Assurance of Discontinuance
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Assurance of Discontinuance: Morgan Stanley and New York AG
Introduction
Martin Act, is New York's version of Blue Sky law, that gives broad powers to investigate securities fraud cases. New York's Attorney General Eliot Spitzer used that to investigate Morgan Stanley and other firms.
Findings
The State of New York found that the investment banker had conflict of interest in its research coverage and investment banking business. For example, part of analysts' compensation came from investment banking business profits, causing analysts incentive not to write negative reports on the investment banking clients.
Background
Investigates the importance of investment banking business for Morgan Stanley and examines the role of research analysts in that.
Research as Marketing Tool
Alleges that the research coverage was used as a marketing tool to win investment banking business. It included implicit promise of favorable ratings.
Coverage Based on Banking Fees
Research coverage was initiated or continued for clients from whom the company expected to or was already getting millions of dollars of investment banking fees. NO PAY NO COVERAGE was the implicit policy in some cases.
Research Analysts as Investment Bankers
Research analysts were touted as investment bankers.
Conpensation Tied to Banking
Compensation for the research analysts was tied to the performance in investment banking business and in many cases it was the overwhelming influence, compensating for loss in income due to poor stock research.
Non-disclosure
The firm didn't tell investors that it paid money at issuers' initiative to other firms to write research reports.
Lack of Supervision
There was a general lack of supervision allowing many analysts to maintain Outperform ratings on stocks that were sinking.
Relief Agreement
Morgan Stanley agreed to pay certain amounts (in total $125 million) without accepting any guilt.
Conclusion
Details of the agreement and people signing it.
For more details, please visit New York Attorney General's site: Conflict Probes Resolved at Citigroup and Morgan-Stanley