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Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment Promotion

March 25, 2009

Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating
to Misconduct in Early Retirement Investment Promotion

FINRA Also Bars Broker, Charges Second Broker, Suspends Supervisor

Washington, DC - The Financial Industry Regulatory Authority (FINRA)
announced today that it has fined Morgan Stanley & Co. $3 million - and
ordered it to pay more than $4.2 million in restitution to 90 Rochester,
NY-area retirees - to resolve charges that its supervisory system failed to
detect and prevent brokers from persuading Eastman Kodak Company and Xerox
Corporation employees to take early retirement based upon unrealistic
promises of consistently high investment returns and by espousing unsuitable
investment strategies.

FINRA found that Morgan Stanley failed to reasonably supervise the
activities of Michael J. Kazacos and David M. Isabella, two former
registered representatives in its Rochester branch office. FINRA has
permanently barred Kazacos from the securities industry for committing
numerous violations of FINRA rules in connection with his solicitation and
handling of IRA rollover/retirement accounts, such as making unrealistic
predictions that customers would earn investment returns of 10 percent each
year.

In a formal disciplinary complaint filed today, FINRA charged Isabella with
having engaged in similar misconduct. The matter will be adjudicated before
a three-member FINRA Hearing Panel. FINRA also found that Ira S. Miller, the
manager of Morgan Stanley's Rochester branch, failed to reasonably supervise
both representatives. Miller was fined $50,000, suspended from acting in a
principal capacity for one year and ordered to re-qualify as a principal
before serving in such capacity in the future.

FINRA found that as a result of the misconduct at least 184 customers
suffered financial hardships, including market losses, a reduction in
principal and the inability to sustain expected withdrawal rates. In many
cases, the customer's initial investment was eroded by market declines and
the customer's monthly withdrawals were not funded by income but were really
distributions of principal. Some customers were forced to return to work at
a greatly reduced income in order to meet their basic living expenses. FINRA
has ordered Morgan Stanley to pay restitution to 90 former customers of
Kazacos or Isabella who sustained losses. The firm has previously settled
with 101 other customers of those brokers.

"Protecting investors who have retired or are considering retirement has
been one of FINRA's top priorities," said Susan L. Merrill, Executive Vice
President and Chief of Enforcement. "Brokerage firms and brokers who serve
investors considering retirement must ensure that their customers are given
suitable investment recommendations based upon reasonable assumptions of
market performance and are given thorough disclosure of investment risks.
The supervisory failures of Morgan Stanley and its management led to losses
suffered by customers at a vulnerable time in their lives - retirement -
which could have been avoided."

Specifically, FINRA found that, from 1998 through 2003, Kazacos persuaded
retirees and potential retirees to invest their retirement assets with him
by representing that these investors would earn 10 percent returns each year
and would be able to satisfy their income needs by withdrawing annually a
similar percentage for living expenses without reducing their principal.
Kazacos' statements encouraged several individuals to move their retirement
accounts to Morgan Stanley, with some deciding to retire sooner than they
otherwise might have.

FINRA found that Kazacos told customers in their 50s that, even though they
had not reached the minimum age for taking withdrawals from their qualified
retirement accounts (59-and-a-half), they could begin taking systematic
distributions from their accounts, without penalty, by relying upon Section
72(t) of the Internal Revenue Code. FINRA also found that Kazacos failed to
inform these customers of the risks associated with his recommended
investment strategies.

FINRA further found that, once Kazacos began servicing the retirement
accounts - which were often the only source of income for the retirees - he
implemented unsuitable investment strategies that exposed the accounts to
greater risk, particularly in a declining market, and reduced the principal
in many accounts. He invested many of the customers in mutual funds, with an
unsuitably high concentration in equity funds. Kazacos also recommended
unsuitable variable annuity transactions.

As to Isabella, a former Xerox employee, FINRA charged that from 2000
through 2003, he solicited many of that company's retirees and potential
retirees to invest with him at Morgan Stanley. Isabella allegedly
represented to prospective customers that, if they invested their retirement
money with him, they would earn approximately 10 percent returns or more
each year and be able to satisfy their income needs by withdrawing a
consistent amount of money each year without reducing their principal.

In addition to the violations above, FINRA charged Isabella with falsifying
records concerning the financial situations and goals of his customers.
FINRA also alleged that, in exchange for various gifts to certain Xerox
employees, Isabella improperly obtained confidential employment records
regarding, among other things, the retirement status of prospective
customers employed by Xerox. He utilized this confidential information to
attract new customers. FINRA further alleged that, in communicating with
prospective customers, Isabella used a professional designation - Retirement
Planning Specialist - that he did not actually possess. Finally, FINRA
charged Isabella with providing false testimony during its investigation.

FINRA found that Morgan Stanley failed to enforce a reasonable supervisory
system to ensure that Kazacos and Isabella provided customers with
appropriate risk disclosures concerning their retirement accounts. During
the relevant time period, Kazacos and Isabella generated approximately $15.4
million in gross commissions. The firm knew or should have known that these
representatives were actively marketing their early retirement programs to
retirees and potential retirees. Nevertheless, the firm failed to take
reasonable steps to ensure, among other things, that customers received
proper risk disclosures and that Kazacos and Isabella did not promise or
promote unrealistic investment returns. FINRA further found that Morgan
Stanley also failed to ensure that the securities and accounts that those
representatives recommended for the retirees, such as variable annuities and
fee-based managed accounts, were properly reviewed for suitability and other
concerns.

FINRA also found that Miller failed to take appropriate action to reasonably
supervise Kazacos and Isabella to prevent their unsuitable investment
recommendations and failures to disclose risks to many customers.

In settling these matters, Morgan Stanley, Kazacos and Miller neither
admitted nor denied the findings, but consented to the entry of FINRA's
findings.

Under FINRA rules, a firm or individual named in a complaint, such as
Isabella, can file a response and request a hearing before a FINRA
disciplinary panel. Possible remedies include a fine, censure, suspension,
or bar from the securities industry, disgorgement of gains associated with
the violations, and payment of restitution. The issuance of a disciplinary
complaint represents the initiation of a formal proceeding by FINRA in which
findings as to the allegations in the complaint have not been made and does
not represent a decision as to any of the allegations contained in the
complaint. Because the complaint against Isabella is unadjudicated,
interested persons may wish to contact the respondent before drawing any
conclusions regarding the allegations in the complaint.