Application security

NASD accuses Morgan Stanley of lying about losing emails


The National Association of Securities Dealers (NASD) has accused investment house Morgan Stanley of lying that millions of emails it possessed were lost in the terrorist attacks on the World Trade Center.

The NASD claims Morgan Stanley routinely fails to provide emails dated prior to Sept. 11, 2001 to claimants and regulators involved in arbitration proceedings - even though the company deployed backup tapes to replicate the emails and others were saved on users' PCs, the complaint said.

But Morgan Stanley later did destroy its saved emails by overwriting backup tapes and by permitting users to permanently delete messages, the complaint said.

"It is essential that firms comply with discovery obligations in arbitration proceedings and respond fully and truthfully to regulatory requests," said James S. Shorris, executive vice president and head of enforcement for NASD.

Morgan Stanley, in a statement emailed to, said it plans to dispute the charges.

"The 9/11 attacks destroyed the firm's legacy Dean Witter email servers and archives," the statement said. "When prior management learned there were still backup emails from that era that might bear on arbitrations, it informed regulators, plaintiffs' counsel and outside counsel; built searchable databases; produced newly discovered emails; and cooperated fully with the NASD's review."

"Current management has made extensive efforts to reach a fair and appropriate settlement of this matter, but the NASD's disproportionate and unprecedented demands leave us no choice but to litigate," the statement concluded. "We look forward to having this issue heard by an impartial hearing panel."

Morgan Stanley agreed earlier this year to pay $15 million in civil fines to settle Securities and Exchange Commission charges it failed to retain tens of thousands of emails sought in cases against the brokerage firm.

In the wake of that settlement, new amendments have been made to the Federal Rules of Civil Procedure, which govern the role of electronic discovery in cases of civil litigation. According to the new rules, businesses must properly manage and be able to produce the retrieved electronic information in its native format. In addition, both sides of a dispute must meet prior to litigation to discuss electronic evidence.

This means big changes for companies such as Morgan Stanley, Michael Rothschild, senior director of product marketing for electronic communication control provider Orchestria, told today.

"It's no longer a defensible answer to say, 'Hey I didn't know we had it,'" he said. "I think where a lot of organizations are getting into hot water is that once they keep them (electronic records)...that it largely goes into a black box. While they are complying with the spirit of the law, they're not necessarily complying with the letter of the law."


Click here to email reporter Dan Kaplan.

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