Morgan Stanley is in still more hot water for how it encouraged brokers to push its funds. The latest trouble is an administrative complaint filed in Massachusetts by Secretary of the Commonwealth William Galvin under that state's anti-fraud regulations. Last month, Galvin initiated a look into sales practices at the firm in response to allegations made by a broker.

The new complaint could broaden the case against Morgan Stanley into a national one. The problems allegedly started at Morgan Stanley's national branch-managers meeting held in Chicago in July 2002. At that meeting the firm set a nationwide sales goal of its proprietary funds of $5.27 billion for Morgan Stanley's fourth fiscal quarter.

The complaint contends that Morgan Stanley waived $100,000 in front of brokers to as part of a sales contest designed to encourage the brokers to sell its funds. Through the civil action the state seeks an estimated $5 million to $8 million in commissions that it claims Morgan Stanley collected through sales of its funds. Galvin is also seeking civil penalties.

To encourage the sales in the northeast region, Massachusetts's regulators contend that sales managers provided prizes, including $15,000 for the sales team that sold the most in-house funds during the quarter. The team that sold the most in November were promised a reported $6,000. Other prizes included awards of $9,000, $7,500 and $6,000 for branches that met set percentages of predetermined sales targets.

Galvin claimed that the practice harmed investors by pushing them into funds that may not have been the best for them. "It put Massachusetts investors at a great disadvantage," he said at a press conference announcing the action. He also contends that Morgan Stanley broke Massachusetts's law when the brokers did not disclose all of the incentives they were receiving to fund investors.

"These kinds of practices under cut the public confidence. I find it very disturbing that Morgan Stanley's culture put sales contests ahead of customers," Galvin said. He also said that state investigators are investigating the matter to see how high ranking the executives were at Morgan Stanley who knew of the contests.

Galvin also alleged that Morgan Stanley revealed knowledge that their plan was illegal. As evidence, he pointed to an internal email from Drew Hawkins, associate regional director for Morgan Stanley's northeast region that instructed branch managers to inform brokers not to put the details of the reward program into writing.

"Please DO NOT put anything in writing via E-mail or fax," read the August 27 email. It added that managers should "walk your team members through this information VERBALLY."

Galvin also provided more details of how the branch manager of the Morgan Stanley Back Bay office pressured brokers to sell the Morgan Stanley Allocator fund.

"Varela promised financial incentives and rewards to financial advisers who successfully met the demanding production goals he set for the Fund," according to the complaint filed by Galvin's office. "Conversely, financial advisers also understood that negative consequences such as the loss of client leads, travel and entertainment reimbursements, office assignments and ultimately the potential loss of employment with Morgan Stanley would result if they did not meet the sales objectives."  

Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE