed to the settlement without officially admitting or denying the SEC’s findings.

The settlement calls for the company to pay $50 million — half of it returned profits and interest, the other half a civil penalty. All the money will be placed in a fund to be distributed to investors who bought the “preferred” mutual fund shares from Jan. 1, 2000, to the present, the SEC said.

Morgan Stanley will add disclosures of its practices to its Web site and in documents provided to investors. For investors who bought $100,000 or more of certain mutual fund shares in question, it will convert them to another class of shares that charge lower fees.


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