Tuesday, Aug. 12, 2003 | 9:27 a.m.
BOSTON -- Morgan Stanley set up elaborate contests and incentives that encouraged its offices in the Northeast to push customers to buy the company's in-house mutual funds, and failed to disclose those measures to investors, Massachusetts authorities alleged Monday.
Secretary of State William Galvin, whose office filed a complaint, said the improperly disclosed sales brought the firm between $5 million and $8 million in commissions on mutual fund sales that likely amounted to tens of millions of dollars.
"There was a contempt for the customers here," Galvin said at a news conference. "There was a recognition these people didn't know any better and were to be taken advantage of."
The allegations that Morgan Stanley failed to disclose such practices were first brought last month, but the latest filing provides further details, including an e-mail from Drew Hawkins, an associate regional director for the firm in the Northeast, warning a colleague, "Please DO NOT put anything in writing via e-mail or fax on the promotional part of our current campaign."
The complaint's focus is Morgan Stanley's former branch office in the Back Bay section of Boston, an operation Galvin said "seemed to be a place that was totally overrun by contests." The filing describes Morgan Stanley channeling bonuses, and even travel expenses, to reward sales of in-house funds, which Galvin said significantly underperformed the market.
One team of fund sellers, calling itself the "Chowdaheads," won a $1,000 award for a fast start selling proprietary funds in the company's "Find the Right Fit" campaign, and won another $15,000 for winning a regional contest.
The latest filing, which cites interviews with former branch employees, also said Back Bay branch manager David Varela threatened to fire employees who didn't sell enough Morgan Stanley funds.
Galvin also said his office may look into partnership arrangements in which other mutual funds received "shelf space" from Morgan Stanley advisors.
Pushing in-house and partnered funds does not violate Massachusetts laws, but Galvin's office believes such practices must be disclosed. He also said using deferred compensation to push in-house funds violated Morgan Stanley's own policies that stated non-cash compensation can be used to reward sales only of classes of products, not of specific products.
Morgan Stanley spokeswoman Andrea Slattery said the company was reviewing the complaint, but understood it repeated what Galvin's office said in the earlier filing. She noted the National Association of Securities Dealers proposed requiring such disclosure only last week.
Slattery said that Hawkins and Varela would not be available for comment.
"The sales practices were so bad they were embarrassed about it," Galvin said of the e-mails. "They didn't want to put it in writing."
Galvin said his office would seek substantial penalties, the right of investors to rescind their transactions and total disgorgement by Morgan Stanley of its proceeds from such sales.
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