Morgan Stanley Charge Is Dismissed
A regulatory charge that Morgan Stanley Dean Witter & Co. failed to adequately inform investors of the risks of bond funds it was selling has been dismissed by a National Assn. of Securities Dealers hearing panel.
A disciplinary panel found that NASDR Inc., the regulatory division of the NASD, took too long to bring fraud charges in connection with the purchase by 100,000 investors of $2.1 billion in closed-end bond funds in 1992 and 1993. The ruling, made in December, was appealed by the NASD, said NASDR spokeswoman Nancy Condon.
Investor lawsuits against Dean Witter Reynolds Inc., now part of Morgan Stanley Dean Witter (ticker symbol: MWD), were dismissed by federal and state courts in New York and New Jersey. A New York federal court, in dismissing one suit, found the firm’s prospectus adequately disclosed risks. Morgan Stanley settled another investor suit in California, and another is pending in Florida.
“We’re obviously pleased with the NASD ruling, which dismisses the action based on the principle of fundamental fairness,” said Morgan Stanley spokesman Bret Gallaway. “A federal court and two state courts and now the unanimous NASD hearing panel have ruled in our favor.”
Condon, at the NASDR, said she couldn’t comment on the ruling because the case was on appeal.
The closed-end funds trade on the New York Stock Exchange. The funds at issue were TCW/DW Term Trust 2000, TCW/DW Term Trust 2002 and TCW/DW Term Trust 2003. The fund manager was TCW Group Inc., an L.A.-based money-management firm that wasn’t charged by the NASD.
The value of the funds’ derivatives, which typically are tied to other financial benchmarks, was dependent on interest rates staying low. When rates rose during 1994, about a quarter of all the funds’ original investors sold their shares at a loss, the NASD contended.
Term Trust 2002 lost a third of its value in 1994, and about 30,000 investors sold shares during this period, realizing $65 million in losses, the NASD alleged. Since then, the funds, which were sold at an initial price of $10 per share, have gained, Morgan Stanley said.
Dean Witter received more than $119 million in underwriting fees and sales concessions as well as about $7 million a year in management fees, the NASD complaint said. NASD Regulation said that about half the investors were older than 60.
