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Some Wall St. firms admit breaking prospectus rules

By MICHAEL J. MARTINEZ
The Associated Press

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At least one other firm the size of Morgan Stanley stepped forward to admit failures in sending prospectuses, and other top firms face similar problems, Susan Merrill, executive vice president and chief of enforcement at the NYSE, said yesterday.

The admissions, which have exposed a more widespread issue than first thought, came after Merrill sent letters in early November to the chief executive officers or chief operating officers of the top 25 brokerages on Wall Street. The firms had until Nov. 19 to respond, and a number came forward with problems they had discovered.

Merrill would not say how many firms came forward or whether all would face penalties.

Firms that were found to have sold new stock offerings to investors who did not receive a prospectus also could be forced to give customers their money back.

"Sending out a prospectus to investors is Securities 101," Merrill said. "It's not rocket science. But a lot of firms simply assumed that it was being done properly and weren't taking the time to see if they were actually getting [prospectuses] out."

According to Securities and Exchange Commission and NYSE regulations, brokerages must send prospectuses to potential investors before initial public stock offerings or secondary offerings are made — or must at least make an effort to get the information in investors' hands around the same time a deal is struck and money changes hands.

Facing an NYSE investigation, Morgan Stanley admitted earlier this year that it failed to send materials to a large number of clients who had invested. Despite the admission and Morgan Stanley's cooperation, the NYSE fined the company $19 million for the prospectus lapses and other regulatory issues.

The unusually large fine, the biggest the NYSE had imposed in an investigation conducted solely by exchange regulators, is part of an overall effort to put teeth back into its regulatory division after the departure of Chairman and Chief Executive Richard Grasso last year.

Merrill said the other firms could receive leniency by coming forward, so long as they continued to cooperate with the NYSE investigation. However, she added that chronic problems that went undetected for a long time — and only addressed after the letters went out — would be dealt with more harshly.

Copyright © 2004 The Seattle Times Company

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