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A Morgan Stanley Victory in Dispute on Bond Funds
Securities regulators have lost the latest round in a legal battle with Morgan Stanley over tactics that its brokers and managers used to sell three bond funds in the early 1990's. But the regulators are not giving up the fight. The regulatory arm of the National Association of Securities Dealers accused Dean Witter, now a unit of Morgan Stanley, of misleading investors, many of them elderly, about the risks of buying the funds. Those investments, which Dean Witter had described as "simple and safe," resulted in losses of $65 million, the N.A.S.D. said. The losses arose when customers sold the funds, known as term trusts, after the value of interest-sensitive securities they owned sank. Dean Witter officials argued that the funds, more than $2 billion of which were sold in 1992 and 1993, were designed to be held until they matured 7 or 10 years later. Regulators said the funds were not suitable investments for many of the people who bought them, including some in their 80's and 90's. Investors who held on would not have lost money. Morgan Stanley recently settled a lawsuit filed by buyers of the funds in California for about $4.5 million, said Katherine Blanck Radsan, a lawyer for the plaintiffs. Similar suits were dismissed in New York and New Jersey; another is pending in state court in Florida. Dean Witter refused to settle with the regulators, though. Instead, it took the unusual step for a major Wall Street firm of meeting the N.A.S.D.'s department of enforcement in a court of sorts, an N.A.S.D. hearing panel. Last month, the panel decided that the regulators had taken too long to build their case against Dean Witter and dismissed it. The regulators appealed that decision to the National Adjudicatory Council, the next rung up the ladder of litigation at the N.A.S.D. A few days later, the council called for a review, a step it takes in a small number of cases each year. The council has 12 to 14 members, half of whom are considered representatives of the securities industry. It will now decide whether to uphold the hearing panel's dismissal or reach a different judgment. The hearing panel said the regulators' case might have had merit, but they did not move fast enough. Citing an earlier decision by the Securities and Exchange Commission in a different case, the hearing panel faulted the N.A.S.D. for taking nearly five years to complete its investigation into the term trusts. "The department filed the complaint seven years after the last act of alleged misconduct occurred," the panel said in its decision. N.A.S.D. officials declined to comment yesterday about the decision or their appeal of it. In the past, they have said the investigation took so long because it was complex and involved more than 100 current and former employees of Dean Witter and the deposition of 60 people. A Morgan Stanley spokesman said yesterday: "We're obviously pleased with the N.A.S.D. ruling, which dismisses the action based on the principle of fundamental fairness. A federal court and two state courts and, now, the unanimous N.A.S.D. hearing panel have ruled in our favor." |
