We previously posted that FINRA has imposed a $3 million fine against Morgan Stanley; the firm must also fork over a $9.5 million “Discovery Fund,” all to benefit customers in settlement of the firm’s failure in securities arbitration to produce emails ostensibly “lost” in the tragic World Trade Center attacks in 2001 (some of which “surfaced” years later). In fact, Wall Street’s email record retention has had a checkered track record at a number of firms. Several years ago for example in December 2002 the SEC, NASD and NYSE imposed an $8.25 million penalty against Deutsche Bank Securities Inc., Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc., and U.S. Bancorp Piper Jaffray Inc. for failure to maintain and/or preserve email communications.

Spoliation of evidence, or the more easily discernable failure to turn over documents in securities arbitration, may be an old story but in the case of the Morgan Stanley “Discovery Fund” it has yet to be adequately addressed for the benefit of many investors who brought a case at FINRA’s predecessors (the NASD or NYSE) and either lost their case, received low awards or decided to settle at a discount. The rules governing the distribution of the funds do not address how to fully and fairly compensate these investors (many if not all of whom by now will have been precluded by the SRO rules or the passage of time from opening their cases or filing an appeal) much less the countless investors who were shut out of the “Discovery Fund” entirely if their cases pending from September 11, 2001 onward were settled or closed after June 20, 2005.

The “Discovery Fund’s” formula for compensating investors is fuzzy as to precisely how much and when eligible investors who file their claims will receive relief, and according to FINRA’s website the “remediation” process isn’t expected to be completed until 2009. Meanwhile, those claimants who are fortunate enough to be notified of the fund have a choice of: accepting an “estimated” so-called “Standard Payment” of up to a few thousand dollars; or requesting that Morgan Stanley produce any extant emails; or requesting production of the emails and then deciding whether to accept the “Standard Payment” or, alternatively, to give the fund administrator discretion to review unnamed facets of the claimant’s closed case and newly produced emails and to decide independently how much to dispense.

Implicitly, even if the administrator discovers a fraud lurking in the e-mails, the maximum recovery for an investor after the administrative review is capped at $20,000.

As of mid-December 2007 the “Discovery Fund” administrator communicated to us that the list of potential claimants and their attorneys had not yet been fully compiled.  To read about the Morgan Stanley Arbitration Discovery Fund and restitution that investors may be eligible to receive go to the FINRA Home Page; then on the bottom of the right column listing Investor Resources and Investor Tools, go to Investor Claims Funds; then go to Arbitration Discovery Fund - Morgan Stanley & Co.