SEC v. MORGAN STANLEY & CO. INCORPORATED, District of Columbia (May 10, 2006) — Complaint

 
UNITED STATES DISTRICT COURT 
FOR THE DISTRICT OF COLUMBIA 
_____________________________________________ 
             : 
UNITED STATES SECURITIES AND        : 
EXCHANGE COMMISSION,         : 
100 F Street, N.E.           : 
Washington, D.C. 20549,          :  Civ. No. 060882 (RCL) 
             :            
                Plaintiff,       :          
             :      
  v.           :           
                :           
MORGAN STANLEY & CO. INCORPORATED,    :      
1585 Broadway           :      
New York, New York 10036          :  
             : 
 Defendant.       :      
_____________________________________________: 
 
COMPLAINT 
 
Plaintiff United States Securities and Exchange Commission (“Commission”) alleges the 
following against defendant Morgan Stanley & Co. Incorporated (“Morgan Stanley” or “the 
firm”): 
1. From December 11, 2000 through at least July 2005, Morgan Stanley failed to 
produce tens of thousands of e-mails sought by Commission subpoenas and other requests issued 
in the course of two Commission investigations:  an investigation into Morgan Stanley’s 
practices in allocating shares of stock in initial public offerings (“the IPO Investigation”) and an 
investigation into conflicts of interest between the firm’s research and investment banking 
practices (“the Research Analyst Investigation”).  As a result, Morgan Stanley violated the 
provisions of the federal securities laws requiring Morgan Stanley, a regulated broker-dealer, to 
timely produce its records and documents to the Commission. 

  
2. Morgan Stanley did not search diligently for back-up tapes containing responsive 
e-mails until 2005, over four years after being served with Commission subpoenas and requests 
in the two investigations.  As a result, Morgan Stanley failed to timely produce e-mails contained 
on thousands of back-up tapes.  These back-up tapes were readily accessible to Morgan Stanley 
in its offices and the facilities of its off-site storage providers (“Storage Facilities”).  To date, 
these tapes have yielded 14.3 million e-mails that Morgan Stanley had not previously searched in 
responding to the investigations.   
3. During the Commission’s investigations, Morgan Stanley made numerous 
misstatements regarding the status and completeness of its productions and the unavailability of 
certain documents.  For example, Morgan Stanley asserted in both the IPO and the Research 
Analyst Investigations that it had not retained any 1999 tapes that backed-up e-mail.  In fact, 
numerous back-up tapes from 1999 existed, and Morgan Stanley began producing e-mails from 
those back-up tapes in 2005. 
4. Morgan Stanley also did not timely produce e-mails sought in the Research 
Analyst Investigation because it delayed loading millions of e-mails into its searchable e-mail 
archive database (“the E-Mail Archive”) and searching them for responsive e-mails.  The firm 
had told the Commission staff that its e-mail productions were “complete.”  In fact, this process 
was not “complete,” and Morgan Stanley made the loading of these e-mails into the E-Mail 
Archive a low priority. 
5. In addition, Morgan Stanley failed to produce responsive e-mails by over-writing 
back-up tapes after receiving Commission subpoenas and requests despite its repeated 
representations to the Commission and the staff that all over-writing had ceased in January 2001.  
Morgan Stanley’s continued over-writing destroyed at least two hundred thousand e-mails, 
 
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including some e-mails which likely were responsive to the Commission’s subpoenas and 
requests. 
 6. These repeated violations of the production obligations compromised the 
Commission’s ability to effectively investigate and determine whether Morgan Stanley had 
complied with the federal securities laws.  Morgan Stanley’s conduct delayed the Research 
Analyst Investigation and prejudiced both the IPO and Research Analyst Investigations by 
depriving the Commission of evidence and potential sources of information relevant to those 
investigations for years, and in some cases, permanently. 
 7. By engaging in the conduct described in this Complaint, Morgan Stanley violated 
the production provisions of the federal securities laws, Section 17(b) of the Securities Exchange 
Act of 1934 (“Exchange Act”) [15 U.S.C. § 78q(b)] and Exchange Act Rule 17a-4(j) [17 C.F.R. 
§ 240.17a-4(j)], and is likely to continue to engage in such conduct unless and until it is enjoined 
by this Court.  Accordingly, the Commission seeks an Order of this Court permanently enjoining 
Morgan Stanley from future violations and imposing civil monetary penalties. 
JURISDICTION AND VENUE
8. The Commission brings this action pursuant to Section 21(d) of the Exchange Act 
[15 U.S.C. § 78u(d)] to restrain and permanently enjoin Morgan Stanley from violating Section 
17(b) of the Exchange Act [15 U.S.C. § 78q(b)] and Exchange Act Rule 17a-4(j) [17 C.F.R. § 
240.17a-4(j)]. 
9. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e) and 
27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78aa].  
10. Venue lies in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 
78aa].  Morgan Stanley is found and transacts business in this District. 
 
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DEFENDANT 
11. Morgan Stanley is a Delaware corporation with its headquarters and principal 
executive offices in New York, New York.  Morgan Stanley was and continues to be registered 
with the Commission as a broker-dealer.  Morgan Stanley is licensed to conduct securities 
business on a nationwide basis.  Morgan Stanley is an international financial services firm that 
provides securities underwriting services, sales trading services, merger and acquisition advisory 
services, private banking services and equity research.  Employees of Morgan Stanley received 
and sent e-mail in conducting Morgan Stanley’s business as a broker-dealer.   
FACTS 
I. THE COMMISSION ISSUED SUBPOENAS AND DOCUMENT 
 REQUESTS TO MORGAN STANLEY FOR ITS E-MAILS  
 AND BACK-UP TAPES CONTAINING E-MAIL 
 
12. Beginning in December 2000 and continuing through October 2004, the 
Commission issued subpoenas and document requests to Morgan Stanley for e-mails and back-up 
tapes containing e-mail in the IPO and Research Analyst Investigations.  Prior to 2003, e-mail sent 
or received by Morgan Stanley employees was backed-up on magnetic tapes.  In early 2003, 
Morgan Stanley began using the E-Mail Archive which preserved e-mails sent or received by 
Morgan Stanley employees on a going-forward basis in a database that was more readily 
searchable.  The E-Mail Archive allowed Morgan Stanley to discontinue its use of tapes which 
Morgan Stanley had used to back-up and search for e-mail sent prior to January 2003.  Later in 
2003, Morgan Stanley began loading its pre-2003 e-mails stored on back-up tapes into the E-Mail 
Archive so that its pre-2003 e-mails would be more accessible and more readily searchable (“the 
Migration Project”). 
 
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A. The IPO Investigation 
13. On December 11, 2000, the Commission issued a subpoena to Morgan Stanley for 
documents, including e-mails and back-up tapes containing e-mails, relating to Morgan Stanley’s 
allocation of IPO shares during the period 1999-2000 (“the December 2000 Subpoena”).  In the 
cover letter to the subpoena, the Commission specifically instructed Morgan Stanley to retain all 
e-mails relating to its IPOs during 1999 and 2000.  At that time, Morgan Stanley was also 
reminded that Exchange Act Release No. 38245 (February 5, 1997) states that electronic mail 
communications relating to a broker-dealer’s “business as such” must be retained for not less 
than three years pursuant to Exchange Act Rule 17a-4(b)(4). 
14. From March 2001 through May 2001, the Commission sent two additional 
document requests to Morgan Stanley seeking e-mails relating to the firm’s IPOs in 1999 and 
2000.  Morgan Stanley made its first production of e-mails in response to the Commission’s 
December 2000 subpoena and subsequent document requests in August 2001, consisting of 
approximately 350 pages. 
15. In October 2001, after having produced those few e-mails, Morgan Stanley 
informed the Commission staff that e-mails from its 1999 back-up tapes were not recoverable 
because the firm had recycled its back-up tapes after one year and, in the process, had written over 
any e-mails on those back-up tapes prior to receiving the Commission’s December 2000 Subpoena.  
When the Commission issued another subpoena in November 2001 seeking all e-mails and back-
up tapes containing e-mail related to certain 1999 and 2000 IPOs, Morgan Stanley again told the 
Commission staff that no 1999 back-up tapes containing e-mail were in existence.  Morgan Stanley 
produced e-mails, including some 1999 e-mails contained on year-2000 back-up tapes, on a rolling 
basis. 
 
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16. When the staff began taking testimony in late 2002, the staff told Morgan Stanley it 
could defer further production of e-mails responsive to the Commission’s subpoenas and requests 
in the IPO Investigation.  Although production was deferred, all responsive e-mail remained under 
subpoena. 
17. Morgan Stanley repeatedly stated, both orally and in writing, that it had ceased 
recycling e-mail back-up tapes and was preserving all e-mails and back-up tapes containing e-mail 
dating from 2000 and later.  For example, on October 2, 2001, Morgan Stanley represented: 
   Our efforts to preserve e-mails began shortly after receiving a subpoena from the 
 SEC late last year.  At that time, we inquired internally how best to preserve and 
 gather e-mails that had been (or might be) requested for 1999 and 2000.  We learned 
 that e-mails for Morgan Stanley individuals are backed up from servers to magnetic tapes 
 nightly, and we concluded that preserving those magnetic tapes would ensure that e-mails 
 were preserved and not discarded, recycled or lost.  We thus requested our Information 
 Technology group (“IT”) to retain and preserve those magnetic tapes Firm-wide going 
               forward.                              
 18.    In May 2002, the Commission staff notified Morgan Stanley that it intended to 
recommend that the Commission institute an enforcement action against Morgan Stanley (“Wells 
notice”) for violating the record retention provisions by recycling back-up tapes containing e-mail 
less than three years old.  The Commission staff offered Morgan Stanley an opportunity to submit 
to the Commission a written explanation of its conduct (“Wells submission”).  In June 2002, prior 
to making its Wells submission, Morgan Stanley provided a power point presentation entitled 
“Morgan Stanley/SEC Discussion re: E-mail Retention” which again represented that, as of 
January 2001, Morgan Stanley was “backing up and retaining all e-mails for a three-year period 
and it ha[d] spent considerable resources in order to avoid future mistakes” (emphasis in original).   
19. Morgan Stanley’s Wells submission in July 2002 represented to the Commission 
that once Morgan Stanley “became aware of the full scope of the email retention issue in January 
 
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2001, [it] took immediate steps to cease the recycling of email [and] secure the remaining 24,000 
magnetic tapes containing email backups from 2000 and early 2001 . . . .” 
20. On December 3, 2002, the Commission sanctioned Morgan Stanley for violating the 
record retention provisions and ordered it to cease and desist from such violations of the record 
retention regulations.  See In the Matter of Deutsche Bank Securities, Inc., et al., Exchange Act 
Rel. No. 46987 (December 3, 2002). 
21. It was not until late-2004 that the Commission staff learned that Morgan Stanley’s 
representations that it had ceased over-writing back-up tapes containing e-mail and secured its e-
mail back-up tapes in January 2001 were untrue. 
B. The Research Analyst Investigation 
22. In April 2002, the Commission commenced the Research Analyst Investigation 
which focused on whether certain broker-dealers, including Morgan Stanley, engaged in 
practices that created conflicts of interest for their research analysts’ coverage of investment 
banking clients.  NASD and the New York Stock Exchange, Inc. (“NYSE”) conducted parallel 
investigations.  On April 29, 2002, the Commission, NASD and the NYSE sent a request to 
Morgan Stanley seeking e-mail for certain Morgan Stanley employees for the period July 1, 1999 
to June 30, 2001 (“the April 2002 Request”).   
23. In response, Morgan Stanley again informed the Commission staff that all of its 
1999 back-up tapes containing e-mail had been over-written.  Morgan Stanley subsequently 
provided the Commission staff with a list that purported to represent all of the e-mail back-up 
dates for the analysts’ e-mail the staff had requested.  That list did not include 1999 e-mail back-
up dates. 
 
7

  
24. In April 2003, as part of a global settlement in the research analyst conflicts of 
interest case, the Commission filed a settled injunctive action against Morgan Stanley.  The 
Commission continued its investigation focusing on the conduct of supervisors at Morgan 
Stanley and the other eleven broker-dealers. 
25. On May 30, 2003, the Commission issued a subpoena to Morgan Stanley seeking 
all e-mails for certain members of the firm’s senior management, including certain investment 
banking and research supervisors, for the period July 1, 1999 through June 30, 2002 (“the May 
2003 Subpoena”).  NASD and the NYSE sent identical requests to Morgan Stanley in their 
parallel investigations.  In June 2003, Morgan Stanley began to produce e-mail responsive to the 
May 2003 Subpoena on a rolling basis, and on November 6, 2003, Morgan Stanley advised the 
Commission staff that it had satisfied its production obligations, as modified by the Commission 
staff. 
26. On December 10, 2003, the Commission sent a subpoena to Morgan Stanley 
requesting e-mail of certain research analysts based in the United States and Asia during 1999, 
2000 and 2001 (“the December 2003 Subpoena”).  In January 2004, Morgan Stanley advised the 
Commission staff that, because of the different retention periods of overseas jurisdictions, e-mail 
back-up tapes were no longer available from Hong Kong, Korea, Singapore and London for 
some periods covered by the December 2003 Subpoena.  Morgan Stanley also advised the 
Commission staff that Morgan Stanley was in the process of loading e-mails from its pre-2003 
back-up tapes into the E-Mail Archive, which would enable Morgan Stanley to locate and 
produce certain e-mail between overseas personnel and personnel based in North America 
resulting in a more complete production.  Morgan Stanley represented that the firm would 
complete the loading of e-mail from historical back-up tapes into the E-Mail Archive by April 
 
8

  
2004 and requested an extension of the production schedule for e-mail of overseas-based 
analysts in order to complete the Migration Project.  Morgan Stanley began producing the e-mail 
of overseas-based analysts in May 2004, after it represented that the Migration Project had been 
completed.  In fact, the Migration Project was not completed until 2005. 
27. On June 3, 2004, the Commission issued a request for e-mail of certain research 
supervisors in Morgan Stanley’s overseas offices during 2000 and 2001 (the “June 2004 
Request”).  Morgan Stanley again used the E-Mail Archive to respond to this request although 
the Migration Project was not complete.  In September 2004, Morgan Stanley represented that its 
production of the e-mails requested by the December 2003 Subpoena and the June 2004 Request 
had been completed.  Relying upon Morgan Stanley’s periodic representations that it had 
completed production of particular persons’ e-mail in response to the December 2003 Subpoena 
and June 2004 Request, the Commission staff took testimony beginning in April 2004 and 
continuing through October 2004. 
C. The Anonymous Tip 
28. In Fall 2004, the Commission staff received an anonymous tip alleging that 
Morgan Stanley had destroyed e-mails and failed to produce e-mails in the IPO and Research 
Analyst Investigations.  According to the anonymous tip, Morgan Stanley had not disclosed to 
the Commission and other regulators the existence of relevant e-mails.  The Commission staff 
immediately conducted an investigation of these allegations.   
 
9

  
II. MORGAN STANLEY’S PRODUCTION FAILURES 
 A. Morgan Stanley Failed for Years to Produce 
  
E-Mail to The Commission 
 
29. In the course of investigating the allegations in the anonymous tip, the Commission 
staff learned for the first time that Morgan Stanley had failed for years to produce e-mail -- 
including 1999 e-mail on back-up tapes which the firm had claimed no longer existed.  Morgan 
Stanley failed to conduct diligent searches for back-up tapes, including tapes that were accessible 
in the firm’s offices and its Storage Facilities.   
30. Starting in or around May 2004 through July 2005, Morgan Stanley located over 
10,000 back-up tapes, many of which contained e-mails for time periods covered by subpoenas and 
requests in the IPO and Research Analyst Investigations.  The newly-found tapes included 
numerous 1999 e-mail back-up tapes that Morgan Stanley had repeatedly represented no longer 
existed.  Despite Morgan Stanley’s assertions that such tapes no longer existed, Morgan Stanley 
found most of these back-up tapes in locations where tapes that backed-up e-mail customarily were 
stored. 
31. The 10,000 tapes included approximately 1,400 tapes found in one of Morgan 
Stanley’s offices in Brooklyn, New York (“the Brooklyn Tapes”) in May 2004.  In early June 
2004, Morgan Stanley’s Law Division was informed about the discovery of the Brooklyn Tapes.  
In early July, 2004, nine lawyers in Morgan Stanley’s Law Division were informed that a 
preliminary analysis showed about 90 of the tapes contained e-mail and some of those tapes dated 
from 1999.  On July 16, 2004, the firm’s tape restoration vendor informed Morgan Stanley’s 
Information Technology (“IT”) group that 112 of the Brooklyn Tapes contained a total of 
 
10

  
2,183,331 “unique e-mails” (that is, e-mails that  were not duplicates of other e-mails in Morgan 
Stanley’s E-Mail Archive).   
32. Morgan Stanley failed to tell the Commission staff about the discovery of the 
Brooklyn Tapes at that time, although the firm was producing e-mails responsive to the December 
2003 Subpoena and June 2004 Request in the Research Analyst Investigation.  Instead, Morgan 
Stanley represented in the summer of 2004 that it had completed e-mail production in the Research 
Analyst Investigation.   
33. On September 28, 2004, Morgan Stanley signed a certification which it provided to 
the Commission on October 13, 2004.  Morgan Stanley certified to the Commission as part of its 
settlement of the IPO case that a diligent search had been made of all files that were reasonably 
likely to contain responsive documents. 
34. Morgan Stanley did not inform the Commission staff of the existence of the 
Brooklyn Tapes until about October 28, 2004, after the Commission staff began investigating the 
allegations in the anonymous tip.  Morgan Stanley represented to the Commission staff that it first 
learned in late October 2004 that the Brooklyn Tapes contained e-mail.  In fact, as noted above, 
Morgan Stanley’s Law Division was informed in July 2004 that about 90 of the Brooklyn Tapes 
contained e-mail.  Morgan Stanley did not load the e-mail from the Brooklyn Tapes into the E-
Mail Archive until early 2005. 
35. After its discovery of the Brooklyn Tapes, Morgan Stanley continued to find 1999 
and 2000 back-up tapes that had not been searched in the IPO and Research Analyst Investigations.  
For example, in January 2005, one of Morgan Stanley’s Storage Facilities informed the firm that it 
had located 169 back-up tapes.  Those tapes contained e-mails for the period May 1999 through 
December 2000. 
 
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36. As late as February 2005, Morgan Stanley continued to provide inaccurate 
information about the status of its productions.  Specifically, on February 10, 2005, Morgan 
Stanley made a Wells submission to the Commission (“the February 2005 Wells Submission”) 
after receiving a notice that the staff intended to recommend an enforcement action against the 
firm for its production failures described in this Complaint.  In its February 2005 Wells 
Submission, Morgan Stanley incorrectly stated that it had migrated all of its pre-2003 e-mail from 
back-up tapes into the E-Mail Archive.   
37. However, just days after its February 2005 Wells Submission, Morgan Stanley 
began searching for -- and finding -- additional back-up tapes containing e-mails.  Between mid-
February and July 7, 2005, Morgan Stanley found approximately 8,770 additional tapes -- 
including back-up tapes containing e-mails from 1999 and other time periods covered by the 
Commission’s subpoenas and requests.  Morgan Stanley advised the Commission staff when it 
learned of these additional back-up tapes and thereafter provided regular updates regarding the 
status of processing these tapes. 
38. By July 2005, Morgan Stanley’s tape restoration vendor had extracted 14.3 million 
unique e-mails from newly found tapes that included time periods covered by the Commission’s 
subpoenas and requests in the IPO and Research Analyst Investigations.  The newly-located tapes 
have yielded thousands of responsive e-mails for the period from 1999 through 2002. 
B. Morgan Stanley Failed For Months to Produce E-Mail  
 Because it Delayed Loading E-Mails into Its E-Mail Archive System 
  
39. Morgan Stanley failed for months to produce e-mail that it had located because it 
delayed loading e-mails into its E-Mail Archive.  Morgan Stanley also told the Commission staff 
 
12

  
in the Research Analyst Investigation that its productions of e-mails were complete, when that 
was inaccurate. 
40. In about September 2003, Morgan Stanley began the Migration Project by 
directing its tape restoration vendor to harvest e-mails from pre-2003 back-up tapes and send the 
harvested e-mail to Morgan Stanley to be uploaded into the E-Mail Archive.   
41. Contrary to Morgan Stanley’s representations to the Commission staff, however, 
Morgan Stanley had not completed the Migration Project in April 2004.  In fact, by August 2004, 
there was a large backlog of e-mail that had been extracted from pre-2003 back-up tapes, 
including the Brooklyn Tapes, at Morgan Stanley waiting to be loaded into the E-Mail Archive.  
At this time, Morgan Stanley was producing e-mail to the Commission in the Research Analyst 
Investigation.  Morgan Stanley knew that the Commission staff was scheduling and conducting 
testimony based on Morgan Stanley’s representations that e-mail production for certain 
witnesses had been completed.  Nevertheless, Morgan Stanley treated the loading of these e-
mails into the E-Mail Archive as a low priority.  An Executive Director in Morgan Stanley’s IT 
group, after consulting with senior IT staff and Morgan Stanley’s compliance department, 
accorded the loading of those e-mails “a lower priority” -- “closer to the bottom” of a long list of 
priorities that included capturing e-mail on a real-time basis.  Morgan Stanley elevated the 
uploading of those e-mails to a high priority in mid-October 2004 after the Commission staff 
began investigating Morgan Stanley’s e-mail production failures. 
42. Morgan Stanley did not tell the Commission staff until November 23, 2004 that 
potentially responsive e-mail had not been loaded into the E-Mail Archive.  It was not until April 
1, 2005 -- almost a year after Morgan Stanley had located the Brooklyn Tapes -- that Morgan 
 
13

  
Stanley began producing e-mails extracted from the Brooklyn Tapes and from other newly-
located tapes. 
C. Morgan Stanley Failed To Produce E-Mail  
  by Recycling Back-Up Tapes Containing E-Mail 
   
43. In the fall of 2004, the Commission staff interviewed numerous Morgan Stanley 
employees in connection with the Commission’s investigation of the allegations in the anonymous 
tip.  Morgan Stanley witnesses consistently stated that back-up tapes containing e-mail had been 
preserved since January 12, 2001 -- the date when a Morgan Stanley compliance officer sent an e-
mail to IT staff instructing IT to cease recycling of back-up tapes containing e-mail that were less 
than three years old.   
44. Nevertheless, the Commission staff asked Morgan Stanley to perform forensic 
testing on a number of Morgan Stanley’s tapes that had backed up e-mail servers.  The staff asked 
Morgan Stanley to test 501 tapes selected by the staff from a total of 19,000 tapes identified by 
Morgan Stanley.  Testing determined that 341 of the tested tapes could have contained e-mail 
requested by subpoenas and requests in the IPO and Research Analyst Investigations.  Of these 341 
tapes, fifty (50) had been over-written after Morgan Stanley received the Commission’s December 
2000 Subpoena in the IPO Investigation or the April 29, 2002 Request in the Analyst Investigation.   
The recycling of these 50 tapes destroyed at least two hundred thousand e-mails, including some e-
mails which likely were responsive to the Commission’s subpoenas and requests in the IPO and 
Research Analyst Investigations.  Recycling of back-up tapes containing e-mail continued through 
at least December 2002 even as Morgan Stanley was representing to the Commission and its staff 
that it had ceased recycling and had secured all of its remaining tapes containing e-mail. 
 
14

  
45. Despite Morgan Stanley’s assurances to the Commission and its staff in the IPO and 
Research Analyst Investigations that it was securing and preserving all back-up tapes containing e-
mail since January 2001, Morgan Stanley failed to safeguard all potentially responsive e-mails and 
back-up tapes.  For example, Morgan Stanley allowed low-level IT staff to implement a number of 
ad-hoc measures which were not sufficient to secure the existing back-up tapes containing e-mail 
or prevent additional recycling.  In 2004, in connection with the Migration Project, Morgan 
Stanley’s IT staff expressed concern that tapes containing e-mail had been recycled despite the 
January 2001 instruction from compliance to cease recycling.  Morgan Stanley, however, took no 
action to investigate whether recycling had occurred and made no disclosure of the issue to the 
Commission. 
D. Morgan Stanley’s E-Mail Production Failures  
  Prejudiced the Commission’s Investigations 
 
46. Morgan Stanley’s production failures prejudiced the IPO and Research Analyst 
Investigations.  By failing for years to find back-up tapes containing e-mail -- including 1999 back-
up tapes -- and by continuing to over-write back-up tapes containing e-mail, Morgan Stanley 
deprived the Commission in both investigations of potential sources of evidence for years, and in 
some instances, permanently. 
47. In the Research Analyst Investigation, Morgan Stanley’s production failures caused 
the Commission staff to delay the testimony of certain witnesses for a year and to recall certain 
witnesses for additional testimony. 
48. The Commission also expended significant additional resources to investigate 
Morgan Stanley’s e-mail production failures which also delayed the Research Analyst 
Investigation and the IPO case.   
 
15

  
FIRST CLAIM FOR RELIEF 
 
Violation of Section 17(b) of the Exchange Act [15 U.S.C. § 78q(b)]  
By Failing to Produce and Failing to Promptly Produce Records 
 
49. Paragraphs 1 through 48 are realleged and incorporated herein by reference. 
50. Under Section 17(b) of the Exchange Act [15 U.S.C. § 78q(b)], all records of 
Morgan Stanley were subject to reasonable periodic, special or other examinations by 
representatives of the Commission.  Morgan Stanley also was required to respond to the 
Commission’s lawfully issued subpoenas and requests.  
51. As alleged above, from December 11, 2000 through at least July 2005, Morgan 
Stanley failed to produce and failed to promptly produce e-mails sought by the Commission’s 
subpoenas and requests in the IPO and Research Analyst Investigations.  Specifically, after 
receiving the Commission’s subpoenas and requests beginning on December 11, 2000, Morgan 
Stanley:  (1) failed timely to produce e-mail -- including 1999 e-mail from 1999 back-up tapes 
which it wrongly represented no longer existed -- because it failed for years to search for 
thousands of back-up tapes containing e-mail which were accessible at the firm and Storage 
Facilities; (2) failed timely to produce e-mail because it delayed loading e-mail extracted from 
back-up tapes into its E-Mail Archive; and (3) failed to produce e-mails by over-writing back-up 
tapes containing e-mail, thereby destroying potentially responsive e-mails.  
52. By reason of the foregoing, Morgan Stanley violated Section 17(b) of the 
Exchange Act [15 U.S.C. § 78q(b)]. 
 
16

  
SECOND CLAIM FOR RELIEF 
Violation of Exchange Act Rule 17a-4(j) [17 C.F.R. § 240.17a-4(j)] 
By Failing to Produce and Failing Promptly to Produce Records 
 
53. Paragraphs 1 through 48 are realleged and incorporated herein by reference. 
 54. Exchange Act Rule 17a-4(j) [17 C.F.R. § 240.17a-4(j)] requires members, brokers 
and dealers “to furnish promptly to a representative of the Commission . . . copies of those 
records . . . which are required to be preserved [under Rule 17a-4 and] are requested by the 
representative of the Commission.”  After May 3, 2003, Rule 17a-4(j) was amended to also 
require members, brokers and dealers to furnish promptly “any other records of the member, 
broker or dealer subject to examination under Section 17(b) of the Exchange Act [15 U.S.C. § 
78q(b)] that are requested by the representative of the Commission.”  
 55. Morgan Stanley violated Rule 17a-4(j) by failing to produce and failing promptly 
to produce e-mails less than three years old (i.e., records required to be preserved under Rule 
17a-4) which were requested by the Commission’s subpoenas and requests in the IPO and 
Research Analyst Investigations because it did not conduct diligent searches for back-up tapes 
containing e-mail and over-wrote back-up tapes containing potentially responsive e-mails.  After 
May 3, 2003, Morgan Stanley also violated Rule 17a-4(j) by failing promptly to produce e-mails 
requested by the Commission’s subpoenas and requests in the Research Analyst Investigation 
because it did not conduct diligent searches for back-up tapes containing e-mail and delayed 
loading e-mails into its E-Mail Archive. 
 56. By reason of the foregoing, Morgan Stanley violated Rule17a-4(j) of the 
Exchange Act [17 C.F.R. § 240.17a-4(j)]. 
 
 
17

  
RELIEF REQUESTED 
               WHEREFORE, the Commission respectfully requests that this Court enter an Order 
that:  
I. 
Permanently restrains and enjoins Morgan Stanley from violating, directly or indirectly, 
Section 17(b) of the Exchange Act [15 U.S.C. § 78q(b)] and Exchange Act Rule 17a-4(j) [17 
C.F.R. § 240.17a-4(j)];  
II. 
Requires Morgan Stanley to pay a civil money penalty pursuant to Section 21(d)(3) of the 
Exchange Act [15 U.S.C. § 78u(d)(3)]; 
III. 
 Grants such other and further relief as the Court may deem just and proper including, 
but not limited to, directing Morgan Stanley to:  (a) institute policies, procedures and training 
reasonably designed to prevent future violations of Section 17(b) of the Exchange Act and 
Exchange Act Rule 17a-4(j); and (b) retain an independent consultant to audit the 
implementation and effectiveness of such policies, procedures and training and provide a report 
of its comments, conclusions and recommendations to the Commission; and  
 
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IV. 
Retains jurisdiction of this action in order to implement and carry out the terms of any 
Orders that may be entered herein. 
Dated:  May 10, 2006. 
Respectfully submitted, 
 
 
                                                                           ___________________________            
                                                                           Antonia            Chion            (DC            Bar            #358014)            
         [email protected]
 
 
 
 
 
                                                                           ____________________________            
      Arthur S. Lowry (DC Bar #421266) 
         [email protected]
                                                                           ATTORNEY            TO            BE            NOTICED            
             
          
                                                                           Christopher            R.            Conte            (D.C.            Bar            #419774)            
                                                                           Yuri            B.            Zelinsky            
         Lisa Deitch 
         Kara Brockmeyer   
                                                                           Ann            Rosenfield            (DC            Bar            #418316)            
                                                                           Michael            Fuchs            (DC            Bar            #431440)            
 
                                                                           Attorneys            for            Plaintiff            
         United States Securities and Exchange Commission  
                                                                           100            F            Street,            N.E.                                                            
                                                                           Washington            D.C.            20549-4030            
                                                                           Telephone:                                    (202)            551-4918            (Lowry)            
      Facsimile:    (202) 772-9245 (Lowry) 
 
19

UNITED STATES DISTRICT COURT 
FOR THE DISTRICT OF COLUMBIA 

_____________________________________________ 
             : 
UNITED STATES SECURITIES AND        : 
EXCHANGE COMMISSION,         : 
100 F Street, N.E.           : 
Washington, D.C. 20549,          :  Civ. No. 060882 (RCL) 
             :            
                Plaintiff,       :      
             :  
  v.           :           
              :           
MORGAN STANLEY & CO. INCORPORATED,    :  
1585 Broadway           :  
New York, New York 10036          :  
             : 

 Defendant.       :  
_____________________________________________: 
 

COMPLAINT 
 

Plaintiff United States Securities and Exchange Commission (“Commission”) alleges the 

following against defendant Morgan Stanley & Co. Incorporated (“Morgan Stanley” or “the 

firm”): 

1. From December 11, 2000 through at least July 2005, Morgan Stanley failed to 

produce tens of thousands of e-mails sought by Commission subpoenas and other requests issued 

in the course of two Commission investigations:  an investigation into Morgan Stanley’s 

practices in allocating shares of stock in initial public offerings (“the IPO Investigation”) and an 

investigation into conflicts of interest between the firm’s research and investment banking 

practices (“the Research Analyst Investigation”).  As a result, Morgan Stanley violated the 

provisions of the federal securities laws requiring Morgan Stanley, a regulated broker-dealer, to 

timely produce its records and documents to the Commission. 



  

2. Morgan Stanley did not search diligently for back-up tapes containing responsive 

e-mails until 2005, over four years after being served with Commission subpoenas and requests 

in the two investigations.  As a result, Morgan Stanley failed to timely produce e-mails contained 

on thousands of back-up tapes.  These back-up tapes were readily accessible to Morgan Stanley 

in its offices and the facilities of its off-site storage providers (“Storage Facilities”).  To date, 

these tapes have yielded 14.3 million e-mails that Morgan Stanley had not previously searched in 

responding to the investigations.   

3. During the Commission’s investigations, Morgan Stanley made numerous 

misstatements regarding the status and completeness of its productions and the unavailability of 

certain documents.  For example, Morgan Stanley asserted in both the IPO and the Research 

Analyst Investigations that it had not retained any 1999 tapes that backed-up e-mail.  In fact, 

numerous back-up tapes from 1999 existed, and Morgan Stanley began producing e-mails from 

those back-up tapes in 2005. 

4. Morgan Stanley also did not timely produce e-mails sought in the Research 

Analyst Investigation because it delayed loading millions of e-mails into its searchable e-mail 

archive database (“the E-Mail Archive”) and searching them for responsive e-mails.  The firm 

had told the Commission staff that its e-mail productions were “complete.”  In fact, this process 

was not “complete,” and Morgan Stanley made the loading of these e-mails into the E-Mail 

Archive a low priority. 

5. In addition, Morgan Stanley failed to produce responsive e-mails by over-writing 

back-up tapes after receiving Commission subpoenas and requests despite its repeated 

representations to the Commission and the staff that all over-writing had ceased in January 2001.  

Morgan Stanley’s continued over-writing destroyed at least two hundred thousand e-mails, 

 2



  

including some e-mails which likely were responsive to the Commission’s subpoenas and 

requests. 

 6. These repeated violations of the production obligations compromised the 

Commission’s ability to effectively investigate and determine whether Morgan Stanley had 

complied with the federal securities laws.  Morgan Stanley’s conduct delayed the Research 

Analyst Investigation and prejudiced both the IPO and Research Analyst Investigations by 

depriving the Commission of evidence and potential sources of information relevant to those 

investigations for years, and in some cases, permanently. 

 7. By engaging in the conduct described in this Complaint, Morgan Stanley violated 

the production provisions of the federal securities laws, Section 17(b) of the Securities Exchange 

Act of 1934 (“Exchange Act”) [15 U.S.C. § 78q(b)] and Exchange Act Rule 17a-4(j) [17 C.F.R. 

§ 240.17a-4(j)], and is likely to continue to engage in such conduct unless and until it is enjoined 

by this Court.  Accordingly, the Commission seeks an Order of this Court permanently enjoining 

Morgan Stanley from future violations and imposing civil monetary penalties. 

JURISDICTION AND VENUE

8. The Commission brings this action pursuant to Section 21(d) of the Exchange Act 

[15 U.S.C. § 78u(d)] to restrain and permanently enjoin Morgan Stanley from violating Section 

17(b) of the Exchange Act [15 U.S.C. § 78q(b)] and Exchange Act Rule 17a-4(j) [17 C.F.R. § 

240.17a-4(j)]. 

9. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e) and 

27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78aa].  

10. Venue lies in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 

78aa].  Morgan Stanley is found and transacts business in this District. 

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DEFENDANT 

11. Morgan Stanley is a Delaware corporation with its headquarters and principal 

executive offices in New York, New York.  Morgan Stanley was and continues to be registered 

with the Commission as a broker-dealer.  Morgan Stanley is licensed to conduct securities 

business on a nationwide basis.  Morgan Stanley is an international financial services firm that 

provides securities underwriting services, sales trading services, merger and acquisition advisory 

services, private banking services and equity research.  Employees of Morgan Stanley received 

and sent e-mail in conducting Morgan Stanley’s business as a broker-dealer.   

FACTS 

I. THE COMMISSION ISSUED SUBPOENAS AND DOCUMENT 
 REQUESTS TO MORGAN STANLEY FOR ITS E-MAILS  
 AND BACK-UP TAPES CONTAINING E-MAIL 

 
12. Beginning in December 2000 and continuing through October 2004, the 

Commission issued subpoenas and document requests to Morgan Stanley for e-mails and back-up 

tapes containing e-mail in the IPO and Research Analyst Investigations.  Prior to 2003, e-mail sent 

or received by Morgan Stanley employees was backed-up on magnetic tapes.  In early 2003, 

Morgan Stanley began using the E-Mail Archive which preserved e-mails sent or received by 

Morgan Stanley employees on a going-forward basis in a database that was more readily 

searchable.  The E-Mail Archive allowed Morgan Stanley to discontinue its use of tapes which 

Morgan Stanley had used to back-up and search for e-mail sent prior to January 2003.  Later in 

2003, Morgan Stanley began loading its pre-2003 e-mails stored on back-up tapes into the E-Mail 

Archive so that its pre-2003 e-mails would be more accessible and more readily searchable (“the 

Migration Project”). 

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A. The IPO Investigation 

13. On December 11, 2000, the Commission issued a subpoena to Morgan Stanley for 

documents, including e-mails and back-up tapes containing e-mails, relating to Morgan Stanley’s 

allocation of IPO shares during the period 1999-2000 (“the December 2000 Subpoena”).  In the 

cover letter to the subpoena, the Commission specifically instructed Morgan Stanley to retain all 

e-mails relating to its IPOs during 1999 and 2000.  At that time, Morgan Stanley was also 

reminded that Exchange Act Release No. 38245 (February 5, 1997) states that electronic mail 

communications relating to a broker-dealer’s “business as such” must be retained for not less 

than three years pursuant to Exchange Act Rule 17a-4(b)(4). 

14. From March 2001 through May 2001, the Commission sent two additional 

document requests to Morgan Stanley seeking e-mails relating to the firm’s IPOs in 1999 and 

2000.  Morgan Stanley made its first production of e-mails in response to the Commission’s 

December 2000 subpoena and subsequent document requests in August 2001, consisting of 

approximately 350 pages. 

15. In October 2001, after having produced those few e-mails, Morgan Stanley 

informed the Commission staff that e-mails from its 1999 back-up tapes were not recoverable 

because the firm had recycled its back-up tapes after one year and, in the process, had written over 

any e-mails on those back-up tapes prior to receiving the Commission’s December 2000 Subpoena.  

When the Commission issued another subpoena in November 2001 seeking all e-mails and back-

up tapes containing e-mail related to certain 1999 and 2000 IPOs, Morgan Stanley again told the 

Commission staff that no 1999 back-up tapes containing e-mail were in existence.  Morgan Stanley 

produced e-mails, including some 1999 e-mails contained on year-2000 back-up tapes, on a rolling 

basis. 

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16. When the staff began taking testimony in late 2002, the staff told Morgan Stanley it 

could defer further production of e-mails responsive to the Commission’s subpoenas and requests 

in the IPO Investigation.  Although production was deferred, all responsive e-mail remained under 

subpoena. 

17. Morgan Stanley repeatedly stated, both orally and in writing, that it had ceased 

recycling e-mail back-up tapes and was preserving all e-mails and back-up tapes containing e-mail 

dating from 2000 and later.  For example, on October 2, 2001, Morgan Stanley represented: 

 Our efforts to preserve e-mails began shortly after receiving a subpoena from the 
 SEC late last year.  At that time, we inquired internally how best to preserve and 
 gather e-mails that had been (or might be) requested for 1999 and 2000.  We learned 
 that e-mails for Morgan Stanley individuals are backed up from servers to magnetic tapes 
 nightly, and we concluded that preserving those magnetic tapes would ensure that e-mails 
 were preserved and not discarded, recycled or lost.  We thus requested our Information 
 Technology group (“IT”) to retain and preserve those magnetic tapes Firm-wide going 
 forward.  

 18. In May 2002, the Commission staff notified Morgan Stanley that it intended to 

recommend that the Commission institute an enforcement action against Morgan Stanley (“Wells 

notice”) for violating the record retention provisions by recycling back-up tapes containing e-mail 

less than three years old.  The Commission staff offered Morgan Stanley an opportunity to submit 

to the Commission a written explanation of its conduct (“Wells submission”).  In June 2002, prior 

to making its Wells submission, Morgan Stanley provided a power point presentation entitled 

“Morgan Stanley/SEC Discussion re: E-mail Retention” which again represented that, as of 

January 2001, Morgan Stanley was “backing up and retaining all e-mails for a three-year period 

and it ha[d] spent considerable resources in order to avoid future mistakes” (emphasis in original).   

19. Morgan Stanley’s Wells submission in July 2002 represented to the Commission 

that once Morgan Stanley “became aware of the full scope of the email retention issue in January 

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2001, [it] took immediate steps to cease the recycling of email [and] secure the remaining 24,000 

magnetic tapes containing email backups from 2000 and early 2001 . . . .” 

20. On December 3, 2002, the Commission sanctioned Morgan Stanley for violating the 

record retention provisions and ordered it to cease and desist from such violations of the record 

retention regulations.  See In the Matter of Deutsche Bank Securities, Inc., et al., Exchange Act 

Rel. No. 46987 (December 3, 2002). 

21. It was not until late-2004 that the Commission staff learned that Morgan Stanley’s 

representations that it had ceased over-writing back-up tapes containing e-mail and secured its e-

mail back-up tapes in January 2001 were untrue. 

B. The Research Analyst Investigation 

22. In April 2002, the Commission commenced the Research Analyst Investigation 

which focused on whether certain broker-dealers, including Morgan Stanley, engaged in 

practices that created conflicts of interest for their research analysts’ coverage of investment 

banking clients.  NASD and the New York Stock Exchange, Inc. (“NYSE”) conducted parallel 

investigations.  On April 29, 2002, the Commission, NASD and the NYSE sent a request to 

Morgan Stanley seeking e-mail for certain Morgan Stanley employees for the period July 1, 1999 

to June 30, 2001 (“the April 2002 Request”).   

23. In response, Morgan Stanley again informed the Commission staff that all of its 

1999 back-up tapes containing e-mail had been over-written.  Morgan Stanley subsequently 

provided the Commission staff with a list that purported to represent all of the e-mail back-up 

dates for the analysts’ e-mail the staff had requested.  That list did not include 1999 e-mail back-

up dates. 

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24. In April 2003, as part of a global settlement in the research analyst conflicts of 

interest case, the Commission filed a settled injunctive action against Morgan Stanley.  The 

Commission continued its investigation focusing on the conduct of supervisors at Morgan 

Stanley and the other eleven broker-dealers. 

25. On May 30, 2003, the Commission issued a subpoena to Morgan Stanley seeking 

all e-mails for certain members of the firm’s senior management, including certain investment 

banking and research supervisors, for the period July 1, 1999 through June 30, 2002 (“the May 

2003 Subpoena”).  NASD and the NYSE sent identical requests to Morgan Stanley in their 

parallel investigations.  In June 2003, Morgan Stanley began to produce e-mail responsive to the 

May 2003 Subpoena on a rolling basis, and on November 6, 2003, Morgan Stanley advised the 

Commission staff that it had satisfied its production obligations, as modified by the Commission 

staff. 

26. On December 10, 2003, the Commission sent a subpoena to Morgan Stanley 

requesting e-mail of certain research analysts based in the United States and Asia during 1999, 

2000 and 2001 (“the December 2003 Subpoena”).  In January 2004, Morgan Stanley advised the 

Commission staff that, because of the different retention periods of overseas jurisdictions, e-mail 

back-up tapes were no longer available from Hong Kong, Korea, Singapore and London for 

some periods covered by the December 2003 Subpoena.  Morgan Stanley also advised the 

Commission staff that Morgan Stanley was in the process of loading e-mails from its pre-2003 

back-up tapes into the E-Mail Archive, which would enable Morgan Stanley to locate and 

produce certain e-mail between overseas personnel and personnel based in North America 

resulting in a more complete production.  Morgan Stanley represented that the firm would 

complete the loading of e-mail from historical back-up tapes into the E-Mail Archive by April 

 8



  

2004 and requested an extension of the production schedule for e-mail of overseas-based 

analysts in order to complete the Migration Project.  Morgan Stanley began producing the e-mail 

of overseas-based analysts in May 2004, after it represented that the Migration Project had been 

completed.  In fact, the Migration Project was not completed until 2005. 

27. On June 3, 2004, the Commission issued a request for e-mail of certain research 

supervisors in Morgan Stanley’s overseas offices during 2000 and 2001 (the “June 2004 

Request”).  Morgan Stanley again used the E-Mail Archive to respond to this request although 

the Migration Project was not complete.  In September 2004, Morgan Stanley represented that its 

production of the e-mails requested by the December 2003 Subpoena and the June 2004 Request 

had been completed.  Relying upon Morgan Stanley’s periodic representations that it had 

completed production of particular persons’ e-mail in response to the December 2003 Subpoena 

and June 2004 Request, the Commission staff took testimony beginning in April 2004 and 

continuing through October 2004. 

C. The Anonymous Tip 

28. In Fall 2004, the Commission staff received an anonymous tip alleging that 

Morgan Stanley had destroyed e-mails and failed to produce e-mails in the IPO and Research 

Analyst Investigations.  According to the anonymous tip, Morgan Stanley had not disclosed to 

the Commission and other regulators the existence of relevant e-mails.  The Commission staff 

immediately conducted an investigation of these allegations.   

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II. MORGAN STANLEY’S PRODUCTION FAILURES 

 A. Morgan Stanley Failed for Years to Produce 
  E-Mail to The Commission 
 

29. In the course of investigating the allegations in the anonymous tip, the Commission 

staff learned for the first time that Morgan Stanley had failed for years to produce e-mail -- 

including 1999 e-mail on back-up tapes which the firm had claimed no longer existed.  Morgan 

Stanley failed to conduct diligent searches for back-up tapes, including tapes that were accessible 

in the firm’s offices and its Storage Facilities.   

30. Starting in or around May 2004 through July 2005, Morgan Stanley located over 

10,000 back-up tapes, many of which contained e-mails for time periods covered by subpoenas and 

requests in the IPO and Research Analyst Investigations.  The newly-found tapes included 

numerous 1999 e-mail back-up tapes that Morgan Stanley had repeatedly represented no longer 

existed.  Despite Morgan Stanley’s assertions that such tapes no longer existed, Morgan Stanley 

found most of these back-up tapes in locations where tapes that backed-up e-mail customarily were 

stored. 

31. The 10,000 tapes included approximately 1,400 tapes found in one of Morgan 

Stanley’s offices in Brooklyn, New York (“the Brooklyn Tapes”) in May 2004.  In early June 

2004, Morgan Stanley’s Law Division was informed about the discovery of the Brooklyn Tapes.  

In early July, 2004, nine lawyers in Morgan Stanley’s Law Division were informed that a 

preliminary analysis showed about 90 of the tapes contained e-mail and some of those tapes dated 

from 1999.  On July 16, 2004, the firm’s tape restoration vendor informed Morgan Stanley’s 

Information Technology (“IT”) group that 112 of the Brooklyn Tapes contained a total of 

 10



  

2,183,331 “unique e-mails” (that is, e-mails that  were not duplicates of other e-mails in Morgan 

Stanley’s E-Mail Archive).   

32. Morgan Stanley failed to tell the Commission staff about the discovery of the 

Brooklyn Tapes at that time, although the firm was producing e-mails responsive to the December 

2003 Subpoena and June 2004 Request in the Research Analyst Investigation.  Instead, Morgan 

Stanley represented in the summer of 2004 that it had completed e-mail production in the Research 

Analyst Investigation.   

33. On September 28, 2004, Morgan Stanley signed a certification which it provided to 

the Commission on October 13, 2004.  Morgan Stanley certified to the Commission as part of its 

settlement of the IPO case that a diligent search had been made of all files that were reasonably 

likely to contain responsive documents. 

34. Morgan Stanley did not inform the Commission staff of the existence of the 

Brooklyn Tapes until about October 28, 2004, after the Commission staff began investigating the 

allegations in the anonymous tip.  Morgan Stanley represented to the Commission staff that it first 

learned in late October 2004 that the Brooklyn Tapes contained e-mail.  In fact, as noted above, 

Morgan Stanley’s Law Division was informed in July 2004 that about 90 of the Brooklyn Tapes 

contained e-mail.  Morgan Stanley did not load the e-mail from the Brooklyn Tapes into the E-

Mail Archive until early 2005. 

35. After its discovery of the Brooklyn Tapes, Morgan Stanley continued to find 1999 

and 2000 back-up tapes that had not been searched in the IPO and Research Analyst Investigations.  

For example, in January 2005, one of Morgan Stanley’s Storage Facilities informed the firm that it 

had located 169 back-up tapes.  Those tapes contained e-mails for the period May 1999 through 

December 2000. 

 11



  

36. As late as February 2005, Morgan Stanley continued to provide inaccurate 

information about the status of its productions.  Specifically, on February 10, 2005, Morgan 

Stanley made a Wells submission to the Commission (“the February 2005 Wells Submission”) 

after receiving a notice that the staff intended to recommend an enforcement action against the 

firm for its production failures described in this Complaint.  In its February 2005 Wells 

Submission, Morgan Stanley incorrectly stated that it had migrated all of its pre-2003 e-mail from 

back-up tapes into the E-Mail Archive.   

37. However, just days after its February 2005 Wells Submission, Morgan Stanley 

began searching for -- and finding -- additional back-up tapes containing e-mails.  Between mid-

February and July 7, 2005, Morgan Stanley found approximately 8,770 additional tapes -- 

including back-up tapes containing e-mails from 1999 and other time periods covered by the 

Commission’s subpoenas and requests.  Morgan Stanley advised the Commission staff when it 

learned of these additional back-up tapes and thereafter provided regular updates regarding the 

status of processing these tapes. 

38. By July 2005, Morgan Stanley’s tape restoration vendor had extracted 14.3 million 

unique e-mails from newly found tapes that included time periods covered by the Commission’s 

subpoenas and requests in the IPO and Research Analyst Investigations.  The newly-located tapes 

have yielded thousands of responsive e-mails for the period from 1999 through 2002. 

B. Morgan Stanley Failed For Months to Produce E-Mail  
 Because it Delayed Loading E-Mails into Its E-Mail Archive System 
  

39. Morgan Stanley failed for months to produce e-mail that it had located because it 

delayed loading e-mails into its E-Mail Archive.  Morgan Stanley also told the Commission staff 

 12



  

in the Research Analyst Investigation that its productions of e-mails were complete, when that 

was inaccurate. 

40. In about September 2003, Morgan Stanley began the Migration Project by 

directing its tape restoration vendor to harvest e-mails from pre-2003 back-up tapes and send the 

harvested e-mail to Morgan Stanley to be uploaded into the E-Mail Archive.   

41. Contrary to Morgan Stanley’s representations to the Commission staff, however, 

Morgan Stanley had not completed the Migration Project in April 2004.  In fact, by August 2004, 

there was a large backlog of e-mail that had been extracted from pre-2003 back-up tapes, 

including the Brooklyn Tapes, at Morgan Stanley waiting to be loaded into the E-Mail Archive.  

At this time, Morgan Stanley was producing e-mail to the Commission in the Research Analyst 

Investigation.  Morgan Stanley knew that the Commission staff was scheduling and conducting 

testimony based on Morgan Stanley’s representations that e-mail production for certain 

witnesses had been completed.  Nevertheless, Morgan Stanley treated the loading of these e-

mails into the E-Mail Archive as a low priority.  An Executive Director in Morgan Stanley’s IT 

group, after consulting with senior IT staff and Morgan Stanley’s compliance department, 

accorded the loading of those e-mails “a lower priority” -- “closer to the bottom” of a long list of 

priorities that included capturing e-mail on a real-time basis.  Morgan Stanley elevated the 

uploading of those e-mails to a high priority in mid-October 2004 after the Commission staff 

began investigating Morgan Stanley’s e-mail production failures. 

42. Morgan Stanley did not tell the Commission staff until November 23, 2004 that 

potentially responsive e-mail had not been loaded into the E-Mail Archive.  It was not until April 

1, 2005 -- almost a year after Morgan Stanley had located the Brooklyn Tapes -- that Morgan 

 13



  

Stanley began producing e-mails extracted from the Brooklyn Tapes and from other newly-

located tapes. 

C. Morgan Stanley Failed To Produce E-Mail  
  by Recycling Back-Up Tapes Containing E-Mail 
   
43. In the fall of 2004, the Commission staff interviewed numerous Morgan Stanley 

employees in connection with the Commission’s investigation of the allegations in the anonymous 

tip.  Morgan Stanley witnesses consistently stated that back-up tapes containing e-mail had been 

preserved since January 12, 2001 -- the date when a Morgan Stanley compliance officer sent an e-

mail to IT staff instructing IT to cease recycling of back-up tapes containing e-mail that were less 

than three years old.   

44. Nevertheless, the Commission staff asked Morgan Stanley to perform forensic 

testing on a number of Morgan Stanley’s tapes that had backed up e-mail servers.  The staff asked 

Morgan Stanley to test 501 tapes selected by the staff from a total of 19,000 tapes identified by 

Morgan Stanley.  Testing determined that 341 of the tested tapes could have contained e-mail 

requested by subpoenas and requests in the IPO and Research Analyst Investigations.  Of these 341 

tapes, fifty (50) had been over-written after Morgan Stanley received the Commission’s December 

2000 Subpoena in the IPO Investigation or the April 29, 2002 Request in the Analyst Investigation.   

The recycling of these 50 tapes destroyed at least two hundred thousand e-mails, including some e-

mails which likely were responsive to the Commission’s subpoenas and requests in the IPO and 

Research Analyst Investigations.  Recycling of back-up tapes containing e-mail continued through 

at least December 2002 even as Morgan Stanley was representing to the Commission and its staff 

that it had ceased recycling and had secured all of its remaining tapes containing e-mail. 

 14



  

45. Despite Morgan Stanley’s assurances to the Commission and its staff in the IPO and 

Research Analyst Investigations that it was securing and preserving all back-up tapes containing e-

mail since January 2001, Morgan Stanley failed to safeguard all potentially responsive e-mails and 

back-up tapes.  For example, Morgan Stanley allowed low-level IT staff to implement a number of 

ad-hoc measures which were not sufficient to secure the existing back-up tapes containing e-mail 

or prevent additional recycling.  In 2004, in connection with the Migration Project, Morgan 

Stanley’s IT staff expressed concern that tapes containing e-mail had been recycled despite the 

January 2001 instruction from compliance to cease recycling.  Morgan Stanley, however, took no 

action to investigate whether recycling had occurred and made no disclosure of the issue to the 

Commission. 

D. Morgan Stanley’s E-Mail Production Failures  
  Prejudiced the Commission’s Investigations 

 

46. Morgan Stanley’s production failures prejudiced the IPO and Research Analyst 

Investigations.  By failing for years to find back-up tapes containing e-mail -- including 1999 back-

up tapes -- and by continuing to over-write back-up tapes containing e-mail, Morgan Stanley 

deprived the Commission in both investigations of potential sources of evidence for years, and in 

some instances, permanently. 

47. In the Research Analyst Investigation, Morgan Stanley’s production failures caused 

the Commission staff to delay the testimony of certain witnesses for a year and to recall certain 

witnesses for additional testimony. 

48. The Commission also expended significant additional resources to investigate 

Morgan Stanley’s e-mail production failures which also delayed the Research Analyst 

Investigation and the IPO case.   

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FIRST CLAIM FOR RELIEF 
 

Violation of Section 17(b) of the Exchange Act [15 U.S.C. § 78q(b)]  
By Failing to Produce and Failing to Promptly Produce Records 

 
49. Paragraphs 1 through 48 are realleged and incorporated herein by reference. 

50. Under Section 17(b) of the Exchange Act [15 U.S.C. § 78q(b)], all records of 

Morgan Stanley were subject to reasonable periodic, special or other examinations by 

representatives of the Commission.  Morgan Stanley also was required to respond to the 

Commission’s lawfully issued subpoenas and requests.  

51. As alleged above, from December 11, 2000 through at least July 2005, Morgan 

Stanley failed to produce and failed to promptly produce e-mails sought by the Commission’s 

subpoenas and requests in the IPO and Research Analyst Investigations.  Specifically, after 

receiving the Commission’s subpoenas and requests beginning on December 11, 2000, Morgan 

Stanley:  (1) failed timely to produce e-mail -- including 1999 e-mail from 1999 back-up tapes 

which it wrongly represented no longer existed -- because it failed for years to search for 

thousands of back-up tapes containing e-mail which were accessible at the firm and Storage 

Facilities; (2) failed timely to produce e-mail because it delayed loading e-mail extracted from 

back-up tapes into its E-Mail Archive; and (3) failed to produce e-mails by over-writing back-up 

tapes containing e-mail, thereby destroying potentially responsive e-mails.  

52. By reason of the foregoing, Morgan Stanley violated Section 17(b) of the 

Exchange Act [15 U.S.C. § 78q(b)]. 

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SECOND CLAIM FOR RELIEF 

Violation of Exchange Act Rule 17a-4(j) [17 C.F.R. § 240.17a-4(j)] 
By Failing to Produce and Failing Promptly to Produce Records 

 
53. Paragraphs 1 through 48 are realleged and incorporated herein by reference. 

 54. Exchange Act Rule 17a-4(j) [17 C.F.R. § 240.17a-4(j)] requires members, brokers 

and dealers “to furnish promptly to a representative of the Commission . . . copies of those 

records . . . which are required to be preserved [under Rule 17a-4 and] are requested by the 

representative of the Commission.”  After May 3, 2003, Rule 17a-4(j) was amended to also 

require members, brokers and dealers to furnish promptly “any other records of the member, 

broker or dealer subject to examination under Section 17(b) of the Exchange Act [15 U.S.C. § 

78q(b)] that are requested by the representative of the Commission.”  

 55. Morgan Stanley violated Rule 17a-4(j) by failing to produce and failing promptly 

to produce e-mails less than three years old (i.e., records required to be preserved under Rule 

17a-4) which were requested by the Commission’s subpoenas and requests in the IPO and 

Research Analyst Investigations because it did not conduct diligent searches for back-up tapes 

containing e-mail and over-wrote back-up tapes containing potentially responsive e-mails.  After 

May 3, 2003, Morgan Stanley also violated Rule 17a-4(j) by failing promptly to produce e-mails 

requested by the Commission’s subpoenas and requests in the Research Analyst Investigation 

because it did not conduct diligent searches for back-up tapes containing e-mail and delayed 

loading e-mails into its E-Mail Archive. 

 56. By reason of the foregoing, Morgan Stanley violated Rule17a-4(j) of the 

Exchange Act [17 C.F.R. § 240.17a-4(j)]. 

 

 17



  

RELIEF REQUESTED 

 WHEREFORE, the Commission respectfully requests that this Court enter an Order 

that:  

I. 

Permanently restrains and enjoins Morgan Stanley from violating, directly or indirectly, 

Section 17(b) of the Exchange Act [15 U.S.C. § 78q(b)] and Exchange Act Rule 17a-4(j) [17 

C.F.R. § 240.17a-4(j)];  

II. 

Requires Morgan Stanley to pay a civil money penalty pursuant to Section 21(d)(3) of the 

Exchange Act [15 U.S.C. § 78u(d)(3)]; 

III. 

 Grants such other and further relief as the Court may deem just and proper including, 

but not limited to, directing Morgan Stanley to:  (a) institute policies, procedures and training 

reasonably designed to prevent future violations of Section 17(b) of the Exchange Act and 

Exchange Act Rule 17a-4(j); and (b) retain an independent consultant to audit the 

implementation and effectiveness of such policies, procedures and training and provide a report 

of its comments, conclusions and recommendations to the Commission; and  

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IV. 

Retains jurisdiction of this action in order to implement and carry out the terms of any 

Orders that may be entered herein. 

Dated:  May 10, 2006. 

Respectfully submitted, 

 

 

      ___________________________ 
      Antonia Chion (DC Bar #358014) 
      [email protected]
 
 
 
 
 
      ____________________________ 
      Arthur S. Lowry (DC Bar #421266) 
      [email protected]
      ATTORNEY TO BE NOTICED 
          
       
      Christopher R. Conte (D.C. Bar #419774) 
      Yuri B. Zelinsky 
      Lisa Deitch 
      Kara Brockmeyer   
      Ann Rosenfield (DC Bar #418316) 
      Michael Fuchs (DC Bar #431440) 
 
      Attorneys for Plaintiff 
      United States Securities and Exchange Commission  
      100 F Street, N.E.     
      Washington D.C. 20549-4030 
      Telephone:   (202) 551-4918 (Lowry) 
      Facsimile:    (202) 772-9245 (Lowry) 

 19

mailto:[email protected]
mailto:[email protected]

	UNITED STATES DISTRICT COURT 
	FOR THE DISTRICT OF COLUMBIA