Morgan Stanley And Washington State Halt Talks On Investment Settlement

The talks concerning accusations that the investment firm gave Microsoft employees bad advice broke off after a state agency withdrew a settlement offer and demoted a top regulator.

InformationWeek Staff, Contributor

May 11, 2004

2 Min Read

OLYMPIA, Wash. (AP) -- Negotiations between state securities regulators and Morgan Stanley over accusations that the investment firm's brokers gave Microsoft Corp. employees bad advice have broken off after a state agency withdrew one settlement offer and demoted a top regulator.

The state plans to pursue administrative charges against two Morgan Stanley brokers who pitched investment strategies to Microsoft employees during the high-tech boom of the late 1990s, when many workers at the Redmond, Wash., software giant were flush with lucrative stock options.

Last year, the state accused the brokers, Arun Sardana and Michael Moriarty, of talking the employees into high-risk strategies that didn't suit their goals and wound up costing them hundreds of thousands of dollars.

The employees were urged to borrow heavily to exercise as many options as possible, then sell off the Microsoft stock to buy risky stocks in other high-tech companies, according to a November charging document from the state Department of Financial Institutions that was made public Tuesday.

"They wanted to diversify their concentrated portfolios and preserve their wealth to provide for the future financial well-being of their families," Deborah Bortner, then the securities administrator for the Financial Institutions Department, wrote in the statement of charges in November. "As a result of Sardana and Moriarty's recommendations, the wealth of their clients was dissipated rather than preserved."

Bortner and Morgan Stanley negotiated a settlement of the case that called for the company to pay $200,000 and change various practices. But during a review of the settlement, lawyers in the office of Attorney General Christine Gregoire found some of its provisions did not provide the state adequate enforcement power, said Scott Kinney, as spokesman for the Financial Institutions Department.

"We halted negotiations," Kinney said. "We regrouped. We came up with another settlement agreement. It had tougher language."

But Morgan Stanley rejected the new settlement on Friday.

"We have a legally binding agreement in effect with the state of Washington," said Andrea Slattery, a Morgan Stanley spokeswoman in New York who refused to discuss the specifics of the case.

Kinney said Bortner was demoted over her role in the talks--and other factors--although state civil-service protections let her take a lesser job elsewhere in the department, Kinney said.

Bortner did not immediately return a telephone call from The Associated Press on Tuesday. But she told the Wall Street Journal that her dismissal was politically motivated and reflected a desire by Helen Howell, the department's director, to go after a big Wall Street firm. Through Kinney, Howell refused a request for an interview.

Morgan Stanley contends the agreement is binding because it was negotiated in good faith and the company had already started to abide by some of its provisions. If a new settlement is not reached, the case would go before an administrative law judge and perhaps eventually to state Superior Court.

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