While Eliot Spitzer has a knack for sound bites and splashy press briefings, it was the NASD's decision to fine Morgan Stanley yesterday hit the fund industry the hardest in the long-term. After all, handing out Britney Spears tickets in exchange for pushing funds on unsuspecting investors is far easier to understand than anything involving international arbitrage. How big of an impact the story has with retail investors and lawmakers depends on how it is reported. Keeping that in mind, the MFWire.com takes a look at yesterday's coverage of the story by the major media outlets.



The NASD's charges "target the heart of Morgan Stanley's system for motivating its brokers to sell the firm's own lines of mutual funds," reports the Wall Street Journal's Tom Lauricella in a "just-the-facts" version of the story.

The Journal pulls the same statement from a Morgan Stanley spokesperson that all of the papers will repeat. He tells the paper that the brokerage is "pleased to have put this matter behind us." Not mentioned for another two paragraphs is the fact that the NASD settlement does not preclude other government officials, including those in Massachusetts and at the SEC from taking their own action. Also not precluded by the settlement is private litigation. All that means, of course, that the matter is not really behind Morgan Stanley.

The spokesperson also sticks by Bruce Alonzo, the managing director heading the Investor Advisory Services, by telling the paper that Alonzo "is a highly valued, longtime member of our management team" who "agreed to participate in the settlement because it was the best way to ensure a timely resolution that was satisfactory to the NASD and in the best interest of Morgan Stanley."

The paper is the only one to report on the fact that Morgan Stanley filed a response to the charges with Massachusetts's regulators Tuesday. However, the paper was unable to obtain the content of the response. [To see excerpts appeared from the response published in the Boston Herald see the end of this story].



The nation's lawmakers and regulators woke up to a Washington Post version of events that tied the Morgan Stanley fine into coverage of Theodore Sihpol's arrest. The Morgan Stanley news was clearly the secondary news of the day in the Post's view.

Post staff reporter Brooke A. Masters took until paragraph three to cover the NASD's fine against Morgan Stanley for "'clear violations' of a 1999 rule against offering brokers non-cash incentives for selling particular mutual funds."

The article added that the Sihpol arrest combined with the Morgan Stanley fine "add up to one of the worst days in recent history for the enormous mutual fund industry, which depends on small investors for its survival." The paper puts the stakes for the industry in high relief by noting that "about 95 million investors own shares in 8,000 funds" and that "these pools of shared investments are the main way middle-class Americans participate in the stock and bond markets.".

To drive the point home, the Post turns to Jacob S. Frenkel, a former SEC enforcement lawyer, for perspective. "Most mutual fund investors have believed until now that the mutual fund system was the safest mechanism for investing in the market. Now they can no longer believe that," he offers.

The Post also pulls in reaction from the Securities Industry Association. SIA spokesman James D. Spellman said the trade group welcomes the action and that regulators had "demonstrated that they are moving swiftly and jointly to investigate wrongdoing in their mutual fund probes. . . . Their efforts are a plus for investor trust and confidence."

One source in academia, though, warns that more scandal may come to light. "Once you get regulators looking at something, you get whistle-blowers reporting what they have always known," Columbia University law professor John C. Coffee is quoted as saying.



The New York Times assigned Gretchen Morgenson, perhaps it highest profile Wall Street reporter on author of the book "Fidelity's World" to the story. Unlike reporters at Journal and Post, Morgenson brings some dramatic flair to the story and leads with the perks her readers will be envious of: sales staff tickets to a Britney Spears concert, gift certificates to spas, restaurants, golf courses and department stores.

While the article describes the perks offered, Morgenstern did not go the extra mile and include insight from any sources other than the NASD and Morgan Stanley.

She adds that "sales contests have been common on Wall Street for years," but cites no specific details of the goings on at other firms. "Never has it been more clear why so many mutual funds are sold, not bought," she concludes.



Hotel denizens across the nation learned that "sales contests encourage brokers to recommend investments that generate prizes, rather than serve the best interests of their customers" in the USA Today edition at their door.

Those readers also learn of the "tickets to Britney Spears and Rolling Stones concerts, tickets to the National Basketball Association finals, resort trips and tuition at a high-performance auto racing school."

The sole outside source for the article is Andrew Stoltmann, a Chicago-based securities lawyer who says that regulators have "prohibited sales contests for more than a decade because of the potential for conflicts of interest."



The Boston Globe shows takes the local news angle on the story and mixes in wire coverage from Bloomberg News which was the only news outlet to obtain a copy of Morgan Stanley's response to Massachusetts officials.

Meanwhile, the NASD fine is not reported on until paragraph five. There it is referred to as "another matter" although the paper does break the news that "the penalty was the biggest imposed by the NASD involving mutual fund abuses. The NASD oversees the brokerage industry."

The brokerage's response reportedly argues that the Commonwealth of Massachusetts' complaint is flawed.

"The complaint hinges primarily upon the contention that Morgan Stanley has an obligation to disclose compensation rates for different mutual fund products. This contention is wrong as a matter of law," is the sound bite Bloomberg News offers from Morgan Stanley documents that it somehow obtained when the Wall Street could not.

The Globe then provides detailed background on how the investigation into the matter started.

"Galvin began his investigation after receiving an anonymous letter from a Morgan Stanley employee in March. It said a former branch manager, David Varela, threatened that expense reimbursements and development dollars would be rescinded unless employees focused on selling the Allocator Fund, a Morgan Stanley mutual fund. The branch, in Boston, was closed in May. At the branch, Varela determined which expenses would be paid and rewarded financial advisers who followed his strategies by giving them potential new clients, private offices, and other indirect financial compensation, the state alleges," according to the paper.



The second-leading paper in Beantown, the Boston Herald, also tries harder. It alone reports on the reaction of Massachusetts Secretary of State William Galvin to the NASD settlement. Galvin, it appears, it neither happy nor appeased. In fact, he is reported to be "disappointed."

"I'd call it a slap on the wrist, but it's more like a slap on the pinkie," Galvin told the Herald. "This firm made a game out of people's financial futures and they never told people in the game that they were in the game."

The paper also reported that the "deal will not stop Massachusetts Secretary of State William Galvin - who exposed some of Morgan's sales practices this summer - from pursuing civil charges against the firm."  

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