wallstreetsedge
06-08-2008, 02:41 PM
May 24, 2008
Last August, Wall Street firm Morgan Stanley and one of its senior
traders agreed to pay $6.1 million in fines and restitution to settle
allegations that the investment bank overcharged brokerage customers on
2,800 purchases of $59 million of bonds.
Regulators investigating the case had a crucial inside source: Dana de
Windt, a broker at the aquamarine, glass Morgan Stanley branch nestled
among back-pain and varicose-vein-removal clinics in this small city on
Florida's east coast.
For four years, the 60-year-old Mr. de Windt has been fighting a lonely
war against his own firm. Saying he was convinced that Morgan Stanley
cheated clients, Mr. de Windt complained to regulators, helped recruit
customers to file damage claims and repeatedly tried to confront his
bosses with questions tucked inside a thick, three-ring binder.
"These firms are such big bullies that they feel if they stonewall,
you're eventually going to go away," he says. Morgan Stanley declined to
comment on Mr. de Windt's version of events.
What makes Mr. de Windt an unusual adversary is that he fought so openly
and aggressively against Morgan Stanley even while continuing to work
there. His production plunged, and he says his boss in the Stuart office
told him to get over it.
Yet the firm tolerated Mr. de Windt's rebellion. A Morgan Stanley
spokesman says officials were aware of the broker's contacts with
regulators but didn't retaliate. Senior Morgan Stanley executives also
responded to his concerns, the spokesman adds.
"It definitely took a toll," says Mr. de Windt's son, Cullen, a tennis
pro at a Palm City, Fla., country club. "It's tough to do business and
really be fired up when you are fighting the big boys to make sure no
one gets taken."
Part of Mr. de Windt's fury was personal. He joined Morgan Stanley in
1992 after working at E.F. Hutton & Co. and Prudential Securities. In
2001, Morgan Stanley sold customers in Florida and elsewhere $59 million
in bonds issued by Lumbermens Mutual Casualty Co., a property and
casualty unit of Kemper Insurance Cos.
But the bonds lost their investment-grade rating in 2002 because of
deterioration in the insurer's finances. The bonds eventually plunged
90% or more in value. And Mr. de Windt discovered that his 87-year-old
father owned $65,000 of the battered securities.
Other brokers at Morgan Stanley also started raising questions. Michael
Blankenship, another broker in the Stuart office, had bought about
$700,000 of the bonds for seven or eight clients. Then he noticed that
the bonds reflected a market value about 20% lower than the purchase
price once they were put in client accounts.
Mr. Blankenship was told the prices were in error, according to
documents filed in an arbitration case.
In a 2003 meeting about the bonds, according to people familiar with the
meeting, Mr. Blankenship tangled with a Morgan Stanley lawyer over the
phone. Asked by the lawyer what Mr. Blankenship normally did when an
investment fell in price, the broker heatedly replied that there was
"nothing normal" about the Kemper bonds, which had quickly "turned to
dust," the same people said.
Morgan Stanley fired Mr. Blankenship ten days later, saying he had
improperly covered a customer's losses after a trading mix-up. Mr.
Blankenship later argued he was fired in retaliation for his complaints
about the bond losses.
Mr. de Windt, the top producer in his branch in 2003, inherited some of
Mr. Blankenship's clients. They included retired electrician Richard
Mittnacht Jr., who wrote a letter to Mr. de Windt complaining that he
had been "intentionally misled" by the Morgan Stanley bond desk into
believing the bonds were a "safe haven."
Over the next year, Mr. de Windt pushed for answers from top Morgan
Stanley executives. He buttonholed Bruce Alonso, a former senior
brokerage executive, at a meeting for top producers at a Scottsdale,
Ariz., resort; Mr. Alonso had an aide reply. Morgan Stanley declined to
comment and Mr. Alonso couldn't be reached. And after an in-house lawyer
said Morgan Stanley intended to fight customer complaints about the
bonds, since the firm had deemed them "suitable," Mr. de Windt showed up
at her office in New York, he says. She wasn't there.
In 2004, Mr. Mittnacht filed an arbitration claim to recover his losses
on the Kemper bonds. Mr. de Windt acknowledges encouraging other
brokerage customers to join the arbitration. Five of the six customers
reached a settlement in 2005 that gave them back 50% of their losses. In
a separate claim, one couple got 94% of their original investment.
Mr. de Windt wasn't satisfied. He went to the National Association of
Securities Dealers with his complaints. After a response he considered
encouraging, he had bright-yellow golf tees printed with the words:
"nasd examination."
In 2006, Mr. de Windt testified in Mr. Blankenship's
wrongful-termination arbitration against Morgan Stanley, saying he
believed Mr. Blankenship had been fired because of the broker's blast at
the firm lawyer. During the proceeding, a Morgan Stanley lawyer
confronted Mr. de Windt about recruiting investors who complained about
the bonds' losses. Mr. Blankenship lost the case, but Morgan Stanley's
effort to recover money from him also was thrown out.
Mr. de Windt eventually became worried that the NASD was dragging its
feet. At a conference in New York last year, the broker says he pressed
a senior NASD official for 10 minutes, before being edged aside by
someone else. A spokeswoman for the agency, Nancy Condon, said the
complex case involved analysis of thousands of transactions and was
being handled by an NASD office in New Orleans when Hurricane Katrina hit.
Last August's complaint by the Financial Industry Regulatory Authority,
which includes the NASD's enforcement arm, asserted that Morgan Stanley
charged excessive markups and had an inadequate supervisory system for
monitoring the pricing of bonds sold to customers.
Morgan Stanley notes that it neither admitted nor denied wrongdoing in
settling the charges, adding that regulators didn't accuse the firm of
improper sales practices.
Mr. de Windt says he still believes the markups helped Morgan Stanley
deceive customers about the risk of the bonds, since their yields were
below the 10% level that can be a red flag for many investors. "If they
had priced them legally, it would have shown they were junk," he says.
So he is still fighting. Mr. de Windt has filed a new arbitration claim
on behalf of his father and is seeking internal emails about the 2001
bond sale. Last month, though, he retired from Morgan Stanley, saying he
couldn't in good conscience urge customers to make new investments
through the firm.
Last August, Wall Street firm Morgan Stanley and one of its senior
traders agreed to pay $6.1 million in fines and restitution to settle
allegations that the investment bank overcharged brokerage customers on
2,800 purchases of $59 million of bonds.
Regulators investigating the case had a crucial inside source: Dana de
Windt, a broker at the aquamarine, glass Morgan Stanley branch nestled
among back-pain and varicose-vein-removal clinics in this small city on
Florida's east coast.
For four years, the 60-year-old Mr. de Windt has been fighting a lonely
war against his own firm. Saying he was convinced that Morgan Stanley
cheated clients, Mr. de Windt complained to regulators, helped recruit
customers to file damage claims and repeatedly tried to confront his
bosses with questions tucked inside a thick, three-ring binder.
"These firms are such big bullies that they feel if they stonewall,
you're eventually going to go away," he says. Morgan Stanley declined to
comment on Mr. de Windt's version of events.
What makes Mr. de Windt an unusual adversary is that he fought so openly
and aggressively against Morgan Stanley even while continuing to work
there. His production plunged, and he says his boss in the Stuart office
told him to get over it.
Yet the firm tolerated Mr. de Windt's rebellion. A Morgan Stanley
spokesman says officials were aware of the broker's contacts with
regulators but didn't retaliate. Senior Morgan Stanley executives also
responded to his concerns, the spokesman adds.
"It definitely took a toll," says Mr. de Windt's son, Cullen, a tennis
pro at a Palm City, Fla., country club. "It's tough to do business and
really be fired up when you are fighting the big boys to make sure no
one gets taken."
Part of Mr. de Windt's fury was personal. He joined Morgan Stanley in
1992 after working at E.F. Hutton & Co. and Prudential Securities. In
2001, Morgan Stanley sold customers in Florida and elsewhere $59 million
in bonds issued by Lumbermens Mutual Casualty Co., a property and
casualty unit of Kemper Insurance Cos.
But the bonds lost their investment-grade rating in 2002 because of
deterioration in the insurer's finances. The bonds eventually plunged
90% or more in value. And Mr. de Windt discovered that his 87-year-old
father owned $65,000 of the battered securities.
Other brokers at Morgan Stanley also started raising questions. Michael
Blankenship, another broker in the Stuart office, had bought about
$700,000 of the bonds for seven or eight clients. Then he noticed that
the bonds reflected a market value about 20% lower than the purchase
price once they were put in client accounts.
Mr. Blankenship was told the prices were in error, according to
documents filed in an arbitration case.
In a 2003 meeting about the bonds, according to people familiar with the
meeting, Mr. Blankenship tangled with a Morgan Stanley lawyer over the
phone. Asked by the lawyer what Mr. Blankenship normally did when an
investment fell in price, the broker heatedly replied that there was
"nothing normal" about the Kemper bonds, which had quickly "turned to
dust," the same people said.
Morgan Stanley fired Mr. Blankenship ten days later, saying he had
improperly covered a customer's losses after a trading mix-up. Mr.
Blankenship later argued he was fired in retaliation for his complaints
about the bond losses.
Mr. de Windt, the top producer in his branch in 2003, inherited some of
Mr. Blankenship's clients. They included retired electrician Richard
Mittnacht Jr., who wrote a letter to Mr. de Windt complaining that he
had been "intentionally misled" by the Morgan Stanley bond desk into
believing the bonds were a "safe haven."
Over the next year, Mr. de Windt pushed for answers from top Morgan
Stanley executives. He buttonholed Bruce Alonso, a former senior
brokerage executive, at a meeting for top producers at a Scottsdale,
Ariz., resort; Mr. Alonso had an aide reply. Morgan Stanley declined to
comment and Mr. Alonso couldn't be reached. And after an in-house lawyer
said Morgan Stanley intended to fight customer complaints about the
bonds, since the firm had deemed them "suitable," Mr. de Windt showed up
at her office in New York, he says. She wasn't there.
In 2004, Mr. Mittnacht filed an arbitration claim to recover his losses
on the Kemper bonds. Mr. de Windt acknowledges encouraging other
brokerage customers to join the arbitration. Five of the six customers
reached a settlement in 2005 that gave them back 50% of their losses. In
a separate claim, one couple got 94% of their original investment.
Mr. de Windt wasn't satisfied. He went to the National Association of
Securities Dealers with his complaints. After a response he considered
encouraging, he had bright-yellow golf tees printed with the words:
"nasd examination."
In 2006, Mr. de Windt testified in Mr. Blankenship's
wrongful-termination arbitration against Morgan Stanley, saying he
believed Mr. Blankenship had been fired because of the broker's blast at
the firm lawyer. During the proceeding, a Morgan Stanley lawyer
confronted Mr. de Windt about recruiting investors who complained about
the bonds' losses. Mr. Blankenship lost the case, but Morgan Stanley's
effort to recover money from him also was thrown out.
Mr. de Windt eventually became worried that the NASD was dragging its
feet. At a conference in New York last year, the broker says he pressed
a senior NASD official for 10 minutes, before being edged aside by
someone else. A spokeswoman for the agency, Nancy Condon, said the
complex case involved analysis of thousands of transactions and was
being handled by an NASD office in New Orleans when Hurricane Katrina hit.
Last August's complaint by the Financial Industry Regulatory Authority,
which includes the NASD's enforcement arm, asserted that Morgan Stanley
charged excessive markups and had an inadequate supervisory system for
monitoring the pricing of bonds sold to customers.
Morgan Stanley notes that it neither admitted nor denied wrongdoing in
settling the charges, adding that regulators didn't accuse the firm of
improper sales practices.
Mr. de Windt says he still believes the markups helped Morgan Stanley
deceive customers about the risk of the bonds, since their yields were
below the 10% level that can be a red flag for many investors. "If they
had priced them legally, it would have shown they were junk," he says.
So he is still fighting. Mr. de Windt has filed a new arbitration claim
on behalf of his father and is seeking internal emails about the 2001
bond sale. Last month, though, he retired from Morgan Stanley, saying he
couldn't in good conscience urge customers to make new investments
through the firm.