Investors Sue Morgan Stanley Over Soft Dollar Fund Payments

August 4, 2003 ( - Charging that the adviser and distributor of the Morgan Stanley American Opportunities Fund received undisclosed "soft dollar" compensation and other under-the-table benefits, two investors have filed suit.

The suit, filed in a Manhattan federal court, contends the fund’s adviser – Morgan Stanley Investment Advisers Inc. – and distributor – Morgan Stanley Distributors Inc. – breached their fiduciary duty by accepting unreasonably high compensation and other payments.   Additionally, the suit alleges that managers of the fund have collected exorbitantly high fees while the value of investors’ shares has fallen, according to a Dow Jones report.

Pointing at the unreasonable compensation, the suit submits the $4.8 billion fund’s adviser’s publicly disclosed compensation of $54.4 million in 2000, $39 million in 2001 and $27.8 million in 2002. Additionally, the plaintiffs believe that while not yet publicly disclosed, supplementary compensation from soft dollars and other payments will be “significant.”

At the same, the investors assert that the investments made by the adviser “have been substandard, at best.”   “In absolute terms, the fund’s performance has been equally dismal,” with a reported loss of $2.4 billion in 2002, the investors say

Additionally, the suit also argues the fund’s trustees, which include Morgan Stanley Chairman and Chief Executive Philip Purcell, cannot serve as independent “watchdogs” for investors, as they receive substantial compensation from other Morgan Stanley-related activities.

The suit appears to have been prompted by recent regulatory inquiries into soft dollars, which are sometimes described as thinly disguised kickbacks (See  More Fund Disclosures Needed on Fees, Soft Dollar Payments ). Generally,soft dollar arrangements allow fund advisors use part of the brokerage commissions they pay to broker-dealers for executing trades, to obtain research, and other services (See  Nomenclature – Soft Dollars) .     A recent bill sponsored by US Representative Richard Baker (R-Louisiana), would force mutual-fund managers to disclose soft-dollar arrangements to investors (See  House Bill Would Beef Up Fund Disclosure Regs ).