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NEW YORK (CBS.MW) – Massachusetts regulators unveiled civil charges Monday against Morgan Stanley for a sales contest that encouraged brokers to sell in-house funds over third-party investments.
Secretary of State William F. Galvin, who announced the charges at a press conference, said that Morgan Stanley encouraged brokers to sell company-owned mutual funds by offering cash prizes. Galvin said the practice violated the state’s anti-fraud provisions.
“I find it very disturbing that Morgan Stanley’s culture put sales contests ahead of customers,” Galvin said. “This is the kind of sales culture you’d expect at a used-car lot, not from your stockbroker, to whom you’ve entrusted your money.”
Regulators say Morgan Stanley failed to disclose the sales contest to investors and managers were told not to mention the contest in writing. The firm offered $100,000 in cash rewards in the hope of generating $5.27 billion in sales of Morgan Stanley mutual funds including its Van Kampen line in 2002.
According to one e-mail uncovered by regulators a manager wrote “please keep all info on the promo in non written form.”
The state asked the court to order Morgan Stanley to stop the practice, pay a fine and forfeit profits from the plan, according to an administrative complaint filed Monday. Galvin said fines and profits could run into the millions.
Galvin said the investigation was triggered by a whistleblower at Morgan Stanley’s Back Bay branch in Boston.
A rule proposed by the National Association of Securities Dealers would require brokers to disclose if they are to receive sales commissions for selling in-house products.
“The new rule is a step in the right direction. But we’ll need to see how it works in practice,” Galvin said.
The charges come in addition to charges filed last month that the broker misguided regulators about the practice. Galvin and New York Attorney General Eliot Spitzer are jointly investigating the broker.
Morgan Stanley declined to comment on the filing specifically, but in a statement, the firm suggested that it did not violate any rules. “Requiring such disclosure was only proposed by the NASD just this last week,” Morgan Stanley said. “With respect to new issues we have not seen the papers and cannot comment.”
Shares of the broker fell 57 cents, or 1.2 percent, to $47.98 in early afternoon trading.

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