The Securities and Exchange Commission (SEC) has opened a probe into Morgan Stanley's mutual funds. This latest investigation, though, has nothing to do with the recent spate of fund troubles. This time regulators suspect insider trading at the brokerage's funds.

The probe is the latest in a string that are tarnishing the firm's reputation. Two weeks ago Morgan Stanley agreed to pay a $2 million fine to the National Association of Securities Dealers after the body found the brokerage engaged in improper sales practices. Morgan neither admitted nor denied wrongdoing by making the settlement. Massachusetts' Secretary of the Commonwealth William Galvin is also leading an investigation into the Morgan Stanley's use of promotions to boost sales of its proprietary funds in its Boston offices.

In the latest case, the SEC is questioning why a pair of Morgan Stanley mutual funds purchased about one million shares of stock of Dean Foods Co. before the sale of the company to Suiza in April 2001, according to a report in the Wall Street Journal published on Monday.

When the accusations are boiled, down the SEC seems to suspect that two Morgan Stanley fund managers -- Mark Bavoso and Michelle Kaufman -- pierced the wall separating the firm's investment management and investment banking units. Morgan Stanley was one of two bankers representing Dean Foods in its sale to Suiza. Also muddying the waters is the fact that rumors of a possible deal were circulating long before a deal was completed.

However, Morgan Stanley is painting a benign portrait of its managers' actions. It contends that the managers bought the shares after they learned of a possible deal in a Wall Street research piece written by an analyst at another firm. Indeed, Dean Foods also publicly announced that a deal was a possibility prior to the stock purchases made by the two portfolio managers.

On March 9, 2001, Dean Foods said its quarterly earnings would fall short of Wall Street estimates, and that it planned to evaluate its "financial and strategic alternatives." That same day John McMillin, a foods analyst at Prudential Securities, published a research report speculating that Dean Foods would soon be sold.

"We think Suiza may be looking to buy Dean Foods," wrote McMillan according to the Journal.

It was based on that information that the two managers first bought shares for the Morgan Stanley Strategist Fund and Morgan Stanley 21st Century Trend Fund on March 16, according to Morgan Stanley. However, the purchases raised flags at the SEC because Morgan Stanley bankers had started doing preliminary work on the deal before the two firms signed a standstill agreement on February 9. Dean Foods formally retained Morgan Stanley to represent it on March 19. Suiza then made an offer for Dean Foods on March 22 and the deal was signed on April 4 and announced the next day.

The two funds profited by more than $5.4 million, according to the Journal.  

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