Morgan Stanley Faces Questions
On Lost Records Its Clients Need

Living in Wichita, Kan., Kristin Walden never imagined that the terrorist attacks in New York eventually would touch her life.

The 29-year-old Morgan Stanley client recently had launched an arbitration case against the big Wall Street firm, claiming she lost almost all of her savings of $300,000 after her broker and now ex-husband, made unauthorized trades in her account. But her case, and dozens like it, have been hamstrung because Morgan Stanley says many of the documents its customers need to argue their cases against the firm -- everything from broker-commission records to e-mail correspondence -- were destroyed in the Sept. 11 attacks.

Morgan Stanley's claims have raised questions about the firm's record-keeping procedures, and come just weeks after five securities firms, including Morgan Stanley, tentatively agreed to pay fines totaling $8.3 million for allegedly failing to keep e-mails and produce them in regulatory investigations. Meantime, regulators investigating conflict-of-interest issues involving research analysts privately have criticized Morgan Stanley, saying there are noticeably fewer documents to analyze at that firm than at some rivals.

"Taking their claim at face value, you wonder then what the state of the firm's internal controls were at the time of 9/11. Were they so bad that one incident could destroy vital records?" says Henry Hu, a corporate and securities law professor at the University of Texas. "Given the incredible amount of redundancy, to CCs on e-mails to overuse of photocopies, have they been looking at all the conceivable places?"

Morgan Stanley says it is still trying to locate the documents in Ms. Walden's case. "We stored literally tens of millions of individual client records at the World Trade Center so it is not surprising that since 9/11 it has been difficult to obtain some documents for a limited number of arbitration cases," a spokesman says. "In every case we do our best to locate or reconstruct the requested information and most of the time we have been able to." The firm declined to comment on which documents it had backed up at other facilities, and which ones it hadn't.

In some instances, the types of documents that Morgan Stanley says were destroyed on Sept. 11 are routinely backed up at other firms, according to Wall Street executives. In other cases, Securities and Exchange Commission rules require brokerage firms to keep copies of information, such as e-mails. Morgan Stanley is the only firm using this defense in arbitration, according to several plaintiff lawyers.

"I find it inconceivable that the firm has no backup copies, or in cases where they do, they are saying they can't access the information," says Kansas City, Mo., lawyer Robert Barton, who is representing Ms. Walden, a veterinarian's assistant. "It is sad if they are indeed using the tragedy of Sept. 11 to hinder a former customer's serious claim against them."

Morgan Stanley was one of the largest tenants in the World Trade Center, and 13 employees were victims. In a letter to the New York Stock Exchange in March 2002, Morgan Stanley said all "hard-copy and microfiche" documentation was lost when its national operations headquarters, housed in the trade-center complex, was destroyed but that it was able to retrieve "a majority" of the documents. The letter detailed the documents, such as supporting records for securities in transfer, that haven't been recovered.

Despite the missing documents, Morgan Stanley said that it believes its data-retention capability following 9/11 was "unsurpassed," allowing it to resume trading for clients on the day the stock market reopened. The firm has said that improvements to the World Trade Center following the terrorist bombing in 1993 made the complex a safe place to store documents. Indeed, in a research report issued shortly after Sept. 11, Morgan Stanley analyst Charles Phillips concluded the World Trade Center was "probably one of the best prepared office facilities from a system- and data-recovery perspective."

But unhappy clients wonder why their documents are missing, if this is so.

In Ms. Walden's case, a Morgan Stanley official said in a March 2002 affidavit given to Mr. Barton that the firm has the raw data Ms. Walden needs. But it said the information "could only be retrieved if a computer application were developed for that purpose" and it would have to hire additional staff to do that. So far, Morgan Stanley hasn't turned over any documents to Ms. Walden.

She isn't alone. Kansas City, Mo., lawyer John Miller maintains that the document destruction argument has become a standard defense at Morgan Stanley. For instance, his client Gloria Dawn, also of Kansas City, and a retiree of Southwestern Bell, opened an account at Morgan Stanley in October 2001, one month after the terrorist attacks. She is claiming her Morgan Stanley broker bought unsuitable investments for her, including Enron Corp. bonds, and is seeking damages including the restoration of her initial investment of $344,232, which has fallen substantially.

Morgan Stanley told Mr. Miller it couldn't produce certain records he needed because they "were stored in the World Trade Center and thus were destroyed on Sept. 11" despite the fact the account wasn't opened until after the attacks. Morgan Stanley subsequently has apologized to Ms. Dawn, saying its response was a "simple and honest mistake" and has said it can produce the records.

Nancy Van Sant, a Miami lawyer and former lawyer with the SEC's enforcement division, says she has two cases where Morgan Stanley has told her they can't produce e-mails and commission runs because of Sept. 11, but the firm subsequently has been able to produce at least brokerage commission records. She has written to a number of top industry officials, including New York Stock Exchange top boss Richard Grasso, asking them to investigate these claims.

Wrote Ms. Van Sant: "It is inconceivable that after the first bombing of the World Trade Center in 1993, and in the light of the Y2K computer concerns of late 1999, that the SEC, the NYSE and the NASD and all state governments permitted mammoth brokerage firms such as Morgan Stanley to keep only one set of records at a location which has been bombed by terrorists before."

Officials from the SEC, National Association of Securities Dealers and the New York Stock Exchange declined to comment.

Write to Susanne Craig at susanne.craig@wsj.com