When Morgan Stanley Co.’s former affiliate, Morgan Stanley DW, Inc., withheld e-mail evidence from litigants for several years, on the shameless pretense that they were “lost” in the aftermath of the September 11, 2007 attacks on the World Trade Center in New York, it was estimated by FINRA that several thousand customers were affected. The suppression of important evidence may have potentially denied securities arbitration and court litigants the ability to recover on some or all of their claims filed in court or at the self-regulatory, industry run arbitrations such as those administered by FINRA and its predecessor dispute resolution forums (the NASD and NYSE). The failure to produce such evidence during the pendency of cases would also have had a profound effect on the amounts accepted in settlements.

In its September 2007 press release announcing a $9.5 million “Discovery Fund” established to settle the matter (to be financed by Morgan Stanley for distribution to investors, in addition to a $3 million fine), FINRA revealed these troubling findings:

“FINRA found that MSDW failed to provide pre-9/11 emails to claimants in numerous arbitration proceedings and in response to three regulatory inquiries during the period from October 2001 through March 2005. FINRA found that MSDW made statements in numerous arbitration proceedings and to the former NASD, New York Stock Exchange Regulation and the Massachusetts Securities Division that those emails had been destroyed. Those statements were not true.

FINRA also found that MSDW later destroyed many of the pre-9/11 emails it did possess. . . .As a result, between September 2001 and March 2005, MSDW deleted millions of pre-9/11 emails from the firm’s systems.

In addition, FINRA found that MSDW failed to provide updates to the firm’s supervisory manual for branch office managers to claimants in numerous arbitration proceedings over a period of years.

No customer should be precluded from being compensated if they were prejudiced by non-production of pre-9/11 e-mail. Unfortunately, the “Discovery Fund” will not compensate otherwise eligible customers whose cases were settled or closed after June 20, 2005, at best an arbitrary cut-off. It’s anyone’s guess how many customers who were denied access to relevant evidence will also be prevented from collecting anywhere from several thousand to twenty thousand dollars from the fund.

Where do questionable discovery tactics leave customers in their bid for the indispensable documents needed to prove their claims? Judges have firm discovery rules to guide them. But the arbitrators at FINRA, sitting in judgment with the clear mandate to discharge their duties equitably, should be pondering this question when considering spoliation and other discovery abuses in securities arbitration or in court litigation. Equity demands that customers should be afforded liberal access to the evidence in every case, and if they are denied that right the firms and not the public should suffer the consequences.

See our next Securities Fraud Hotline Posting for more. . .