WA Regulators Dump Morgan Options Advice Settlement

May 11, 2004 (PLANSPONSOR.com) - The top Washington State securities regulator is inching closer to slapping Morgan Stanley with regulatory action for the quality of the advice it gave Microsoft Corp. employees for their stock option holdings.

The Wall Street Journal reported that the latest approach by authorities effectively scraps a previously negotiated settlement pact. That turnabout cost a well-known regulator her job as the director of the department’s securities unit – fired for agreeing to the settlement pact, which the higher-ups later deemed too lenient.

Helen Howell, the state’s director of financial institutions, told the Journal that the subordinate was terminated for several reasons. Among them, Howell was concerned that the planned settlement “was not tough enough” and might not be legally enforceable. The subordinate, Deborah Bortner, who had been the state’s director of securities for more than a decade, maintained in an interview that the firing was politically motivated and reflected a desire by Howell to score points with the public by bringing a high-profile enforcement action against a big Wall Street firm.

However, for her part, Howell said the action was prompted by a desire to better address what she deemed “systemic problems” with “lack of supervision” of stock brokers at Morgan Stanley, in alleged violation of Washington state securities law. She said the matter came to a head when lawyers in the state’s attorney general’s office “informed us the agreement Deb reached was unenforceable. If Morgan Stanley decided to take steps not to do the things [agreed to], we couldn’t do much.” This was because the terms themselves were “in a side agreement,” she said.

Morgan Stanley disagrees, however, saying it has signed side agreements in the past and the documents are enforceable, a spokesman for the firm told the Journal.

In the dispute with Morgan Stanley, the regulators maintain that two of its stockbrokers wrongly advised three Microsoft employees to exercise thousands of their Microsoft stock options, then sell some of their Microsoft shares to finance purchases of risky technology and telecommunications stocks, according to a complaint served on the firm by the regulators late last year that has never been made public, the Journal reported.

The brokers also encouraged the employees to finance some of the investment moves by borrowing against their stock holdings, further amplifying the damage when the stock market dropped, the complaint says. One of the state’s biggest concerns was the alleged failure of the firm to better supervise its employees.

Bortner and Morgan Stanley reached an agreement to resolve the matter last month, and Morgan had begun to implement some of the changes. The firm agreed, among other things, to pay approximately $200,000 and provide additional training for its financial advisers, according to people familiar with the matter. It would neither admit nor deny wrongdoing. The firm, the people say, had signed this agreement. While Washington officials had sent the firm a copy of the pact, the state hadn’t signed the document.

Then, late last month Morgan Stanley learned Ms. Bortner had been removed from her job and the deal was off, these people said. “As far as I am concerned, an agreement isn’t done until it is signed by both parties,” said Ms. Howell. She said the state countered with a stronger settlement offer, but it was rejected by the firm on Friday.