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A lawsuit against Morgan Stanley provides a rare look into high-stakes IT deals and begs the question: Are you crossing the line?

Paul McDougall

April 1, 2006

5 Min Read

Morgan Stanley says Riel was fired for abusing his access to the company's E-mail archive, including snooping on internal communications and copying and redistributing E-mail to others. The firm calls his latest allegations of wrongdoing "a smoke screen for his own highly unprofessional conduct."

Also in question is Riel's relationship with Galeon Software, a vendor that was helping to build Morgan Stanley's E-mail archive but which has since lost that business. After being fired by Morgan Stanley, Riel went to work as CTO at Lighthouse Global Technologies. Notably, Lighthouse shares addresses in Madrid, Spain, and Stamford, Conn., with Galeon. Riel declined a request to be interviewed.

Quid Pro Quo
Regardless of whether Riel acted properly in accessing and collecting company E-mail, the contents of those messages reveal potential conflicts of interest at Morgan Stanley. They show a pattern in which the IT department was pressured to use its huge budget to cultivate relationships for the investment banking side of the house. In September 2003, Morgan Stanley banking exec Roger Hoit wrote to IT operations officer Jonathan Teplitz, touting a vendor owned by a major Morgan Stanley client-private equity firm Welsh, Carson, Anderson & Stowe. Hoit noted that the vendor, Headstrong, had just acquired IT services firm Techspan. "It is quite important to Welsh Carson that we communicate to you the financial firepower that comes to Techspan through this acquisition and Welsh Carson's desire to strengthen the Techspan-Morgan Stanley relationship," Hoit wrote.

Hoit wasn't recommending the technology. "As I don't understand anything about Techspan or the products/services they offer, I would appreciate some advice or assistance on ways we could expand these relationships," Hoit wrote, adding: "It is also important for you to understand that Welsh Carson represents a very important relationship to Investment Banking and The Financial Sponsors Group."

Other bankers at Morgan Stanley also leaned on the firm's IT department. In a message dated Jan. 11, 2002, Morgan Stanley's senior banker for the technology sector in Asia, Crawford Jamieson, complained that the company's IT department wasn't moving fast enough to give work to Indian IT services vendor Wipro; Morgan Stanley was the lead underwriter on Wipro's New York Stock Exchange listing. "John Mack promised Azim Premji, the Chairman and founder of Wipro, that MS would commit to providing some outsourcing work, ..." Jamieson wrote. "We need someone senior in the IT organization to cut through the red tape and get Wipro some kind of business." In the same message, Jamieson added, "Wipro is not asking to be 'given' business. They only want to be in a position to compete for it. So all we need really is to get them more in the flow."

In the following months, Morgan Stanley's IT team bent over backward to help. In an E-mail to investment banker Rohit Sipahimalani, sent on April 11, 2003, tech staffer Gol Ophir notes that his team "spent a hugely disproportionate amount of time helping Wipro through this [qualification] process. As a result, they did better than they ever did here at Morgan Stanley." In that note, Ophir explains why Wipro lost out to Tata Consultancy Services and Accenture, which he notes are also clients. Wipro eventually got about $2.5 million in business from Morgan Stanley, according to a source familiar with the deal. A Morgan Stanley spokesman claims the deal was worth considerably less but declined to be more specific.

Whether such deals bend or break Sarbanes-Oxley rules, which require disclosure of material facts in financial reports, isn't clear. At the least, says Leigh Hafrey, senior lecturer on ethics at the MIT Sloan School of Management, "it's inappropriate for someone outside an IT department to encourage or order the use of a vendor."

Some courts have ruled that reciprocal purchasing arrangements, in some circumstances, violate federal antitrust laws, and some IT vendors warn employees about quid pro quo arrangements. In its code of conduct, Internet Security Systems notes reciprocal purchase agreements are "legal in some market situations and illegal in others." At IBM, "seeking reciprocity" is against policy.

But such scenarios are familiar ground to many business technologists. One InformationWeek reader, identified as a CIO in an anonymous blog posting on InformationWeek.com, said he (or she) quit a job after being pressured to buy from a vendor that was also a customer. The CIO had signed a deal for voice and data services, and the company's owner demanded the deal be scrapped in favor of a business partner. "They made a deal behind my back to give each other business. This deal making happens all the time ... and it was never in the best interests of the company."

Others say reciprocity is just the way big business works and that it's mutually beneficial. Robert Bongiorno, CIO of Automatic Data Processing, says he has no problem with awarding an IT contract to a vendor because it's a buyer of ADP's payroll processing services. "If EMC uses our payroll, then it makes sense" to use it as a vendor, he says, provided its products or services are up to snuff and reasonably priced. The practice was the same at his previous employer, United Airlines, Bongiorno says. "Someone who flew on us a lot ... we wouldn't do anything that was stupid, but all things being equal, that would certainly be a tiebreaker," he says.

Morgan Stanley says its primary objective for IT procurement is to get the best technology for its needs. But the firm doesn't deny that business relationships are taken into account. "Doing business with people who do business with us is sound business practice and consistent with the best interests of shareholders," the company said in a written statement.

What about employees accepting Yankees, Jets, and Celtics tickets from vendors? Morgan Stanley says Chiarello, who remains CTO, did nothing wrong. A spokesman says the firm "allows employees to participate in legitimate business entertainment, which may include attending sporting events with vendors."

Business technology professionals, however, should ask themselves whether it's worth even the appearance of impropriety.

--with Eric Chabrow and Marianne Kolbasuk McGee

About the Author(s)

Paul McDougall

Editor At Large, InformationWeek

Paul McDougall is a former editor for InformationWeek.

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