Morgan Stanley Muddles Through An E-Mail Mess

A saga of inappropriate, incompetent, and potentially illegal conduct continues to unfold at Morgan Stanley, with the company's own E-mail trail at the center of it all.

A former IT manager with Morgan Stanley, Arthur Riel, filed suit in January, claiming he was wrongfully dismissed in September after flagging E-mail that raised serious questions about the firm's business practices. In the letter of dismissal, Morgan Stanley accused Riel of being "engaged in a deliberate, extensive, and surreptitious review of other employees' E-mails." Riel had been responsible for creating a database of archived E-mail at Morgan Stanley, giving him access to years of electronic correspondence.

New evidence in the case is expected to be filed any day, adding to what's already an unflattering picture of Morgan Stanley. Among the accusations in the January suit, which have been fodder for the New York Post, are that CTO Guy Chiarello used his position of influence to request personal favors from technology vendors and to attract investment banking business. A Morgan Stanley spokesman says the allegations are baseless.

Riel, who joined Morgan Stanley in 2000, maintains he came across the correspondence when testing new search functions he created for Morgan Stanley's E-mail archive using tools from Galeon Software. Those tools became necessary after the Securities and Exchange Commission in 2002 found that Morgan Stanley wasn't fully compliant with regulations that require companies to retain and have access to corporate E-mail.

Then there was a Florida case centered on allegations by businessman Ron Perelman that Morgan Stanley made false statements about Sunbeam, which the investment bank was representing in a deal to acquire a company controlled by Perelman. Perelman's attorneys accused Morgan Stanley of deliberately losing track of E-mail that could help Perelman's case.

Riel was involved in that mess. He reportedly signed a court document certifying that Morgan Stanley had turned over all relevant E-mail to Perelman's lawyers, when in fact it hadn't done so. Riel couldn't be reached for comment. Riel maintains in the suit that Morgan Stanley used trumped-up allegations of a conflict of interest with Galeon Software to hasten his departure. Notably, Riel's current employer, Lighthouse Global Technologies, shares addresses in Stamford, Conn., and Madrid, Spain, with Galeon.

Trashed
The need for discipline in E-mail management has become acute on Wall Street, says Symantec senior VP Jeremy Burton. E-mail management is Symantec's hottest business, growing more than 50% annually on about $300 million in revenue, and 60% of Symantec's archiving business is discovery related. "The worst time to start looking for information is when the lawsuit comes through the door," Burton says. The SEC requires financial companies to retain E-mail for several years and randomly sample messages for evidence of illegal activity.

Riel's January complaint describes Morgan Stanley's E-mail archiving system as "an unwieldy system of backup tapes," and it claims E-mails moved into trash folders weren't captured during weekly backup. "Tapes were routinely misplaced or lost," according to the complaint.

The suit contends that Morgan Stanley executives were aware of the system's limitations and exploited them to flout court orders and regulators' requests for E-mail. As of 2003, the suit charges, Morgan Stanley was routinely overwriting data on 20% of its backup tapes, despite SEC orders requiring it to cease and desist from such behavior. In January 2005, the SEC hit Morgan Stanley with a "Wells Notice" seeking $10 million in penalties for failure to comply with its orders. In December, Morgan Stanley offered to pay $15 million to settle the expanded complaint, but the SEC hasn't accepted. The Morgan Stanley spokesman declined to discuss the company's E-mail system, citing ongoing litigation.